A Foolish Interview With David Einhorn

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David Einhorn is the president of Greenlight Capital and the author of Fooling Some of the People All of the Time, a compelling account of his battle with Allied Capital (NYSE: AFC  ) . Einhorn also presciently called attention to Lehman Brothers' irregular accounting practices just prior to that firm declaring bankruptcy in September 2008.

Many of us at the Fool admire Einhorn for his investing ability and dedication to the principles of transparency and honesty. In the first part of our interview, he spoke about Allied, the Securities and Exchange Commission, and the ongoing threat to our financial system.

John Reeves: What are the lessons for retail investors from the story of Allied Capital?

David Einhorn: The takeaway for retail investors is that they should be appropriately skeptical of the various gatekeepers that are supposed to be there to protect them. The gatekeepers such as the SEC and sell-side analysts might not be acting on their behalf. Retail investors shouldn't just assume a seal of approval from the SEC because it hasn't brought any action against a company, for example. And sell-side analysts often have huge biases that aren't aligned with ordinary investors.

Reeves: It's ironic that Allied was mostly owned by retail investors.

Einhorn: Yes, Allied preyed on the failures of the gatekeepers. Allied believed that as long as it persisted in paying its dividend, it could continue its questionable practices.

Reeves: What are your thoughts about the SEC? Are things getting better there? Is the Goldman Sachs (NYSE: GS  ) case an example of improvements there?

Einhorn: The SEC -- post Enron -- sees its role as protecting investors from other investors instead of protecting investors from the huge structural problems on Wall Street and abuses by corporate issuers and managements. In order for real change to occur, the SEC will have to actually inflict meaningful penalties on wrongdoers. That's what's necessary to deter bad behavior. I think the Goldman case was a peculiar choice. Ultimately, there hasn't really been a substantive case against a company that was misrepresenting its books during the financial crisis. And to date there have been no prosecutions that I am aware of as a result of Sarbanes/Oxley.

Reeves: The SEC recently investigated its own handling of the Allied case and concluded, "While we did not find any evidence of specific wrongdoing on the part of current SEC employees, we found that serious and credible allegations against Allied were not initially investigated, and instead Allied was able to successfully lobby the SEC to look into allegations against its rival Einhorn without any specific evidence of wrongdoing." What's your response to that statement?

Einhorn: There's a lack of accountability in that statement. Also, there were numerous redactions in that report. I feel the public has a right to know the entire story. One individual, for example, took enormous steps to quash the investigation of Allied and appears to be accused of trying to cover it up by deleting files on the SEC's computer. Ultimately, there were no internal consequences and no external consequences; he is still in his job today. The heavily redacted report, which conceals his identity, even shields him from public accountability for his actions.

Reeves: What are your thoughts on the ratings agencies like Moody's (NYSE: MCO  ) , Standard & Poor's (a division of McGraw-Hill (NYSE: MHP  ) ), and the like?

Einhorn: The main reason ratings agencies exist is for the convenience of Wall Street. Wall Street uses them to make money at the expense of passive long-term credit investors like pension funds. Wall Street firms make money when the ratings are wrong. They are able to front-run the passive buyers of bonds who depend on ratings by dumping bad bonds on them. People sometimes ask how can passive investors survive without the protection of the ratings agencies. Actually, they would be the biggest beneficiaries of a system without the ratings agencies. As for Wall Street needing ratings to assist in the capital raising process, if we didn't have official ratings, underwriters like Bank of America (NYSE: BAC  ) , for example, would just figure out a different way to market new bonds.

Reeves: What must happen before we'll get real reform of our financial system?

Einhorn: The financial crisis exposed a lot of serious problems. But the special interests have been able to protect themselves so far from having the obvious, necessary reforms implemented. Things will likely persist as they are until we encounter another, bigger crisis.

Reeves: What is your view of the media as a result of the Allied experience?

Einhorn: I actually see a big improvement in the media since the beginning of this story. At the beginning, the media just wanted to hear from management and sell-side analysts. Now, the media is far more willing to consider critical information and analysis. The media is still tempted to highlight personalities and attractive headlines. There is a lot of sensationalism at the expense of substance.

Reeves: Is it possible that news organizations don't have the budget to do serious, in-depth stories?

Einhorn: Yes, but different organizations have different capabilities when it comes to telling a complex story. I definitely don't expect every outlet to cover something like the Allied case. I do believe the media is better now, though.

Reeves: Has the reputation of short-sellers improved of late?

Einhorn: I still think there are headwinds there. Investors and the media still prefer the long side of things.

Stay tuned for Part 2 of our interview with David Einhorn.

John Reeves does not own shares in any of the companies mentioned. Moody's is a Motley Fool Inside Value recommendation and also a Stock Advisor pick. Motley Fool Options has recommended writing puts on Moody's. Through our various Rising Star real-money portfolios, the Fool owns shares of and has a short position in Bank of America. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (61)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2011, at 10:49 PM, unkownuser wrote:

    Einhorn is a dishonest crook, just take a look at After you've read about Einhorn and his buddies there, ask yourself, "how could somebody post information like this about well known public figures, and not get sued out of existence?". And the answer is: There is truth behind what is said about David Einhorn at Deepcapture. If it wasn't true, Einhorn would have had Deepcapture shut down long ago. And please, don't be afraid of the truth, don't delete this post again, let people make up their own minds instead of pandering.

  • Report this Comment On January 07, 2011, at 3:06 AM, Accreator wrote:

    Thanks to MF for bringing to light such personalities.

    It seems that the seeds for a serious crisis are still here...and I don't see any hand going there to remove these bad seeds.

    And the rain of forture has just started raining on the hills of Wall Street. I expect end of Q2 to be hot, this is when all these systemic hidden problems will start surfacing...

  • Report this Comment On January 07, 2011, at 12:14 PM, smthdavd wrote:

    This interview is very interesting to read as you get to learn different things from the ore. I also read that the public officers claim their pension fund investments abroad, the leaders of the concession fee as part of efforts to reduce costs.

  • Report this Comment On January 07, 2011, at 12:17 PM, unkownuser wrote:

    The REAL David Einhorn is no friend to the average investor; beware of wolves that come in sheeps' clothing.

  • Report this Comment On January 07, 2011, at 4:26 PM, PDueDiligence wrote:

    I have no problem with short selling but I do have a problem with how Einhorn conducts his trading. Funds must report long positions to the SEC but short positions are exempt from the rule. Einhorn likes to quietly build his short position then pronounce to the world his short position and evidence. Examples are Allied and St. Joe.

    Managers on the long side do not have this luxury because their investments are tracked as they build a position. Einhorn portrays himself vigilante, but he is abusing the current system. Einhorn acts within the law but the law should be changed by the SEC. I would have liked for the Fool to ask about SEC reporting standards...

  • Report this Comment On January 07, 2011, at 4:49 PM, TMFAleph1 wrote:

    What a surprise: Someone with the courage to post under the username 'unknownuser' chooses to slander Einhorn.

    Alex Dumortier

  • Report this Comment On January 07, 2011, at 4:53 PM, TMFAleph1 wrote:

    By the way, Deep Capture is a very poor choice of source, as it is the product of someone with a verified penchant for conspiracy theories when it comes to short sellers.

    Alex Dumortier

  • Report this Comment On January 07, 2011, at 8:48 PM, unkownuser wrote:

    Well gee TMFmarathonman, I'm sorry you don't approve of the username I've had for years.

    So why don't you one-up me; you post your real and valid full name, home address, and home phone, and after I call you and verify that it is in fact real, I will post my real name and personal contact info as well. DOOFUS!

  • Report this Comment On January 08, 2011, at 1:53 AM, TMFAleph1 wrote:

    That is my real name. I'm going to have to decline your invitation to post my telephone number on a public discussion forum. I'm sure you'll agree that no-one likes receiving harassing phone calls from conspiracy theorists.

    Regarding your username, my point was simply that the internet makes it very easy for people to slander others anonymously by calling them "dishonest crooks" without a shred of evidence for their allegations. If that is not dishonest, it is at the very least dishonorable.

    Alex Dumortier

    Alex Dumortier

  • Report this Comment On January 10, 2011, at 10:16 AM, immmccoy wrote:

    After reading his book, I can not believe the government is going to insert itself into Healthcare in a big way. This is absolutely scary. What's a few more regulators asleep at the wheel.

    It sounds like someone from Allied is still harassing Mr. Einhorn.

  • Report this Comment On January 10, 2011, at 6:07 PM, amserv wrote:

    I found Einhorn's book so incredible that I had my doubts.

    Then I took 'unkown's' advice and read the site.

    And I am now convinced that Einhorn is probably 100% accurate.'s arguments were weak, vague and mostly without links to sources. Without links to 80% of deepcapture's allegations, and with very few *specific* allegations, how can they expect to "let people make up their own minds"?

  • Report this Comment On January 16, 2011, at 9:32 PM, raufg wrote:

    I agree with amserv. I went to deepcapture because I know that it is important to review all criticisms, particularly if you are inclined to agree with someone's central thesis. I am sure Mr. Einhorn has portrayed himself in a favorable light, but Deepcapture had little support for its ideas and seemed almost hysterical in tone. I don't care if Einhorn is right or right wrong. If I can learn from him I will. If he is the latest incarnation of evil, as deepcapture would have you believe, I could also have learned a lesson about believing everything you read. But their argument did not convince me, even of their central thesis which is that naked short selling is the root of all evil.

    And I thought the root of all evil was money. :) I guessed I missed something along the way.

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