Problem is, stock prices are more about perception than balance sheets. These are products now under threat from cloud services such as Google Docs and new popular computer form factors including tablets like the iPad. Microsoft has made strides to move into the cloud with Microsoft Office Web apps and the company plans to target the tablet market in the coming months. If Microsoft has a hard time finding a Ballmer alternative, the company might be tempted to look for a Steve Jobs-like figure to run the software giant.
Jobs is seen as a visionary and a brilliant product guy, which is exactly what Microsoft needs to reinvigorate the company, right? It might seem like the best strategy, then, to reach for a Steve Jobs clone. 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. He winced slightly. 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. Number one, I probably cared less. This was the event of the year for them.
We make bigger bets every day. Two, I keep a reasonably decent poker face. 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. 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. Before the end of the year, the stock crashed to a couple bucks. 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 He even sat on its board of directors, stepping down shortly before the company collapsed in early 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.
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. The spread of the subprime crisis provided opportunities to recoup those losses. The trigger for Greenlight was an unheralded item that came across the wire in late July: The largest bank in France, BNP Paribas, had frozen its depositors out of their money-market accounts, an event that caused barely a ripple of coverage in the United States.
But at the Greenlight office, an alarm went off. But when they did that, I was already studying the collateralized-debt obligations and all that other stuff because our short on bond insurer MBIA was beginning to work.
The stock was going down. There was pressure building. The news convinced Einhorn that a much larger crisis was imminent, and on a Friday afternoon, he called together his analysts and they developed a plan for the weekend—to come up with as comprehensive a list as possible of financial firms with exposure to subprime loans.
We left on Friday, and by Sunday night, we had a list of 25 financial firms that we wanted to short. Research-wise, we did a lot less work than we usually do when we take a position. Over the next three days, Greenlight shorted all 25 stocks. One percent of this, one percent of that.
No large positions. We were looking for the firms that we thought had the most exposure. Over the next two or three weeks, we kept working on it, closing some shorts, concentrating our positions on the firms that we felt were the most vulnerable.
They started announcing earnings. We started listening to conference calls, tracking the earnings. The earnings conference call is a routine exercise on Wall Street. Typically, firms release their quarterly earnings a few days in advance and then answer the specific queries of analysts during the call.
Was that merely a gut feeling? I asked. Among other things, Lehman was taking advantage of a new accounting mechanism that allowed it to book revenue based on the declining value of its own debts. In other words, because of the increasingly risky state of Lehman, loans that other firms had made to Lehman had dropped in value, and under the new accounting, Lehman could count this as a gain.
This is crazy accounting. You get to call it revenue. And literally they pay bonuses off this, which drives me nuts. But he kept his tone at the level of intense bemusement. In sifting out the worst companies in the basket, Einhorn understood where he could make the most money. On the one side, you had Goldman, which obviously had it right, and Lehman, which said they were like Goldman.
And then there was everybody else, who either had it wrong or massively wrong. The credit basket went from 25 firms to six. Greenlight covered its short on Citigroup just before the stock took a major hit.
But before long, the basket was down to two, Lehman and Bear Stearns. And though Bear was the one to go down, Einhorn believes Lehman barely escaped the same fate. 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.
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.
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. 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? Management is scared to death of short sellers.
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