Sunday, March 8, 2015

Book Review 342: Fooling Some of the People All of the Time

FOOLING SOME OF THE PEOPLE ALL OF THE TIME: A Long Short Story, by David Einhorn. 379 pages. Wiley, $29.95

Timing isn’t the most important element of securities investing, but it is very important. Over the past two decades, few investors have timed things better than David Einhorn, who started Greenlight Capital with under $1 million and today manages about 10,000 times more money.

But as an author his timing was terrible. Since 2002, Greenlight had shorted Allied Capital, a Washington, D.C., based investment company that mostly made loans to small and medium-sized businesses that were 75% guaranteed by the Small Business Administration.

He was betting Allied’s stock price would have to go down because he had detected accounting errors, which could hardly be the result of anything but fraud, in Allied’s Securities and Exchange Commission reports. Further investigation discovered out-and-out fraud in loan originations.

But as Keynes said, “The market can remain irrational longer than you can remain solvent,” and Allied’s stock did not go down.

“Fooling Some of the People All of the Time” is Einhorn’s riproaring account of six years bearing down on Allied. It is as exciting (for people who can get excited about Wall Street) as Michael Lewis’s “The Big Short” and far more useful as a primer on what really smart investors do.

Also what really corrupt companies do.

But Einhorn published his book in 2008, and very soon people were worried about the collapse of Lehman Brothers, which was 100 times bigger than Allied. And then AIG, bigger even than Lehman.

Einhorn did not help his own book by being short on Lehman, too; and when people subsequently thought of David Einhorn it was not as the young guy who made a small killing on Allied but as the whiz-kid who made a big one on Lehman.

In fact, he didn’t make any personal money off Allied because he got into a public dispute with Allied management, which alleged he was maligning a good company for personal gain. Einhorn countered by pledging to turn over any gains to charity.

The real interest of “You Can Fool Some of the People” is that Einhorn, like Harry Markopolos blowing the whistle on Bernie Madoff, could not get anyone to look as closely at Allied as he had. (You should read “No One Would Listen,” Markopolos’s excellent book.)

Not the SEC, nor the SBA, nor brokerage analysts who followed Allied, nor business journalists, nor Allied’s mostly widow-and-orphan stockholders. Not its directors. Hardly anybody listened, although a couple of other savvy investors joined Einhorn in the pursuit of Allied.

They never truly caught up with them. Allied did eventually come close to collapse, but unlike Enron or Madoff, it was taken over by a bigger company (Ares) and its top officers were never punished. (Some small fry in the Detroit branch were convicted of various charges related to phony loan originations.)

Greenlight profited somewhat from its short, but the big losers were American taxpayers.

By 2008 no one had time for a relatively small con game like Allied, but relative does not mean small. Allied was a $4 billion company, and it had raised more than a billion dollars in fresh capital during the period that no one was listening to Einhorn. The amount of taxpayers’ money the SBA lost in fraudulent loans was at least a quarter of a billion dollars, maybe a lot more.

And that is why it is still well worth reading “Fooling Some of the People All of the Time.” (Get the revised edition which carries the story forward from the mistimed original publication.)

If you have a retirement account, do this. Even if you don’t, it’s a great yarn, and although the subtitle calls it a long story, it isn’t. Paper-wasting design tricks make it appear to be 379 pages, but the text is really about 200 pages. 200 tightly-written, thrilling pages, even when you know the outcome.

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