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The Confidence Man

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If Einhorn has been the face of the shorts, Callan, then Lehman’s CFO, was the same for the other side. She was a ubiquitous presence on television and in the newspapers, talking up Lehman’s financial health in the midst of the Bear Stearns meltdown. She won praise from, among others, Meredith Whitney, the banking analyst at Oppenheimer & Co., one of the early skeptics in the sector. Callan, Whitney told The Wall Street Journal for that May 17 story, “is going out on a limb to provide more transparency in Lehman’s earnings, business, and strategy. As long as things play out according to her guidance, she will solidify her reputation among investors.”

After Einhorn announced in April that he was shorting Lehman, the firm called Greenlight and asked for a copy of the speech, which he sent over. That led to the call between Callan and Greenlight, right before the Sohn conference. Callan’s position, and the firm’s, was that Einhorn didn’t understand the full complexity of their business and that he was merely seizing on particular aspects of it as evidence of wider problems that didn’t exist. More than that, they saw Einhorn as preying on panic in the market for his own crass financial benefit, at potentially disastrous cost to Lehman shareholders, employees, and the financial system. “Short and distort” was Lehman’s anti-Einhorn rallying cry. It didn’t go unheeded on Wall Street. Bear Stearns had been such a big score for so many short sellers that the SEC is now investigating whether they instigated a run on the bank. In the view of Lehman Brothers, Einhorn was merely keeping the short-selling frenzy going and potentially voiding the whole purpose of the Federal Reserve’s intervention at the time of Bear Stearns’ troubles, which had been to prevent another big firm from toppling into insolvency.

Even some in the hedge-fund community puzzled over what exactly Einhorn was up to. Taking a short position is one thing. But what was the point of being so public about it? Einhorn’s contention that it was “the right thing to do” didn’t compute. Most didn’t want to be on the record even discussing shorts. That’s how touchy the issue is. One hedge-fund manager says that going public with a short position is “a business decision we’d never make. The unwritten code is that you don’t talk about your shorts because it’ll make it hard to get meetings with corporate management, which we need to do our job. Management is scared to death of short sellers.”

“I think he’s endangering the franchise—his own franchise,” says another manager. “I believe every word he says, but I’d never say it myself. If Lehman failed, how many lawyers would be coming after him?”

A hedge-fund analyst who covers the banking sector agrees that Einhorn’s analysis is hard to refute, but believes that “the same is probably true of all the broker-dealers. I don’t know any CFO who’d be willing to give you real numbers for what’s on their balance sheet in this environment.”

When Einhorn made his first public remarks about Lehman, a passing reference in a speech that was largely about the failure of the rating agencies to keep up with a massive expansion in credit risk, the company’s stock traded at $57 and rallied modestly over the next couple of weeks. When he talked about it again at the Grants conference on April 8, it traded at $43.67, and dropped about three bucks the next day, though it would soon be back over $45. And when he spoke at the Sohn conference on May 21, it had closed that afternoon at $39.56. The next day, it was down just a dollar, or less than 3 percent.

So Einhorn’s Sohn speech didn’t quite match his Allied speech in immediate market impact. But Lehman stock has weakened almost every day since, whipping Wall Street into a frenzy, making Einhorn a lot of money, and rallying what was left of Lehman’s supporters. And the world once again started crashing down on his head. Brokerage analyst Brad Hintz of Sanford C. Bernstein, who used to be the CFO at Lehman, told Business Week that the “concerns of the shorts” are “overdone.” An analyst on CNBC said Einhorn was “inexperienced” and called his research “flimsy.” A senior partner at a buyout firm, though no fan of Lehman’s, summarized one cynical view of Einhorn on the Street: “When a guy stands to profit as much as he does, shorting a company in so precarious a condition that the Fed had just moved in to protect it, well, you have to wonder about his motivation. Yeah, there’s truth to his argument, but now is not the time. Two years ago would’ve been heroic. If he brings down Lehman, the guarantors are going to be me and you the taxpayer.”


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