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Still, the Crooks Be Winnin’

by: Greg Newton August 23, 2008 | about stocks: ALD    
Greg Newton

Greg Newton

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Fooling Some of the People All of theTime
by David Einhorn
John W. Wiley & Sons 379 pp Hardback

Einhorn_Fooling So, I do have something in common with Joel Greenblatt. I’d rather it was investment talent but, as the celebrated value investor writes in the foreword to David Einhorn’s Fooling Some of the People All of the Time, “I read this book in two sittings. If eating and sleeping hadn’t gotten in the way, it would have been one.”

Fooling Some of the People All of the Time can, according to one’s interest and frame of mind, be read on several levels. As beach reading, the subtle interpolation of the sometimes arcane detail of financial weaponry into a relentless plot has more than a touch of Tom Clancy. As an investment tome, it’s a reminder that even the most intensive research and being right on the facts doesn’t mean a position is going to be particularly, let alone spectacularly, profitable.

And as a parable of the ills that beset the U.S.? Einhorn does not make so bold—he admits to only having written the book to document the wrongdoing of his long-time piñata Allied Capital (ALD) and expose regulatory indifference (at best) —but it’s all here: squandered treasure; richly-rewarded dishonesty; bureaucratic misfeasance touching most points on the arc from blithering incompetence through smug inertia to outright venality; and inquisitors’ cannons spiked by a strategic campaign contribution. Or two.

The broad strokes of Einhorn’s dalliance with Allied Capital are by now well known.

He began shorting the business development company in 2002. Deploying resources available only to the most successful investors, he uncovered wells of skullduggery still being tapped today. For his trouble, he’s been investigated by the US Securities and Exchange Commission, ignored by the Small Business Administration, and had his phone records stolen in a pre-texting attack that predated the Hewlett-Packard scandal. Oh, and he got his wife, the journalist Cheryl Strauss Einhorn, fired from Barron’s after 10 years there as a writer and editor.

“It was a bad few days,” Einhorn writes. I bet.

Meanwhile, Allied Capital has carried on cheating, pretty much regardless. It said, despite overwhelming evidence to the contrary, that criminal behavior exposed at a subsidiary’s Detroit office was the work of a few rogue individuals. It settled an investigation of its accounting practices without admitting or denying the findings, with the SEC deciding it needn’t bother fining or otherwise sanctioning the company.

Putting aside the fact that he’s turned out a near 400-page book on the experience, Einhorn appears to have retained his perspective. Despite the totally undeserved aggravation, his tone throughout, as it was in his more recent encounter with Lehman Bros (LEH), where his thorough humiliation of chief financial officer Erin Callan forced her departure, is cool, professional, even surgical, and entirely fact-based.

But perhaps the book’s most useful lesson, in a world where hedge funds get the blame for pretty much any financial market disruption anywhere, is about how the best go about their work. Hard work, detailed work, and doubtless for every Allied Capital or MBIA (MBI) or Lehman (LEH) project that bears fruit are a dozen more that don’t go anywhere, and a few more that don’t work out quite as planned (New Century q.v.).

The credit implosion has taken its toll on Allied Capital; its stock, which traded in the low $30s through most of 2007, is now in the sub-teens and sporting the sort of unsustainable yield — 20 per cent — normally associated with junk bonds heading from mob-controlled landfill to Superfund toxicity. But still the sleaze, and the denial, carries on.

As recently as Sunday, Aug. 3, The New York Times’ Gretchen Morgenson reported that a scathing 2007 audit of the Small Business Administration’s oversight of one of its top private lenders remains — yep, the Allied Capital subsidiary Business Loan Express — remains hidden from view. And why?

 Also under wraps in the public report was SBA management’s view that it should not suspend BLX’s preferred lending because that would “immediately put BLX out of business.”

Which, speaking as a taxpayer in these here United States, would be a damn good start.

 

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This article has 28 comments:

  •  
    Aug 08 09:40 AM
    Once again another Alpha short seller chimes in on ALD.Recent earnings were double last years quarter.Newly placed funding to several large companies,including joint ventures with GE capital insures earnings will grow in the future.Thus dividends can continue to be paid.Not to mention ALD has stated they will pay the dividend thru the rest of the year.Recent upgrades by analyts seem to be ignored by these shorters.Seems the reasons to continue to hold ALD are as good as the ones to sell.Einhorn has made plenty of bad calls on companies,lost money.But this time he took it personnal.Bad move for an investor.He writes a sappy book to recover his losses and the rest of us are expected to feel sorry for him.If the SEC could find no reason to fine ALD,who are we to believe?This is all old news.The world is moving on maybe Einhorn should too.
    Reply
  •  
    Aug 08 10:28 AM
    If Einhorn is such a great numbers and details guy then how did he lose his shirt in New Century and remained on the BOD until the company was insolvent? Einhorn played sub-prime with New Century and got burnt. Regarding ALD, Einhorn's thesis that ald had not marked its investments to "market" was actually disproved and remained false. His short worked out due solely to the credit crisis that claimed C, BAC, WB, ACAS, and plenty of other financials. ALD's Q2 numbers beat the street and were far better than even the most bullish observers expected. The credit quality of ald's portfolio is better than it's been in the past 2 years and the spread of yield earned against interest cost is widening and forshadowing stronger net investment income in the future. I think that it's time for einhorn to find another horse to ride--
    Reply
  •  
    Aug 08 02:08 PM
    This is a book I wished I could have written. The comments (ravings) sent in by the two writers ahead of me show me that we have a lot of work yet to do in educating investors.

    These comments sound very much like those written by the management of Allied Capital over the years.

    I'm with Einhorn.
    Reply
  •  
    Aug 08 05:22 PM
    I don't know how anyone can say Allied had a good quarter. They only earned 25.7 cents per share (net investment income less realized losses) yet still paid dividends of 65 cents per share. For the mathematically challenged, this means that their earnings only covered 40% of their dividend.

    So, where did ALD get the cash to pay the dividend. They claim it was from income earned during 2007. But the truth is - they probably got it from the sale of new stock shares during 2008.

    Also, recognize that the 25.7 cents per share in earnings doesn't take into account the unrealized depreciation (i.e losses in current portfolio value) of 83 cents per share during the quarter. Since their portfolio is supposedly kept to maturity, these losses will not be completely realized. But, even if only a third of the losses are realized (a conservative estimate), ALD actually lost 2 cents per share during the quarter.

    But they still paid 65 cents in "dividends."

    Reply
  •  
    Aug 09 08:57 AM
    If this is ' a ponzi scheme' dividends have been ongoing for 46 years, Give me more such schemes. They sell more shares to invest in more businesses which then pay the dividends.

    Also, never forget that shorts have to pay the dividends. Those short since 2002 have actually LOST more, after the dividends thay have paid out. I invite ALD Management todeclare a $ 5 special dividend, to blow the shorts out of the water, one and for all.
    Reply
  •  
    Aug 11 04:57 PM
    Permabulls = retarrrrrds...
    Reply
  •  
    Aug 15 09:06 AM
    juiceyjoo=shortseller.... having to pay the dividend is killing them.Look at Einhorn.He has lost tens of thousands.Carry over earnings must be hard for the simple minded to comprehend.Maybe they should invest in something they understand.If ALD is a ponzi,they have gotten away with it an awful long time.Einhorn's case is they have made bad loans and will lose money from them.Well they have admitted in the last two qtrs that some investments have soured,but they have placed credit facilities with many ,many companies that are doing well.Even if some bad investment(which are inevitable in this business)do not pan out,and earnings suffer for a few qtrs they may have to rduce their divi to say .55 per share.big deal.What does that put the yeild at?15%?I can live with that.
    Reply
  •  
    Aug 23 07:25 AM
    Yes Ponzi schemes that last longer than your lifetime are marvelous. But it's still fraud. Your grandchildren will curse you.
    Reply
  •  
    Aug 23 09:52 AM
    Shutting down BLX would put a few dozen people out of a job, so it's not politically feasible to do it. That's laughable, and Americans should do what they can to stop it (as Einhorn does). Except, of course, you're a shareholder..
    Reply
  •  
    Aug 23 11:04 AM
    jamookey has serious skin in the game... was that just your "retunr" button sticking after the 1st post...? lol. you guys are ridiculous...

    Ponzis take a while to play out. With high-level connections to an undermanned SEC, even longer... doesn't change anything material. It's fraud.
    Reply
  •  
    Aug 23 12:27 PM
    A well run BDC could actually be a better investment than most banks. Their leverage is smaller than banks and their loans are often better secured than the average real estate construction loan.
    As one of the posters noted, ALD has been in business 50 years, which is a long time for a true Ponzi scheme.

    Nevertheless, Einhorn is right about the current management. (i.e. Walton.) ALD made a lot of poor loans and didn't accurately report their unrealized losses until recently, and managment skimmed a lot of Allied's profits for themselves.

    ALD does have some strengths - namely the deal with General Electric - and aren't likely to go bankrupt. But I believe that they will have to significantly reduce their dividend payout after the first quarter of next year and the stock price will decline dramatically.

    If you want to see what happens when a BDC loses its ability to make dividend payments, take a look at MCGC. If you have to own ALD, make sure you get out before next April.

    Reply
  •  
    Aug 23 01:22 PM
    I'm not in a position to judge ALD, but one thing I can say for certain that paying a big dividend on one hand and selling stock on the other rarely makes any business sense. If a company needs money to expand, the dividend shud be zero. I know, you see a lot of it going on these days... companies in trouble, issuing shares like confetii just to keep the doors open, and still maintaining a dividend. Stupid. And if you look at the performance of companies that do this... it's not good.

    [There is only one case where it makes any sense: the stock has gotten insanely high. Selling stock looks like free money, so managements sells a bunch, now has plenty of cash to maintain a dividend. Very rare, and of course, not good for the fools who buy the new shares. ]

    Reply
  •  
    Aug 23 02:04 PM
    "Yes Ponzi schemes that last longer than your lifetime are marvelous. But it's still fraud. Your grandchildren will curse you." squashnut

    Wow! Game, set, match.
    Reply
  •  
    Aug 23 02:17 PM
    How many months and YEARS do we readers have to continue the
    Reply
  •  
    Aug 23 02:32 PM
    Somebody edited the above message I sent to become discernible. I'll not repeat it except to say, the constant rehash ad nauseaum of this sophomoric einhorn diatribe is tiresome and boring to say the least. Why don't you shorts find a new tack. Somebody else please write another "book".
    Reply
  •  
    Aug 23 02:34 PM
    Sorry, typo, should have read: INdiscernible.
    Reply
  •  
    Aug 23 03:07 PM
    To " Nic In NC"

    The book is being "rehashed" because its the most visible and best explained example of the Bush Administration's incompetence in regulating the stock market. These idealogues believe in the "invisible hand of the market" so much that they can't tell when the hand is giving "retail" investors the middle finger.
    Reply
  •  
    Aug 23 03:12 PM
    Shorts have a natural tendency to enjoy failures and sufferings.

    The worse the other people fare, the better they are off.
    Reply
  •  
    Aug 23 03:18 PM
    <i>I'm a bear
    who'd like to be a bull.
    But how can I,
    when pigs run the show?</i>

    By pigs, I mean fractional-reserve bankers.
    Reply
  •  
    Aug 23 08:17 PM
    Einhorn is the problem not ALD. ALD has been paying dividends since before the professional poker player was born ( I think he the boy wonder is under 45 ) Einhorn doesn't understand paying out 8% after receiving 12% for business loans is a winner especially if the business loans are somewhat protected. I understand a good poker player gambler must be a great lier and Einhorn's book supports his continued short attacks on Allied Capital. Don't trust him .... REMEMBER NEW CENTURY !
    Reply
  •  
    Aug 23 09:25 PM
    Not incompetence...intenti... criminal negligence..on behalf of the crooks....these idealogues know very well the hand is giving the middle finger to retail investors....the question is, does the retail investor know....elections will show..


    <<The book is being "rehashed" because its the most visible and best explained example of the Bush Administration's incompetence in regulating the stock market. These idealogues believe in the "invisible hand of the market" so much that they can't tell when the hand is giving "retail" investors the middle finger.
    Reply
  •  
    Aug 23 10:52 PM
    What does the Bush adminstration have to do with any of this. corporate fraud has been going on since before the great depression america like it or not is the MOST homest cuntry in the world Just ask the gymnasts in China
    Reply
  •  
    Aug 24 02:57 AM
    Now I see why management of an insolvent financial company or REIT pays a huge dividend. They own increasingly worthless stock and why not punish the shorts. Cash out what you can before Hurricane Ponzi.
    Reply
  •  
    Aug 24 07:53 AM
    With the fiasco at NEW, TMA, WB,BS,CFC, and other firms....why pick on ALD.

    But I do agree that Walton has made some bad investment decisions and Walton and other executives have paid themselves too much in salaries, bonuses, stock options, etc.

    I think the BDC's are in for trouble but with prudent management, ALD, ACAS, MCGC will survive.

    Long ACAS and MCGC. no position in ALD.

    Also, Naked short selling is illegal according to writers on SA. As the SEC enforces the laws on naked short selling then ALD, ACAS, and MCGC common shares should rise.

    Finally, I would make short selling illegal too. And I would increase margin requirements on trading commodity futures contracts to 50% for six month and then to 70% and make it illegal for hedge funds and pension funds to invest ( ie. speculate ) in commodities.
    Reply
  •  
    Aug 25 11:33 AM
    Big Al, it is called Retained Earnings!
    Reply
  •  
    Aug 29 12:16 PM
    So much b.s. and so little time to read it all.The trouble with the shorts is they think they know more about a business than the people running them.If they are so smart why aren't they ceo of one of these firms?Because they are guessing.I guess if you have a losing position in an equity is you have to try anything you can to cut some of your losses.There are so many better short positions to play that don't have such short-killer dividends that it makes one wonder at the intelligence on some traders.If the shorts are correct that means that the CIO's on State Street,Nomura Securities,Vangaurd,Ba... are idiots falling prey to a fifty year old ponzi scheme.I really don't care if SQUASHNUT or Einhorn or ALD pay me my dividends.Let's see what should I do with my next check...maybe a '65 Mustang.Last years divi's got me a '71 z-28.So much hubbub over four year old news.Move on as the rest of the world has.
    Reply
  •  
    Aug 29 02:07 PM
    That should read"...Vangaurd,... be a glitch in Alpha's messaging software.Not the first time.Maybe if they are reading any of these,they might want to look in to it.
    Reply
  •  
    Aug 29 02:15 PM
    That correction isn't right either.I guess Alpha doesn't want me to mention Barclay's.I give up.
    Reply
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