Among the short-sellers being vilified as contributors to the ongoing Wall Street implosion is David Einhorn – a successful hedge fund manager. But Hugo Lindgren, who wrote a portrait of Einhorn for New York Magazine, argues that he’s also something else: an unlikely truth teller whose story offers a case-study on the pitfalls of whistle-blowing on Wall Street.
BROOKE GLADSTONE: This is On the Media. I'm Brooke Gladstone. BOB GARFIELD: And I'm Bob Garfield. As you just heard, a short seller is an investor who makes money when stock prices go down, and they've been vilified as vultures during the current implosion on Wall Street.
David Einhorn, a manager of a multi-billion-dollar hedge fund, is one such short seller, but he also turns out to be a truth teller. Six years ago, Einhorn stumbled on a well-reviewed company named Allied Capital that he thought wasn't coming clean about its financial health. So he decided to offer his perspective at an investors’ conference.
As Hugo Lindgren wrote in June’s New York Magazine, what Einhorn thought would be a merely interesting speech changed his life. HUGO LINDGREN: He gave a fairly rigorous presentation of what he perceived as the company’s problems, and that was sort of what he expected to be the end of it. BOB GARFIELD: As someone who sometimes sells short, who bets on the company’s fortunes to go down, he was immediately suspect for having a stake in this. If he says something nasty about Allied Capital, Allied Capital’s stock price goes down, he profits. No? HUGO LINDGREN: Oh yeah, he does. The stock did go down immediately thereafter – I think it went down about 10 percent – in large part because his opinion so conflicted with the kind of Wall Street conventional wisdom on the stock. Allied Capital was a very popular pick among a lot of Wall Street analysts and it also paid a pretty healthy dividend, which a lot of investors liked. So it was a pretty radical move on his part. BOB GARFIELD: And he was treated radically. HUGO LINDGREN: Well, a whole lot of things happened and it took several years for it all to transpire, in part because he just refused to back down from his original position, as perhaps a lot of people would have.
A lot of it was just at first just an awful lot of namecalling, but the larger case was that they really started to try to mount an investigation into him. He was threatened with all kinds of things from the company, and then eventually an agent of the company searched his phone records.
And if he'd said something positive about Allied Capital, no one really would have cared. But because he dared to sort of have a negative opinion about it, suddenly that was seen as instantly suspect, although his profit motive in either case could have been the same.
Many of the other presenters at that conference and all over television and in the whole rest of the world often tout stocks that they own, but touting the shorting of a stock, was perceived as being fundamentally different. BOB GARFIELD: Was he right about Allied? HUGO LINDGREN: Yeah, he was right about Allied, and the company has been struggling to catch up to his critique for most of the last six years. BOB GARFIELD: Now, there’s something just so paradoxical about all of this because whistleblowers tend to get attention because they are telling the truth while putting their own careers at risk, but a hedge fund manager [LAUGHS] who’s shorting stocks and who is similarly being a whistleblower is immediately suspect.
But his answer was, okay, don't believe me. Obviously, I have a vested interest in this stock going down. But go look at this company. Look at its balance sheet, look at its income statements. He’s telling the financial press, just do your due diligence and the issue will no longer be me. Did the press take him up on that? HUGO LINDGREN: Although there were people who understood David Einhorn’s track record and respected his sort of analytical skills, there were some who supported him in the financial media, the whole complexity of accounting, not just in Allied Capital but in financial companies, are so complex that I think the financial media, for the most part, doesn't do a lot of independent evaluation of companies.
They trust what the analysts say. They trust, for the most part, what the companies say, until recently. And so, no, I think for the most part the financial media did not do its due diligence. BOB GARFIELD: Okay, so flash forward six years. Einhorn, in spite of having [LAUGHS] endured what he endured in the Allied Capital episode, makes a similar public pronouncement about Lehman Brothers, which he said was in a precarious financial position. What happened this time around? HUGO LINDGREN: Well largely the same thing. I mean, financial companies, mostly Lehman Brothers, fought back and tried to battle against the short sellers. But, to his benefit, all the things that he said were problematic with the company were quickly becoming apparent.
He was, in large part, quickly vindicated because his whole argument from the very beginning was what Lehman Brothers needed to do was come clean with investors and to show what the problems on their books really were. BOB GARFIELD: So what is the moral of the David Einhorn story? When a whistleblower has a vested interest, you know, do you pay attention to what he’s saying, or do you pay attention to what he stands to gain? What is a financial reporter to do? HUGO LINDGREN: Well, I think the important thing is to try to get away from the personalities a little bit and look at what they're actually talking about, and that’s something that David Einhorn was very explicit about saying. He was, like, if the story becomes about David Einhorn, then he is already losing.
What he wants the story to be about is like, well, here is what I see as their problems. What do you think? Do you believe what they say? Who has the better command of the facts? Who is laying out a more convincing picture?
There’s all kinds of financial chicanery going on. There’s all kinds of manipulation of the market every day. But as someone who is going to be investing in the market and tries to figure out what’s happening by reading the media, you have to evaluate for yourself what you believe to be true. BOB GARFIELD: Hugo, thank you very much. HUGO LINDGREN: Thank you. BOB GARFIELD: Hugo Lindgren is a writer and editor for New York Magazine.