Lehman (LEH) appeared to have quieted rumours that it would be the next Bear Stearns, especially after raising $5 billion of emergency capital. But David Einhorn, who is short, is doing his best to start a run on the bank–by launching a propaganda campaign. Runs on the bank are as much about perception as reality, so now that Einhorn has the major media behind him–and some scary sounding details to hang stories on–Lehman’s damage control folks will once again have to start scrambling. WSJ:
On Wednesday… David Einhorn, manager of hedge fund Greenlight Capital gave a critique of the earnings in a speech to a room packed with high-profile investors. Lehman’s shares fell 2.7% Thursday as word of Mr. Einhorn’s speech spread around Wall Street.
Mr. Einhorn, who is well respected for his detailed research, is short, or betting against, Lehman’s stock.
In his comments, Mr. Einhorn squared off in particular against Erin Callan, Lehman’s chief financial officer and the executive who has led the public charge against the firm’s critics. Mr. Einhorn met with Ms. Callan last week to discuss his research.
Einhorn’s influence is such that Lehman had to respond, and they did it the intelligent way: attacking Einhorn. Note, however, that they didin’t specifically address his concerns.
“We will not continue to refute Mr. Einhorn’s allegations and accusations. 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. He also makes allegations that have no basis in fact with the same hope of achieving personal gain.”
Those are the fisticuffs. Here are Einhorn’s actual beefs:
- Lehman had an equity gain of $695 million in Q1 versus a $69 millon average in the last four quarters. Lehman told Einhorn that $400-$600mm of the gain came from a write-up of the value of a private India power company. Lehman initially said the write-up was due to a new investment in the company at a higher valuation. Then, Einhorn says, Lehman changed its story and said the new valuation was the result of an expected investment.
- Lehman only wrote down $200 of a $6.5 billion pool of CDOs that included $1.6 billion of junk. Based on writedowns of similar junk at other firms, Einhorn finds this absurd.
The main contention, obviously, is that Lehman dressed up Q1 to quash fears of insolvency. Now that Einhorn has the major media behind him, at least some of those fears will likely return.