by David Einhorn, published 2010
So much could be said about Einhorn’s “Fooling Some Of The People All Of The Time” that I’ll necessarily have to ignore much of it to keep this review to the point. And let me say up front that I believe the main point of Einhorn’s book is that frauds may not be transparent, but the people perpetrating and enabling them often are and on that note I believe it’s clear that Einhorn is the hero and the Allied Capital crowd are the villains. If the opposite be true, Einhorn certainly has me “fooled.”
For what amounts to a legal caper (not a crime caper, a legal caper) involving all kinds of humorless characters, including the liars at Allied Capital attempting to perpetrate a fraud, the duplicitous analysts and journalists seemingly working on their behalf to help cover it up and a menagerie of lawyers, government officials and SEC investigators — can you get any more humorless than that group? — “Fooling” is darned entertaining. Funny, too. I found myself chuckling at the outrageous prevarications of the guilty parties on more than one occasion.
It’s not just a good story, though, it’s something of an instructive modern parable, political, financial and even economic in nature.
Einhorn’s sojourn into the bowels of the Allied Capital fraud began before the current financial crisis but carried into it. Knowing this, it’s both fascinating to see the struggles of someone who had come upon the margins of the crisis before it had become a crisis as well as frustrating to see that the Allied Capital saga is yet another facet of that crisis and one which, despite Einhorn’s having published a whole book about it, has yet to see much coverage in the mainstream press. Three years into what is becoming a growing pile of frauds and wasted resources, many politicians and interest groups are unabashedly calling for the expansion of the Small Business Administration and its various loan programs, rather than the shutting down of a completely compromised institution.
Financially, “Fooling” tells two tales: one is of a bold, dedicated individual (Einhorn) and his small band of loyal followers (Greenlight Capital staff) and friends (private citizens like Jim Brickman) who, despite the odds and the constant doubting of the hoi polloi nevertheless persevered in their struggle for truth and were ultimately vindicated by the facts and their profitable short position; the other is the story of that same man and his merry band who put an ungodly amount of time and resources into investigating a fraud that ultimately represented only about 8% of their portfolio, begging the question, “How much of this was about ego-gratification versus responsibly representing the interests of Greenlight’s partners?”
Knowing that Einhorn and Greenlight continued to make other successful investments along the way, more than once you find yourself wondering if Allied Capital would prove to be some kind of a Pyrrhic Victory. Certainly it’s reasonable to question whether Greenlight wouldn’t have fallen victim to another fraud they had invested in at Tyco if they had spread their attention and energies more equally amongst their various positions.
In the end, it is the economic parable which reigns supreme, however. The Allied Capital case is one of those seeming empirical confirmations of free market economic tenets. One by one, the various watchdogs and regulators prove either useless, incompetent, disinterested or entirely corrupted, from the federal SBA, SEC and even FBI, to the ratings agencies, to the Wall Street establishment analysts to the sacred Fourth Estate itself. It is only Greenlight Capital, and finally the market place at large, motivated by the profit principle, which has any incentive to actually root out and expose the fraudulent financial activities at Allied.
Einhorn’s triumph demonstrates that it isn’t about people but processes, the fundamental and natural incentives of the two competing and mutually exclusive principles of profit versus welfare.
This book is not perfect but it’s enlightening in more ways than one. “Fooling” does an excellent job of revealing the way modern capital markets work and while Einhorn mostly manages to stay above the vulgarity of his opponents, the Allied feud proves that to win a confidence game it’s helpful to have both the truth, and some talented lawyers and public opinion-setters, on your side.