Einhorn vs. Lehman — David vs. Goliath, but which one’s Goliath?

by Patrice Sarath, June 25th, 2008, 7:00 am

Remember what your mother always said? “If you can’t say something nice, don’t say anything at all?”

Short sellers live to mock that quaint old adage.

It’s no wonder that they dredge up all sorts of emotions. CEOs loathe them, whether they have been targeted by short sellers or just live in fear of catching their attention. Pundits question their motives or outright accuse them of spreading negative rumors about companies to drive the stock prices down. Internet chat rooms are full of short sellers (and their counterparts, the touts), trying, usually clumsily, to push stock one way or the other in hopes of making a buck or two. In short (sorry), short sellers, if not the spawn of the devil, are at least considered to be rather impolite society.

And then there’s David Einhorn of Greenlight Capital.

Einhorn first came to the attention of most investors in 2002 when he gave a talk at the Ira Sohn investor conference and in a 20-minute speech shorted the stock of Allied Capital. Allied retaliated, going after Einhorn with a vengeance. You can follow the sequence of volleys here — it’s fascinating reading. Einhorn also wrote a book about the experience, You Can Fool Some of the People All of the Time.

Now Einhorn is shorting Lehman Brothers. Same deal — he gave a speech at the same conference, explaining his analysis, and once again, he’s getting the same response. Either he’s a selfish fearmonger driving down the stock of an innocent company for his own greedy ends, or he’s performing a necessary function to put poorly performing companies out of their misery. Forget bull or bear — we’re talking noble hawk or filthy vulture.

Einhorn has been all over the news channels of late (check out his appearances on CNBC, catalogued here) maintaining his position. And he makes an excellent point. Critics are all over him for selling companies short (and as he points out, he mostly holds long positions; selling short is just part of his strategy). Yet analysts puff up investments all the time, investments that turn out to be real dogs. How often do we point fingers and cry, “Hey! That’s just mean!” the way we do with short sellers? Short selling goes against the grain.

Einhorn isn’t totally altruistic. (And by the way, how cool is it that his name means unicorn? It’s pretty cool.) The man is holding a short position after all. But neither is he evil incarnate. But maybe, even if Lehman doesn’t see it that way, he is a necessary evil. Remember, we know what the market looks like without short sellers. Yep, the tech bubble.

Sure would have been nice to have a skeptic’s eye back then too.