This week, David Einhorn has been all over the news. We covered the news, but thought some of his old speeches/ideas before he was super famous would be of interest to readers. We found some material from 2007/08. If you have anything earlier we would LOVE to see it send us a tip (thanks to all those who responded to the call both)! Here is a speech Einhorn made in October, 2008, which became rather famous (we have the full transcript below). We will be posting more. sign up for our free newsletter to ensure you do not miss any.
David Einhorn, Greenlight Capital, “Accounting Ingenuity”
Ira W. Sohn Investment Research Conference
May 21, 2008
I appeared at this conference six years ago and joked that my wife, while trying to help me prepare my presentation of the Allied Capital analysis, had a hard time staying awake. This is pretty ironic, since the ensuing fallout from that speech has cost us a substantial amount of sleep. Over the past six years I have learned a lot and grown a little, and formed some strong views about Wall Street regulation and the muzzle it often places on free speech.
I think that research conferences like these are important. Of course, this one is particularly worthy because it supports a great cause: The Tomorrows Children’s Fund. Further, it is important for investors to discuss market information and analysis to help sort the good companies from the bad. But, there is a structural impediment in our financial markets that creates a massive disincentive to share research about companies doing bad things.
I can fully understand why other investors might decline to appear in this forum or to share a critical analysis. Who could blame them? The cost is high (think lawyers here), it extracts an enormous personal toll, and there are better ways to raise money for a good charity. I have decided to persist because I believe it is important and the right thing to do. Since the Allied speech, I have developed a thicker skin. Back then, when Allied COO Joan Sweeney said that my “plan was to scare the little old ladies,” it actually bothered me. When Holman Jenkins at The Wall Street Journal equated my presentation to a “mugging” – a violent crime – I was incensed because it wasn’t fair. Now, when I read book reviewers of Fooling Some of the People All of the Time calling me naïve because of how I used to believe the system worked, I’m just happy if they like the book.
The Allied experience gives me less confidence today than I had six years ago that the regulators are even trying to enforce rules to protect investors from dishonest public disclosures and outright lies by unscrupulous corporate managements. Maybe they are understaffed or too busy with other priorities. Maybe they are not as sophisticated or close enough to the issues. However, my experience leads me to fear that maybe they just don’t care.
In Fooling Some of the People All of the Time, I point out that the SEC is not enforcing the existing anti-fraud rules against corporate managements. I wonder if part of the reason Bear Stearns lost the market’s confidence was a sense that Bear had undisclosed losses and that the SEC was not taking proper measures to ensure that Bear reported accurate financials. The large losses that JPMorgan Chase & Co. (NYSE:JPM) has now acknowledged on Bear’s books support this theory. The lack of confidence in the SEC’s oversight ultimately undermines investor confidence.
When I speak of investors I am including hedge fund managers. An author on Investopedia defined hedge funds as “lightly regulated, private investment funds that use unconventional investment strategies and tax shelters in an attempt to make extraordinary returns in any market…these factors have given them a secretive and shady aura in the financial community.” Forbes has called us “The Sleaziest Show on Earth.” Basically, according to some in the media, elected officials, government regulators and individuals, hedge funds are really gambling operations amounting to ticking time bombs with secret plans to destroy the galaxy. Good thing they don’t say what they really think. In truth, hedge fund managers at their core are simply investors.
David Einhorn, Greenlight Capital, “Accounting Ingenuity” via foolingsomepeople