Early last month, just before his appearance at the Sohn conference, Einhorn sat in his semi-neat office and discussed how he came to single out Lehman among all the other reeling financial companies. He has black curly hair, cut short and neat, and was wearing in a blue dress shirt, no tie, pleated khakis, and loafers, a vision in Banana Republic. There’s an air of the Boy Scout about him. He’s tall, slight, and has a nasal, high-pitched voice. He is 39 years old, but could easily be mistaken for someone half his age.
Einhorn runs his firm in a self-consciously humane way. High performance is expected, but there is no cracking of the whip and no overbearing hierarchy. Office doors are open; people tend not to work crazy hours. I asked him if it’s true, though, that he starts his own workday at two in the morning. He winced slightly. “My goal is to get home every day in time for dinner with the family”—he lives in Westchester and has two girls and a boy—“and then we play with the kids for a while, and then I go to bed around the time they do and sleep from nine to three or nine to four. It’s the same six hours everyone else gets. I’d just rather do my e-mails and my reading in the morning rather than late at night, that’s all.”
He doesn’t spend much time playing poker anymore. He took it up mostly for the purpose of playing at the World Series; all he really did to prepare was read a couple of books and play a bit with friends and online. But that was enough to finish in eighteenth place with a big chunk of prize money, which he donated to charity. “Texas hold ’em is all about folding and waiting for that time that comes up every hour or two where you actually have an advantage and you can press it,” he says. “I had a couple of advantages over the group. Number one, I probably cared less. This was the event of the year for them. We make bigger bets every day. There’s more at risk in what happens in Microsoft than I could ever bet on a poker table. Two, I keep a reasonably decent poker face.” A trader who has known him for more than a decade said his talents at the table translate easily to the market: “There are lots of smart people out there. I don’t think all of them have the ability to read the rest of the players as well as David. He can actually see how stocks move on different pieces of news and judge what facts the market seems to be acting on. Then he assesses what analytical edge he has over the other players.”
“I think he’s endangering the franchise—his own franchise. I believe every word he says, but I’d never say it myself. If Lehman failed, how many lawyers would be coming after him?”
He certainly knows what bluffing looks like. In its early days, Greenlight prospered, in part, by identifying a succession of weak financial firms and aggressively shorting them. Delving deep into their books, Einhorn saw, before the market did, just how paltry their hands, which is to say their balance sheets, really were. His shorts on Conseco, CompuCredit, Sirrom Capital, and Resource America—some of the more spectacular corporate flameouts of the late nineties and early aughts—each returned more than 80 percent. Greenlight had bombs, too. It bet against a dot-com-era phenomenon called Chemdex, adding to its short position as the stock soared for no good reason. Finally, Greenlight lost its nerve and covered at about $160 a share, losing 4 percent of the firm’s total capital. Before the end of the year, the stock crashed to a couple bucks.
“We’ve had catastrophes, and that was one,” says Einhorn. “And what we do is we own up to it immediately, we write about it in the quarterly letter. We admit our mistakes so that we have a chance at not repeating them.”
The most recent catastrophe involved a subprime lender called New Century, in which Einhorn held a position dating back to 2002. He even sat on its board of directors, stepping down shortly before the company collapsed in early 2007. Einhorn had been drawn to the company because it had what he considered an advantageous model—rather than convert its loans into securities, as many lenders do, New Century sold its immediately for cash. All it did was originate loans, and in Greenlight’s analysis, that made it safer and more profitable than others in the field. But that distinction failed to make a difference when the subprime market cratered—“If the ship sinks, it doesn’t matter who’s sitting in luxury class,” says a manager of a rival fund—and the wreckage of the company is now in litigation, limiting Einhorn’s ability to talk about it freely. What he does say is that the company began to convert loans into securities and that he joined the board to urge otherwise. In any case, Greenlight seems to have missed a fundamental truth—that the whole sector was headed over a cliff.