David Einhorn's Book: What Else I Learned

David Einhorn's financial involvement with Conseco, Inc. is very instructive for anyone involved in investment research or portfolio management. The patterns of individual and corporate behavior exhibited by Conseco and its CEO have been, and will continue to be repeated by many other actors in specialty financial services. 

The bulk of the book, however, is a copiously detailed recounting of Greenlight's involvement with a Business Development Company called Allied Capital.  I have to believe that some of Mr. Einhorn's motive for writing at such great length was cathartic, given "what a long strange trip" shorting these shares must have been.  It's understandable, but I took away a couple of points which I think are very important for the future of our markets and regulation.

Greenlight Capital did a prodigious amount of due diligence on Allied, its accounting, and even on its portfolio companies.  It even hired the global investigations firm Kroll International to help them, along with a colorful retired business executive and shareholder who was a research pit bull on Allied.

Greenlight chose to share its research findings with buy and sell side analysts, portfolio managers, the SEC, the Small Business Administration, Congressional staffers and the top guns in the financial press. 

It was absolutely no surprise to me about the conflicted behavior and personal lassitude of Wall Street analysts.  That is a given, and it has always been thus. The financial press writers Mr. Einhorn spoke to really never took the bit between their teeth even though they were spoon fed data and clues, like bread crumbs.  I wonder why they demonstrated such passivity towards this story?

No, the biggest disappointment came from the Federal regulators, particularly the SEC and the Small Business Administration, which had jurisdiction because of direct funding and their oversight of BDC's and their portfolio companies.  Both the SEC and the SBA come across as arrogant, distant, lazy and incompetent.  Federal financial regulators recent performance history has been less than stellar, just when the need for superior acumen was greatest.

In the case of IndyMac Bank, which we have written about, Congress and auditors found the Federal Office of Thrift Supervision so negligent and incompetent that OTS was dissolved and folded into the Office of the Comptroller of the Currency. 

Dodd-Frank has multiplied the number of Federal regulatory actors, at great expense to taxpayers and businesses.  Given the culture of these Federal agencies, the quality and motives of senior political employees, and the lack of incentives to perform, our financial regulation structure will be prohibitively expensive and unproductive for managing or reducing systemic risks.  This was not a happy lesson to take away from the author's book.