As Einhorn left the stage to thunderous applause, the moderator came back on and said, “Six years ago, Allied stock opened down 20 percent the day after David spoke. We’ll see where Lehman opens tomorrow.”
Einhorn had just invited the world to fall on his head for a second time.
In Greenlight Capital’s first quarterly letter to investors, Einhorn and his original partner, Jeffrey Keswin, signed off with a quote from the noted philosopher Ken Griffey Jr.: “I don’t consider myself a home-run hitter. But when I’m seeing the ball and hitting it hard, it will go out of the park.”
That was 1996. The firm had just $900,000 in assets, more than half of which came from Einhorn’s parents back in Milwaukee. It was barely enough to rent an office—they made do with a single windowless room. Twelve years later, Greenlight has over $6 billion under management. Einhorn has hit many balls hard, and some of them have gone to the moon.
Though Allied tried to brand him in the public eye as a ruinous short seller, it is difficult to overstate Einhorn’s stature within the hedge-fund community. His peers respect him personally—“A super-high-quality human being,” says Bill Ackman of Pershing Square Capital, who has known him for about eight years—and more than that, they revere his acumen as an investor. He is, for the most part, an old-fashioned stock picker. Though he does engage in short selling, most of his positions are long, and they include companies like Microsoft and Target. Unlike other types of funds, Greenlight doesn’t use borrowed money, or leverage, to amplify small profit spreads, nor does the firm rack up huge trading volume. The nine analysts who work for Einhorn take weeks, if not months, to research companies, and when they find one that he likes—or doesn’t like—he tends to hold the position for a long time. Given this approach, Einhorn can’t afford to be wrong very often, and he hasn’t been. If you had given him $1,000 in 1996, he’d have turned it into $14,600 by now.
In the larger Wall Street community, however, the view of Einhorn is somewhat less fawning, owing in part to the fact that he has established himself as a critic of contemporary investment-banking practices. “The investment banks outmaneuvered the watchdogs,” he said at Grant’s Spring Investment Conference in April. “With no one watching, the managements of the investment banks did exactly what they were incentivized to do: maximize employee compensation. Investment banks pay out 50 percent of revenues as compensation. So more leverage means more revenues which means more compensation.”
Lehman Brothers has been Einhorn’s largest target to date, and it’s a battle that has riveted the financial world. When Bear Stearns had to be bailed out by the Federal Reserve, it was widely rumored that Lehman would’ve been the next one to go down. Spared the worst, Lehman was allowed to borrow from the Federal Reserve against collateral that nobody in the private sector would’ve accepted—and confidently assured investors that it had the wherewithal to make it through whatever remained of the credit crisis. But in this fragile environment, the last thing the firm can afford is a short seller with credibility in the hedge-fund world.
There have been, by all accounts, a lot of hedge funds shorting financial stocks. But the only prominent investor putting his name, and his face, to a singular position has been Einhorn. The predatory nature of short selling drives the target companies mad—“I will hurt the shorts, and that is my goal,” vowed Lehman Brothers CEO Richard Fuld at the firm’s annual meeting in April—and it doesn’t tend to go over well with the public, either. The notion of profiting from a company’s misfortune, as vital as it might be to the efficient running of the market, is anathema to people outside the industry, so much so that precious few investors do it publicly anymore. It’s too easy to look like a scoundrel who’s out to destroy companies and put people out of work. Even Jim Chanos, the short seller who smoked out Enron, is reviled in some circles—because thousands of people lost their jobs and because he made money off it.
But Einhorn is remarkably unfazed by the vitriol he stirs up. He sees no conflict between his public moralism and the fact that he stands to profit from it. He has a profound sense of duty, and an almost innocent belief that if you’re right, nothing else matters.
Greenlight Capital occupies a single high floor of a nondescript modern office building near Grand Central. It’s as quiet and orderly as a library. There is a game room with a pool table and a bar, but it doesn’t look like it’s seen many wild parties lately. The room also contains a couch on which Einhorn often takes an afternoon nap—he’s very serious about his naps. Twenty-five people work in the office, including a single trader who sits in a small, high-tech cubby next to Einhorn’s corner office. Though he lavishes much praise on his “team,” Einhorn is to Greenlight what Kobe Bryant is to the Lakers.