What was Lehman Brothers’ (LEH) reaction when shortseller David Einhorn started arguing that the firm hadn’t written down the value of its debt portfolio enough? It tried to destroy Einhorn’s credibility:
Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm’s financial condition which suits him because of his short position in our stock…
As we now know, Einhorn was right and Lehman was full of it (or clueless), and the credibility of the latter has been largely destroyed. And the more shortsellers are vindicated, the better, because it’s time the public realised that most ranting about the impact and motives of “shorts” is absurd.
Lehman’s attack on Einhorn is nothing new. Shortsellers have come under fire in every market downturn since 1929 (and earlier). Company CEOs also love to blame them for stock declines, while taking full credit for all stock gains (never mind that these are due solely to stock buyers, who the CEOs don’t take time to praise).
Blaming shortsellers is a convenient excuse, of course, because it points the finger at someone other than those who actually deserve criticism–weakening companies, wrong (or gullible) investors, company managers who refuse to acknowledge reality. This isn’t to say that some shortsellers don’t spread false rumours or lies or just “talk their books.” Of course they do. But the latter is no different than stock owners who breathlessly talk up their books all day long on CNBC or make false claims to drive stocks higher.
In the Einhorn-Lehman case, of course, Einhorn’s outspokenness was rare, and the fact that it made a run-on-the-bank scenario more likely created an unsettling conflict. Lehman’s future liquidity depended on the perception of Lehman’s future liquidity, and there’s no more powerful way to change perception than to have a smart, successful, and reasonable-seeming hedge-fund manager go on national TV and argue, persuasively, that Lehman wasn’t being honest about its financial condition. Einhorn did this to great effect, and it’s possible that his media appearances contributed to the “clients getting nervous” analyst report and rating downgrade last week.
But Einhorn is entitled to his opinion, even if wrong, and his ability to articulate it on CNBC probably saved some Lehman shareholders some money (if they listened to him instead of the company). The market’s opinion of Lehman’s value was almost certainly more accurate than it would have been if the company and its boosters had been the only voices in the arena, and if Lehman had been able to persuasively refute Einhorn without trashing him personally, it probably would have done so.
The witch hunts for “shorts” following market declines are similar to the cursing of “speculators” for driving oil prices so high. Trading and jawboning affect prices in the very short term, but the market gets it right over the long term. So when the next Lehman comes along, it’s time to lay off the shortsellers.