Editor’s Note: There is perhaps nothing so silly and attention-seeking as the reporter who willingly inserts him- or herself into a story for some narrative purpose or other, but I am going to make a (big) and one-time exception to this rule by posting this.
The backstory: Prior to committing to a book on AIG and its collapse, I had begun to pitch a book called “Shifting The Blame.”
The idea was simplicity itself: I’d take about eight or nine companies–from Overstock to Lehman, from Arthrocare to MBIA–who had hit the skids and who had, at some point, blamed some combination of reporters and short-sellers for their woes. As opposed to, say, embellishing their financials, lying, losing money, hiding losses, incompetence…you take the point. My goal was to fuse investigative reporting and the naturally dramatic arc of their sleazy behavior and comeuppances to make for an eye-opening read. I’d raise a few eyebrows, get some laughs, maybe make a deeper point about free speech, investigative reporting and the real scandals in the market.
My agent, summoning me to a breakfast one Saturday, said she loved the idea but, well, there was another book coming out by a fellow named Rick Sauer and it was going to hit on a few of the same themes. I lamely tried to suggest that Sauer’s book was an “Inside-the-SEC guy-turned-shortseller” type thing, where as my work was a series of inter-connected investigative essays.
No matter. The market is the market and the market didn’t, apparently, want two of these books. So I scrapped it.
This was the preface to the book telling a story about an earnest PR guy who had the unenviable job of spinning a discredited yarn into gold for his revenge-hungry clients. I found it in a musty corner of the hard-drive and showed it to a few pretty smart former colleagues of mine who said they liked it.
I sort of do too. It’s dated, but like a hiss on an old record album, it gives it some gravity. Maybe.
The origin of this book lies with a series of phone conversations between myself and Jeffrey Lloyd, a partner at the public relations firm of Sitrick and Company, in the early autumn of 2008.
Lloyd, a courteous and affable man, had initially made contact with Fortune Magazine via a colleague named Nick Varchaver, who knowing that my specialty was investigative work into companies in some form of hot water, passed the tip onto me. It seemed that Lloyd was interested in having Varchaver look into the sore treatment his Washington, D.C.-based client, Allied Capital, had received at the hands of one David Einhorn, a high-profile New York money manager.
Luckily for Lloyd, Einhorn and his New York hedge fund, Greenlight Capital, had hit some rough spots performance-wise in the then-brutal markets, and his publicly traded Re-insurance company, Greenlight Capital Re, had also seen its stock price hammered. For a fellow like Lloyd, who is trying to get a story into print on behalf of a client, Einhorn’s headaches were what we in the news business called “an easy peg,” meaning that a story could readily be built around that premise.
Better still, once the hoped-for story touched upon Einhorn’s losses, Lloyd had ready any number of other facts and figures designed to illustrate rather convincingly a very important premise to Lloyd’s client: that David Einhorn was a really, really over-rated fellow. In fact, if I had gone farther and implied that Einhorn was a pretty bad guy, well, Jeff and his clients would have been fine with that too.
All Sitrick’s Lloyd needed was a reporter to bite.
It could not have been a happy moment for Lloyd when instead of the bookish and reserved Varchaver returning his call, he found me on the other end of his phone line.
As the following chapters will make clear, I rarely attempt to mask my beliefs about the subject matter I am writing about, care little for emotional arguments, stereotypes, excuse-mongering and hold no truck for anything that a company or its leaders won’t back up with documents or put on the record. There are companies that are honestly trying to make their way, profitable and otherwise, and there are those that choose other paths. The former are simply doing their job; I’m interested in the latter.
Since the media culture seems to value its business reporters being detached and neutral record-keepers of the ebbs and flows of commerce, I represent a different sort of challenge to people like Lloyd. My anger and disgust at corporate wrongdoing is often expressed–to those I think are doing the wrong– with a lack of patience, plenty of vulgarity or a raised voice. I am frequently called unprofessional and many editors and newsroom lawyers have had to listen to a lot of complaints about me. The companies I am investigating pretty clearly know where I stand. So do the readers.
It is a very safe bet that many of the lawyers, investors, public relations people and executives affiliated with the companies profiled in this book have a very, very grim opinion of me.
I have an especially difficult relationship with Lloyd’s employer, Sitrick and Company. Though the reasons for this will become glaringly obvious later in the book, suffice to say that Mike Sitrick and his flaks make a handsome pile of cash going after the few funds and reporters willing to stand up to some of the more crooked companies in the market.[In their defense, they do plenty of work for legitimate companies too.] It’s all perfectly valid and legal, but I don’t like that they do it, and I don’t like that they do it for big money, and above all, I don’t like that they–along with a New York law firm called Kasowitz, Benson, Torres & Friedman–legally go after the people who blow the whistle on the crap their clients pull.
After about three seconds of pleasantries, I asked Lloyd what the hell he was up to. Point blank, I made clear to him that Einhorn was indeed getting his butt kicked — I had broken the news on this very subject — but it was going to be hard to cast the guy in the role of a market bad guy.
Lloyd, an honestly personable sort, said a story might provide a “counter-narrative” to much of the media coverage about Einhorn, which centered on his very public battles with two companies, Allied Capital and Lehman Brothers.
Counter narrative? Hmmmm. I thought about what he said. Basically, a counter-narrative is exactly what it sounds like: a story that is contrary to prevailing public sentiment. Done right, these can be truly important and ground-breaking. Done poorly, the reporter can wind up being used, often in the most transparent sense.
By pitching a “counter-narrative,” Lloyd was admitting that Einhorn had gotten the best of his client Allied Capital in public opinion, but that “the truth,” or his client’s version of it, still needed to get out.
Lloyd had a frustrating assignment, and if it was possible for me to feel empathy for a Sitrick employee, I felt something like that for him.
It had been quite a year for the boyish-looking Einhorn, He had gone from the ranks of being a successful but broadly unknown money manager to a legitimately high-profile figure. Pretty much anything I wrote about the guy would be both widely-read and talked about (two things every reporter needs to think about in this age of media collapse.)
Einhorn shot into the public eye when he wrote a well-received book about his long-running dispute with Allied Capital called “Fooling Some of the People All of the Time: A Long/Short Story.” Amusingly, he made the kind of stuff I do for a living — pouring though documents looking for corporate problems and chicanery — one hell of a lot more interesting than it actually is.
There was also the not-so-small matter of Einhorn’s being in the eye of two separate storms: The one he set-off with Allied Capital in 2002, and the one he launched with his public criticism of Lehman Brothers. In fact, at the time of Lloyd’s call to me, the capital markets were still reeling from the venerable investment bank’s shocking collapse just weeks before.
The Allied fight was ugly, but the Lehman dispute would have implications for a generation.
In May of 2008, Einhorn, speaking at a children’s medical foundation benefit, had presented an argument to gathered investors centering on Lehman’s financials being alternately baffling, inexplicably opaque and, ultimately, quite exaggerated. Basically, he had done what thousands of highly-paid money-managers — who oversaw hundreds of billions of dollars worth of investment capital for America’s private investors, endowments and pension funds — had simply refused to do. He and his staff went to work looking at the firm’s public filings and wondered about what he could not get to add up.
By the time they were done, they had a lot of questions.
Though I will go into them in detail in a separate chapter, the upshot of it all was that one of the globe’s premier financial institutions had spent a lot of time trying to fool key market participants, like ratings agencies, its largest shareholders and the federal government. [That these three participants were unable or unwilling to do the work that two analysts and a 39-year old portfolio manager had done is also a running sub-theme of this book.]
Lehman and its supporters claimed publicly and privately that much ado was being made about nothing, that a run was being promulgated on the bank and perhaps — just perhaps — a cabal of shorts were trying to drive it to the ground during an unprecedented panic.
When Lehman finally collapsed in September, Einhorn received a certain amount of credit for his work, but also an equal portion of condemnation. Ordinarily hardened traders and fund managers thought Einhorn took a cheap shot at a desperate moment, and combined with the mainstreaming of the once-fringe anti-short-selling conspiracists, lazy reporting and the market collapse, what was a considerable piece of investment research was reduced to another self-promoting stock pick.
Most of all, though, Lloyd wanted me to write about Einhorn because as a rule, corporations simply dislike short-sellers. This tension is to an extent natural, as few executives really relish having it pointed out to them that their corporate financial affairs are a joke, or that their public utterances are at odds with reality. Almost all senior corporate executives hold a material part of their net worth in the company’s stock, so if a short-seller’s argument gains traction, their net worth drops. It’s in their best interests to see skeptical arguments minimized and shot-down.
There is also what I call “The bile factor” at work.
While Allied’s shareholders were getting virtually wiped out, and Lehman’s shareholders were indeed wiped out, Einhorn made boatloads of cash for his investors and himself betting on the drop in their stock prices. Human nature being constant, it is doubtful that Allied or Lehman shareholders who read my reporting on Greenlight’s brutal September 2008 losses shed many tears. For many investors, Einhorn’s success was likely perceived as the worst sort of predatory behavior, in so much as he profited handsomely from the collapse of entire franchises. To them, a millionaire New York hedge fund manager made some arguments and got richer, while people with families to support lost their jobs.
Most businesses, confronted with a stubborn short-seller, try to go about their business and ignore them [“you don’t give a brushfire oxygen” is the old saw,] or they try and wage their fight in the back-channels, with lawyers and public relations sorts, who often prove quite adept at getting their own favorable coverage or heading off unflattering treatments. The goal is always to avoid a protracted public argument.
So Einhorn’s going public with his thesis was naturally a really big problem to the managements of Allied and Lehman, who spared no effort in accusing Einhorn of self-serving behavior, fabrications, exaggerations and shoddy work. Of the pair of Einhorn’s targets however, Allied stood apart in its contempt for him.
While his book contains the riveting blow-by-blow of his six-year battle with the company, it is fair to say that Einhorn so infuriated Allied that someone acting on their behalf hacked into his phone records and the records of several people he talked to, including Herb Greenberg, then a well-known columnist for CBS MarketWatch.
It surely didn’t help their view of Einhorn that in 2008, Allied’s stock price had dropped 90%. That was the least of its problems though —Allied’s financial health had deteriorated to the point where its viability was an open question and, from my seat at Fortune that autumn, a quick perusal of its public filings showed that it sure looked like the company was headed toward trouble with its debt holders. Trouble with debt holders is no laughing matter. As a class, bond investors are entirely single-minded, taking great interest in seeing that their principal and interest gets repaid; wars with short-sellers are considered sharply less useful in accomplishing this end. If Allied stumbled on even one of these payments, bondholders had the right to force a bankruptcy reorganization. [Bondholders would later work with the company to keep it out of bankruptcy.]
Not helping matters in the Allied-Einhorn impasse was that, like the Lehman case, the guy was right.
He and his research team had nailed Allied Capital (which is a business development company, making loans to and taking equity stakes in a variety of smaller corporations) dead-to-rights in over-valuing its portfolio of investments and loans. They caught their chief executive and chief financial officer in a series of bald lies and plainly nonsensical excuses.
Allied was not without defenses however. In trying to press his argument in Washington D.C., Einhorn was taught a lesson in inside-the-beltway hardball he wouldn’t soon forget.
Allied’s highly paid legal and public relations team (including Lanny Davis, a former advisor to President Bill Clinton) got a series of dupes at the Securities and Exchange Commission to not only ignore amply detailed evidence of fraud, but to turn around and launch an inquiry into Greenlight. They were oily and deceptive to be sure, but credit where credit is due, Allied’s team certainly earned their six-figure retainers.
Still facts are facts, and as I considered Lloyd’s “suggestion,” just about every fact I could muster led me to wonder why Allied would be paying Lloyd his high fees to cold-call reporters.
I brought this up to Jeff and being the pro he is, there really wasn’t much he could say.
It wasn’t his fault that he had clients willing to spend their last dollars in an effort to do something, anything really, to tarnish a critic. And he had a job to do and his own family to feed. So he did it. Actually, when I told him that I might look into why Allied was doing this and that I didn’t expect his client to hack into my cell phone records, he readily agreed, noting that, “You and I might have a lot of common ground on this [phone-record stealing] stuff.”
None of which reassured me of anything other than Jeff Lloyd was an agreeable guy whose client had spent a lot of time and money denying vocally that they would ever hack into a reporter’s phone records, until, of course, they were forced to suddenly explain how they came into possession of those very records.
Looking at the situation, though, I didn’t dwell on any of this. I was no stranger to being on the receiving end of the occasional corporate dirty trick and if someone wanted to get my cell-phone records, well, then they were going to see a whole lot of cell phone calls between myself and my wife Laura, most of which dealt with the train I was taking home, our four kids or what we were doing for dinner.
Instead, I was struck by a more basic fact about the people who pay Jeff Lloyd to do what he does for a living.
With their backs to the wall, most corporate managements have a pretty simple operating plan: stave off collapse at all costs. Squabbles with critics and skeptics are luxuries that can be indulged only if the company can come back from the brink. Companies on the precipice have a pretty basic playbook: stretch out their payments to vendors and suppliers, lay-off workers, cut salaries and perks, ground the corporate jet, scale back advertising…you get the idea.
Put even more simply, in their darkest hour, most management’s wouldn’t dream of using precious working capital to wage a public opinion battle they had already resoundingly lost.
But Allied’s leadership was not most corporate managements. The fight had become everything, trumping turning around the business or even re-establishing their good name.
Their stock price had collapsed, their business was in tatters and they had to shut a whole unit because of operating fraud. Investors big and small had abandoned the company.
Yet they weren’t going to leave the field of battle without trying to leave one more mark on their enemy, to gin up something to make people think David Einhorn was the real villain in the affair, despite all evidence to the contrary.
And that fascinates me.
Because some fellows will spend their last breath — and their last few bucks — to shift the blame, you know?
This book is about those guys and the companies they run.