Conversation with David Einhorn

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If you’re going to commit financial fraud, you probably don’t want to find yourself sitting at a table across from David Einhorn, who will know what you’re up to and share it with the world. Similarly, if you’ve never played poker and have only ever had a 15 minute tutorial on the game, you probably should avoid playing with the Greenlight Capital founder, whose vastly superior skills will demonstrate just how much you suck. As I like to live on the edge, yesterday in an undisclosed location, I choose not to heed the wisdom of the latter. Over several hands, Einhorn and I discussed the new edition of his 2008 book, “Fooling Some Of The People, All Of The Time.”

The latest version includes an epilogue, and concludes the story of Allied and Einhorn’s years of trying to get other people to listen when he said something was up. As we now know, Allied’s shares collapsed, Greenlight collected $35 million, and the hedge fund made another big (and correct) call on a bank called Lehman Brothers, whose failure was, according to Einhorn, “the Allied story all over again,” just on a bigger scale, with more resounding consequences. Even after the last crisis, which should have been a wake-up call, Einhorn doesn’t think we’ve changed much and if anything, the reforms passed only “encourage poor behavior and will likely foster an even bigger crisis.” He and I chatted about that exciting event, Quantitative Easing, Steve Eisman’s illicit pleasure of choice and more, plus poker tips for people who really, really need them.**

BL: You mentioned an unexpected and tremendous response from readers of the book the first time around. What’s the craziest piece of fan mail you’ve gotten- has anyone sent you their undergarments in the mail?
DE: [laughs] No, do you think they should?
BL: Sure.
DE: You’re hysterical.
BL: I mean, people do that. Musicians, rock stars get sent that sort of stuff. You’re like a rock star…of investing.
DE: Well, the thing is, my following [for the most part] is with 20 to 35 year old men. So, you know. I definitely don’t want their undergarments.

BL: You said that we didn’t actually get to the root of the last crisis- we just swept the problems under the rug, and that we’re setting the stage for the next crisis, which will be even worse. How much worse? What are we talking here, what does that mean- rioting in the streets? A depression?
DE: I hope not.
BL: Well, does it?
DE: I don’t know, how would I know?
BL: You can’t predict the future?
DE: [laughs] I don’t how exactly it will play out- but I’ve got really good news for you.
BL: What’s that?
DE: You’re going to win this first hand
[I do, with a Queen, but don’t really know how this happened.]
BL: Don’t let me win.
DE: If he keeps dealing me 6-2, you’re going to win.

BL: In the book you write that you “wonder if Andy Fastow, the jailed Enron CFO, ponders why he doesn’t have more cellmates, particularly since his crime provoked Sarbanes-Oxley.” Do you think more financial executives should be going to jail? Should the Lehman people be in jail? Should Erin Callan be in jail?
DE: I think all those those things are very fact specific. But I don’t think it should be ignored as a possibility.
BL: Well do you think Erin Callan committed a crime?
DE: I’m pretty sympathetic to Erin Callan relative to others; I feel like she got put into an unsolvable problem. Lehman’s problems were there before she got promoted to CFO. I’m not saying she did everything perfect, but the previous guy really got them deep into the muck. The problems were very institutional from the behaviors above and I think she was kind of brought in as a functionary.
BL: Then what about Dick Fuld- should he be in jail?
DE: [laughs] I’ve never met Dick Fuld
BL: You don’t have to meet him to know if he did something wrong, you knew this company inside out. And in the book you say Allied management should go to jail, right?
DE: Oh, I definitely think they should.
BL: So was what they did worse than the Lehman people?
DE: The Allied stuff was more clear for a longer period of time; there was some bad stuff at Lehman, but it’s less clear to me.

BL: You said what happened with Allied, and then with Lehman/the financial crisis in general was a failure of the “gatekeepers”– regulators, auditors, directors, media, sell-side analysts, ratings agencies– to do their jobs. You’ve also said not much has changed or at least not enough has changed. That’s a pretty depressing thought, no?
DE: It is disappointing that the financial reform bill, which is as long as a telephone book, does not make the basic, obvious reforms that are needed to fix the structural weaknesses in the system that became quite apparent during the crisis. While one could debate whether it was a good idea for certain entities to receive bailouts for the common good to stem the crisis, it is hard to justify why now that things appear to have stabilized that we didn’t go back and make reforms to prevent a repeat. In early 2009, Michael Lewis and I wrote an op-ed in the New York Times with a few simple ideas about what needed to be done. I am disappointed that none of that was adopted. I believe that the reason Washington wasn’t able to do the needed reform is the problem of concentrated benefit/diffuse harm — also known as the special interest. Avoiding needed reform mattered the most to those that would be affected the most by it. So, they marshaled their resources against reform and largely succeeded. To the extent there are bits of reform that managed to sneak through, they are fighting implementation at the government agency level and lobbying the new Congress to roll back the law.

BL: Vegas or Atlantic City?
DE: Definitely Vegas.
BL: Where do you stay when you’re there?
DE: The Four Seasons.
BL: How often to you go?
DE: Once a year, to play in the World Series of Poker.
BL: Do you have a regular game in New York?
DE: No, I wish I did.
BL: You should start one.
DE: [Smiling] If I had one, we’d invite you.

BL: You’re short St. Joe’s Co. When someone from the company tries to discredit you in the press, is that when you’ll know your analysis is definitely correct?
DE: We already know our position is really solid. [laughs]
BL: Will it give you that extra courage of your convictions?
DE: I don’t think we need it at this point.
BL: Have you talked to Bruce Berkowitz [whose Fairholme Capital Management is St. Joe’s largest shareholder]?
DE: No, but I haven’t tried that hard.
BL: He’s denied you?
DE: We’ve been short St. Joe’s since 2006. It developed for a while, I talked about the position at Ira Sohn in 2007 at a pretty good length. I don’t think he had his position then. Somewhere along the line he started buying up all the stock. We knew someone who knew him and I told that person we’d talk to him about it and we were told Bruce doesn’t want to talk to you. I thought that was the end of that. Then he gave an interview at WealthTrack saying, “I don’t want people calling and tell me we’re right, I want people calling me and telling me why we’re wrong.” I just could not let that one go [laughs], so I wrote him a letter saying, “let’s talk about this, maybe you can talk us out of it or maybe we can do your shareholders a service.” He never responded, and then at the Value Investing Congress in October, someone asked if we’d talked with Berkowitz. We hadn’t and we still haven’t.

BL: Have investors on the opposite side of one of your long or short calls ever convinced you you were wrong about something?
DE: Yes, and I’m glad you asked that question! We were short Goodyear from 2001 to 2004, maybe 2005. And we heard that David Tepper had bought a big position and we called him up and we argued it out and as I listened I realized his argument was about as good as mine, so we covered.

[DE: Can you beat a 6?
BL: No. (shows cards)
DE: Sure you can...you have a King.
BL: Oh...I thought I needed something else to win...(I don’t look at the dealer, who was very kind and understanding of my deficiencies, but if I had I don’t know how it would have been possible for the look on his face to be anything other than utter awe at how a person could be this bad.]

BL: You like to solve puzzles by analyzing documents and people’s motivations, ferreting out information, etc. Have you ever thought about taking your analysis to the next level? Like, for instance, you’re investigating a pizza delivery chain– it could be Domino’s but doesn’t matter. You take a job as a delivery guy. You could get some fundamental economic analysis by charting your tips; you could invite yourself into a customer’s house to see their reaction when they eat the pizza. (The only issue I foresee is that if people found out how you got your research, the company would claim that you screwed up orders, or took bites out of the slices or delivered stuff late in an effort to drive down the stock…but you’re no stranger to that stuff, Lehman and Allied said the same thing.)
DE: [smiling] I don’t think that would play to our strengths. If you have to figure out stuff like that than it’s probably not our type of investment where we’re going to have much of an advantage.
BL: But couldn’t that only add more color to your other research?
DE: Hopefully the investment won’t tip on that kind of experience. I do understand that Domino’s has improved their pizza though.

BL: You don’t agree with the Fed’s Quantitative Easing program. Why didn’t you sign the anti-QE 2 letter a bunch of investors and economists wrote and sent to Bernanke?
DE: No one showed it to me.
BL: Really? That’s surprising. If they had would you have signed it?
DE: I would’ve thought about it- I may not have gotten it because as I remember it was by a bunch of Republicans, so maybe that’s why they wouldn’t have sent it to me, because I don’t qualify.
BL: As a Republican?
DE: Right, I’m a Democrat, my wife is the Republican. We’re in a mixed marriage.
BL: You do a pretty good job of keeping your party affiliation under wraps.
DE: Well, that’s probably because I’m not really terribly partisan- it’s kind of, a pox on both their houses, you know?
BL: Did you support Obama in 2008?
DE: I voted for him. Someone might have hit me up for a very small check but I didn’t do any fundraising.

BL: Should the “rich” pay higher taxes?
DE: I think the fiscal situation is very complicated. In order to address it properly, everyone needs to make concessions. And I think rich people will have to make more– but I don’t believe we can solve the problem simply by raising taxes on rich people. I think it should happen, but not in isolation. A lot of people are going to have to make a lot of compromises.

BL: If you were offered the job of chairman of the Federal Reserve, would you take it?
DE: I don’t think I’m looking for another job.
BL: But if offered…
DE: No, I don’t think I would do that- I have a really good job.

BL: And if you weren’t a hedge fund manager, what would you be?
DE: Oh, god, I’m not sure.
BL: What did you want to be when you were a little kid?
DE: A baseball player- but I have no athletic ability, so that’s a problem.
BL: Did you play in high school?
DE: Nope, just little league- that was really fun. Oh, I’ve got a good hand.
BL: Okay, let’s see…(Einhorn beats me with a pair of tens).
DE: But you know, I didn’t go through college thinking about what I was going to be when I left. I was just concentrating on where I was, which is what I’ve always tended to do. I’m not a huge long term planner.
BL: So you were just taking in the Cornell experience.
DE: Right, exactly.
BL: Were you in a fraternity?
DE: Yes, SAE- I loved it.
BL: What sort of hazing did your pledging entail?
DE: That’s been sworn into confidence forever.
BL: Even in very serious high level interviews?
DE: [laughs] Especially in very serious high level interviews
BL: Do you have a paddle?
DE: [laughs] Yes, got one of those.
BL: Where do you keep it?
DE: That’s a good question- I’d have to look. It’s not on display or in a place of prominence anywhere like that.

[After we finish another round, Einhorn winning, he tells me, “Okay, so you didn’t have to call that bet there. When you’re 5-high, you don’t have to put more money in. That’s my poker tip for you.” I was all "Oh, thanks, I'm going to write that down" but in truth I was finding it difficult to interview and play at the same time (though clearly I would’ve found the just playing on its own part to be a challenge as well), so I had no idea what he was explaining to me but I was later told by a friend I’d done something pretty, pretty, pretty dumb, which I can buy.]

BL: Were you offered the Todd Combs job at Berkshire Hathaway as some have guessed?
DE: Nope, categorically no.

BL: Do you have any thoughts on the insider trading probe?
DE: I think it’s very fact specific. You just have to hold back on what you think of this until more stuff emerges. If the government has evidence, then they should do their thing. But it’s really too soon to say, I think. Not enough has come out.
BL: Do expert networks seem like they have an illegal edge to you, like some are saying?
DE: I don’t think by themselves they’re a problem.

BL: Apple is one of your long positions. What products do you own?
DE: I have an iPad, an iPhone and an iPod.
BL: BlackBerry for work?
DE: Nope, no BlackBerry, never owned a BlackBerry.
BL: What’s your favorite app?
DE: No apps, I just use it for basic stuff- internet browsing, reading emails on a big screen on the train ride home.
BL: I was going to ask- town car or Metro North.
DE: Yup, I’m a Metro North rider.
BL: Bar Car?
DE: What’s the bar car?
BL: What’s the bar car? People LOVE the bar car! It’s where you can drink and mix it up on the way home to Westchester and CT. People are VERY passionate about the bar car.
DE: Wow, I didn’t know that.
BL: What’s your drink?
DE: Scotch.
BL: What brand?
DE: Almost any.
BL: Even cheap stuff?
DE: [laughs] Sometimes cheap stuff. I can tell the difference though.

[Dealer: She wins with a pair of nines.
DE: You’re tough to beat.
(Obviously an entirely true statement)]

BL: Greenlight was named by your wife, because she gave you ‘the green light’ to start the firm. I’m starting a hedge fund–
DE: Really?
BL: For the purposes of this question, yeah. What should it be called?
DE: [laughs] Oh boy.
[dealer deals, I raise 1,000 because why not, I have no idea what I’m doing anyway]
DE: Really? You like that flop?
BL: Yes, I do.
DE: Okay, let’s see the next card; I think I might have to get lucky.
BL: Are you thinking about the answer?
DE: Yes, the name.
BL: While you’re thinking about that- are you going to give me seed capital?
DE: Hmmm…you could call it Second Point, one better than Third Point. Or would Fourth Point be better?
BL: Okay, I’ll let you think about the name a little more- are you investing with me?
DE: What’s your strategy?
BL: I can’t disclose it, it’s too awesome.
DE: [laughs] Oh yeah?
BL: Yeah, I can’t let you take it back to the office.
[Hand goes to Einhorn with 2 pair]

BL: Are you going to write a memoir?
DE: Probably not. I don’t have a plan to. I didn’t really plan to write this book, either.
BL: You felt like you just had to get the story out?
DE: I really did. I felt that people should understand what was going on. I feel even better about it now– they can read it and not worry about it being about Allied stock, which was never really the point.

BL: One of the reviews on the back of the updated version of Fooling is from [FrontPoint Partners’] Steve Eisman, who says: “Got your book on Friday, finished it on Sunday. To me, like reading porn.” Did that disturb or flatter you?
DE: I loved it- I thought it was hilarious.

BL: Does it bother you how hedge fund mangers (and especially short sellers) are perceived (often negatively)? In many cases- for instance, the Allied and Lehman positions- you are the ones pointing out wrongdoing and should be dubbed the “good guys,” but the companies say they’re being victimized and it’s a nice/easy narrative for the media to paint hedge funds as the evil party. Do think it’s possible to change the perception/portrayal?
DE: Part of the “Fooling Some of the People” story is to show in detail that this is case. On the margin, the portrayal/perception is changing for the better. The one group that IS collectively doing better since the financial crisis is the media. It is more willing to consider critical views and give them a hearing rather than just listen to the management/wall street spin.

BL: Last question– are you familiar with this quote– “Einhorn is Finkle! Finkle is Einhorn!” ?
DE: Of course! I thought the movie was hilarious…the quote was most amusing when I heard it in the theater and I still enjoy the reference whenever I hear it.