Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New David Einhorn (best classic books of all time .TXT) 📖

Allied was about to sell parts of its existing portfolio to Goldman Sachs for $170 million, with Goldman committing to at least another $125 million in future deals with Allied. To the public, our short was still a losing bet.

Business Loan Express (BLX) was still BLX, though only for a few more weeks. In an effort to distance itself from being associated with the largest fraud in Small Business Administration (SBA) history, BLX changed its name to Ciena Capital. (For simplicity’s sake I will continue to refer to it as BLX, even when referring to events that occurred after the name change.)

Our shrimp boat qui tam case had been dismissed on a technicality, but our appeal was still pending. We were also embroiled in another qui tam case—one that received no mention in the hardcover edition because it was still under seal—which I will detail in the upcoming pages.

Bear Stearns was not yet owned by JPMorgan Chase, Lehman Brothers stock was trading above $60 per share, and the worst financial crisis in history was still largely unimaginable to all but a few.

Much has changed since then.

BLX failed and Allied’s stock collapsed. I found myself embroiled in a similar (though much shorter, and less ugly) battle with Lehman Brothers. There, too, my analysis was proven correct.

These victories should be cause for celebration, but I take surprisingly little pleasure in them. I always believed that we would eventually be proven right with regard to Allied and Lehman. If anything, I feel somewhat more troubled now than I did then, because for all the things that have changed, far too many remain the same. And the stakes seem higher now.

Despite clear evidence of wrongdoing, there have been no significant consequences for Allied’s officers, directors, and auditors. Other gatekeepers who failed have not been held accountable. Though Allied’s shareholders have lost billions, almost everyone else—including Bill Walton and Joan Sweeney—gets to ride off into the sunset with their fortunes in tow. Robert Tannenhauser has even started a new small-business lending exchange for SBA loans. The regulatory systems in place still do more to reward bad behavior than to discourage it.

On the good side, the response I’ve received from readers has been endearing to me. I was—and continue to be—startled both by the sheer number of letters I received and by the gratitude expressed.

I found it amazing that strangers felt a need to write; I have never sent a letter or an e-mail to a book author. The sincerity in those letters stood in such stark contrast to the dog-and-pony show I’d come to expect between the various entities involved in the Allied debacle. I even appreciated the negative feedback. For everyone who took the time to write to me, or to write reviews on Amazon and various web sites—good or bad—I am genuinely humbled and grateful. The response has made my whole effort feel much more worthwhile.

CHAPTER 36

The Lehman Brothers Saga

In many ways, Lehman is the Allied story all over again. It starts with a speech, ends with a bankruptcy, and in between I am attacked by the company, vilified by the press, and investigated by the Securities and Exchange Commission (SEC). The system of gatekeepers—regulators, auditors, directors, the media, sell-side analysts, and rating agencies—failed with Lehman in the same way it failed with Allied.

The Lehman conflict was significantly shorter than Allied’s, lasting just over a year rather than most of a decade. Unlike Allied, the long-term ramifications of the collapse of Lehman have significant follow-on effects that will linger for years. More importantly, Lehman’s story serves as an even clearer example of what happens when the wrong behavior is rewarded in the short term.

The story gets interesting the morning after my presentation at the annual Ira Sohn conference for the Tomorrows Children’s Fund on May 21, 2008, but that is not where the story begins. On the morning of November 28, 2007, I gave a speech at the Value Investing Congress detailing my criticisms of Lehman’s leverage and accounting. The audience and the market were so taken with my concerns that Lehman shares advanced five dollars that day. On April 8, 2008, I gave a second talk focusing on Lehman at Grant’s Spring Investment Conference. I’d worked hard on this speech, pouring a lot of in-depth analysis into it. The market was similarly indifferent, but the speech itself was widely circulated, and Ben Stein, whom I’d never met, wrote a very flattering piece about it in The New York Times.

Erin Callan, the recently appointed CFO and public face of Lehman, took notice as well. With the collapse of Bear Stearns, Lehman had begun touting its transparency, so much so that on May 17, 2008, The Wall Street Journal did a profile of Callan, titled “Lehman’s Straight Shooter.” It reported, “To quash fears that Lehman could face the same kind of liquidity squeeze as Bear, Ms. Callan has had hundreds of face-to-face meetings and phone calls with investors and trading partners. She aggressively roots out rumors, even while pushing her bosses to disclose more financial information.”

The article was partly true. Indeed, Callan had had a phone call with me just the day before, though I found her answers less straightforward than one might expect from a straight shooter.

It is ironic that my presentation at the Sohn conference will always be known as “The Lehman Speech.” I had really just wanted to talk about Fooling Some of the People. The conference organizers generously bought copies of the book to hand out as gifts to all the attendees. They insisted, however, that I spend at least part of my time talking about a stock other than Allied. So after discussing the book, I offered my latest thoughts on Lehman, including some specific concerns I had about its most recent disclosures, and my troubling phone call with Callan.