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) 📖

several of them and asked about their dealings with BLX. We inquired about adjustments to the debt-service ratios—calculations designed to make sure that the borrower would have sufficient profits to make interest and principal payments on the loans, the adequacy of appraisals and the level of due diligence, verification of the sources of equity injections, history of first-payment defaults, and other related topics.

While a couple of the sources declined to speak with us and one had favorable things to say about BLX, the majority confirmed a negative view. A representative of Zion’s Bank told us that BLX works with riskier clients with less price sensitivity. The official from GE Capital looked at many BLX deals, but passed on most of them for a variety of reasons, including being outbid by other banks and not being comfortable with the credit risks. He said BLX is recognized as having customers with credit problems that keep them from going to other SBA lenders. Bank of the West told us they recently reviewed thirty BLX loans and funded just one due to credit quality concerns. The underwriting was “not what I’m used to,” the bank official said, and referred to BLX as a “production office. Get it in, get it out and get it funded. That’s how it felt . . . [in] dealing with them.”

As we synthesized our understanding of Carruthers’ work, the BancLab report, the views of the former employee, our field calls, and both Allied’s disclosures and refusals to disclose, it became clear that Allied’s exposure to BLX was a problem much bigger than excessive management fees and an inflated 25 percent interest rate on the subordinated note.

Allied formed BLX to get itself out of a mess. Instead, BLX was an even bigger mess, and Allied knew it.

CHAPTER 11

Disengaging and Re-engaging

At the end of June 2002, WorldCom, a large telecommunications company led by Bernie Ebbers, acknowledged it had issued fraudulent financial statements. It filed for bankruptcy in July. Greenlight held a large position in WorldCom’s debt, which fell overnight from about forty cents on the dollar to twelve cents. It was the biggest single day’s loss in our history. As the rest of the market reacted negatively to the fraud, we suffered additional losses in other positions. Between June and July we lost more than 7 percent, the second worst decline in the history of our fund.

At the same time, I was getting tired of the Allied fight. I like stocks. I enjoy finding provocative opportunities on the long side. I am an optimist and want to participate in the market’s long-term positive trend. We always have more exposure to longs than shorts. The press began referring to me as a “noted short-seller,” a label I didn’t care for. Allied had been calling me names that were far worse than “short-seller.”

Allied was just one position in our portfolio, so I decided I would be better off paying attention to other things. Obviously, this book proves this was a resolution not kept, but it was my intention. I reasoned that the Allied controversy would work its way out on its own. The SEC would surely investigate what I sent to them, and, perhaps The Wall Street Journal could tell the rest of the story. I decided I did not need to be the public spokesman for this any longer. Originally, I had asked James Lin to prepare a Greenlight response to Allied’s June 19, 2002 press release. Now, I asked him to stop.

On July 2, 2002, I was on the train on my way to work and opened The Wall Street Journal editorial page, where Holman W. Jenkins Jr. wrote about Allied’s dispute with us. The column headlined “One CEO’s War for ‘Investor Confidence’” with an enlarged “pull quote” that read, “Differences of opinion are increasingly phrased as accusations of fraud.” Clearly, Jenkins sided with Allied.

Jenkins did not contact us in preparing the article. Generally, people named in a story get an opportunity to comment. One would think that Jenkins would want to at least hear the other side of the story before publishing. Later, I learned that Jenkins was a columnist, and the rules for columnists are different than the rules for reporters. They can write their opinion and do not have an obligation to offer the opposing party a chance to respond.

As for the column itself, I had been careful not to accuse Allied of “fraud.” Actually, I did the opposite of what Jenkins was complaining about. I criticized Allied with toned-down language, using terms such as improper and non–arm’s length. I consciously did not used the “F” word—fraud—because at that point I was not certain whether Allied’s actions were intentional or merely unsophisticated.

Jenkins’s column said that auditors had not found any problems with Allied’s accounting and that Merrill Lynch had written that Allied had put up “meritorious defenses against the criticisms leveled.” Then Jenkins said my speech “smacks of a mugging” and linked it to the class-action lawsuits that followed, before finally concluding, “Somehow we prefer the example of Mr. Walton, a CEO who seems to be taking every chance he can find to answer any criticism thrown at him.”

When I read the article, I knew I was going to have to continue the fight. I believe that Allied planted the article. Another hedge fund manager called to tell me that Lanny Davis once boasted that he “owns The Wall Street Journal editorial page.” I e-mailed Jenkins and asked him to call me to discuss the article. When he called a little while later, I told him that he had his facts wrong. I had not, for example, been in contact with class-action lawyers. He seemed mildly amused at my call and suggested that he would like to learn more about the short-selling business and we could chat in late August after his coming vacation. But his curiosity stayed on vacation: He never followed up.

I took the issue to his editor. After several e-mails and phone calls, the