Maverick Hedger Provokes Lehman

The Age

Thursday June 5, 2008

Louise Story, New York

DAVID Einhorn thinks another big Wall Street bank is headed for trouble - and he is not being quiet about it.

For eight months Einhorn, a rabble-rousing hedge fund manager, has pilloried the venerable Lehman Brothers in an effort to drive down the bank's stock price, against which he is betting.

Lehman Brothers is not amused. In recent weeks, chief financial officer Erin Callan has tried privately to rebut Einhorn to nervous investors, who have feared for Lehman's health ever since Bear Stearns succumbed to a panic. But despite Callan's efforts, Lehman's stock keeps falling: It tumbled 9.5% more yesterday in a deluge of selling, bringing its loss for the past year to 59%.

The battle over Lehman has captivated Wall Street and left the bank struggling over what to do next. The bank, which is expected to post a quarterly loss of $US1 billion ($A1.05 billion) in a few weeks, may raise capital to shore up investor confidence. The bank has sold more than $US100 billion in assets in recent months to shore up its finances, according to a person close to the company. That person said new capital would most likely come from a source other than the public markets.

Einhorn, who runs a $US6 billion hedge fund called Greenlight Capital, has been profiting from Lehman's growing pain. Critics say he is needlessly fanning fears about the precarious health of the financial industry at the very moment executives are struggling to stabilise their ailing companies. Many on Wall Street still wonder if hedge funds like Greenlight helped bring down Bear Stearns and spread false rumours about the bank, a possibility the US Securities and Exchange Commission is investigating.

In an interview on Monday, Einhorn said he was not out to tell Lehman Brothers how to fix its problems. He questioned how the company valued the assets on its books, and whether it was disclosing all the risks it faced. Investors have good reason to question banks: financial companies worldwide have suffered more than $US380 billion in write-downs and credit-related losses in the past year, laying bare their shoddy risk management.

Lehman has been singled out because of the large role it played in the mortgage market and its reluctance to disclose information about its assets. "Lehman has been one of the deniers," Einhorn said.

Einhorn began betting against Lehman's stock last July, and he has been right so far. But things have not always gone his way. His long battle against Allied Capital Corp prompted the SEC to investigate comments he had made about that company.

Einhorn instigated the latest dive in Lehman's stock price two weeks ago when he encouraged other investors to short the stock at a large conference in New York.

It is impossible to quantify Einhorn's influence on Lehman's stock price. But hours before his speech two weeks ago, trading volume exploded for Lehman stock puts, which are options to sell the stock to profit if it falls. That day, more than 200,000 put contracts against Lehman were sold, up 49% from recent typical Lehman put trading.

Within Lehman, workers are calling Einhorn's strategy "short and distort". Many hedge fund managers talk freely to each other about companies, but they typically shun publicity. Einhorn, by contrast, is working with a financial public relations firm, the Gordon Group, to promote his views on stocks.

But Einhorn's public approach leaves him open to being criticised himself. Brad Hintz, a banking analyst at Sanford C. Bernstein & Co and Lehman's former chief financial officer, said that supporters of Einhorn's latest arguments were "piling on" against Callan. And Buckingham Research Group said his concerns were "just wrong".

"These recent criticisms seem well-timed to take advantage of the market's concern about weak second-quarter results that we expect for Lehman," the Buckingham analysts wrote in a report.

Lehman, to be sure, will have to explain its second-quarter earnings when they are announced in the next two weeks. Callan has said the bank will take more write-downs and that some hedge trades were not effective.

Einhorn likes to point out that Lehman's management has incentives to be positive since compensation is tied to performance. Short-sellers, he said, received undue scepticism, and he said he would be getting far less attention if he were discussing a positive view of a company. -- NEW YORK TIMES