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Fooling Some of the People All of the Time

Posted by Larry Doyle on December 7, 2010 9:21 AM |

Who is willing to stand up and call out the companies, the financial regulators, and others who both enabled and embodied the practices which brought about our financial crisis?

David Einhorn, President of Greenlight Capital, speaks at the 6th Annual New York Value Investing Congress in New York City, October 13, 2010.There have been and will continue to be many well written books highlighting some of the finer points from this economic period. Will there be any books written which truly take off the gloves and call out the individuals and institutions deeply involved in the ‘Wall Street-Washington incest’ central to our economic demise? One book I plan to read seems to address this very theme. I thank a regular reader of Sense on Cents for bringing David Einhorn’s Fooling Some of the People All of the Time to my attention.

To those involved in the financial industry, Einhorn needs no introduction. To those in the general public, let me inform you that David Einhorn–more than any other individual– publicly called out Lehman Bros. as a disaster waiting to happen, and well in advance of anybody saying the same. What does Einhorn have to say now? What does he address in this book? Let’s navigate.

Einhorn writes:

I want to explain why I wrote Fooling Some of the People All of the Time. After all, I am not an aspiring author and I love my day job as a fund manager. Further, I will not benefit from telling my story, as I have pledged my share of any profit from this book and the investment in Allied Capital to charity. The story you are about to read exposes the grim realities of unchecked corporate misconduct by a bad company and the failures of proper regulatory oversight. Allied Capital is a fraud. I didn’t have to write a book to know that I am right about that. However, Allied isn’t even the biggest, most egregious, or most audacious fraud I have seen. In a sense it is a garden variety fraud – dishonest business dealings by dishonest management.

So why all the fuss? The story I am telling is one that has been surprising and unexpected – even to me. I think it is important and needs to be told. This book reveals some serious problems in the regulatory landscape that I am in a unique place to discuss. I care that the SEC and other regulators seem to have stopped enforcing laws against corporate malfeasance. I care that company officials can lie with impunity on public conference calls. And I have been appalled that the government officials overseeing the lending programs that Allied has defrauded are so indifferent and unwilling to act even when presented with clear evidence of abuse. The overall lack of law enforcement is startling. (LD’s highlight)

There is a growing populist sentiment against the hedge fund industry and short-sellers. I agree that it is unfair and elitist for only wealthy people and institutions to have access to some of the best money managers. I also agree that the hedge fund industry has its share of bad players, as do all professions. However, short-sellers need encouragement. They are an important voice in the market. There is a collective benefit we all enjoy by having profit-motivated investors try to sort out the good companies from the bad. Most short-sellers remain anonymous, and after seeing what I have gone through for simply calling a spade a spade, who could blame them? The only people discussing short-sellers are the even more motivated management teams who get caught with their hand in the cookie jar. They scream loudly, point fingers and make wild accusations, and many uncritical listeners buy into the distraction. This book is meant to inform the marketplace about the other point of view.

If we are going to permit the retribution against the whistleblowers shown in this story – defamation, investigation, invasion of privacy and so forth – then we surrender public free speech. If we allow the people in this story to operate outside the law, then we nourish a corrupt business culture. Rather than turn a blind eye to the fraud I witnessed, I made a decision to stand up and speak out despite the consequences. I hope my story inspires regulators and government agencies to do the right thing.

David Einhorn

Free speech is a virtue worth fighting for.

If regulators and government agencies care about reinstilling confidence in our markets and economy, they can not merely try to do the right thing going forward. They must go back and clean up the dirty laundry left from past transgressions both on Wall Street and in Washington. Not doing so leaves these individuals and institutions open to real questions as to their credibility, if not their integrity.

David Einhorn clearly gets that. America is beginning to capture that reality as well. Are Mary Schapiro of the SEC, Gary Gensler of the CFTC, and Richard Ketchum of FINRA listening? Perhaps we should send them a copy of Einhorn’s book.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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