I Want You to Start Thinking
When I announce to people I am in support of free markets, they may mistakenly conclude that I'm also in favor of the type of fraud that has allowed the current credit crisis to emerge. I vehemently oppose it, and so does the man in my story. I hope this inspires you to think more about speaking up and speaking out against violations you see in the world, and not to have fear even if it is something within your own organization or industry.
An Honest Man on Wall Street
Over the past few months, the question I have asked of professors and classmates most frequently in my finance and econ classes has been, "Did no one see the fraud going on in the financial world? And if so, why didn't anyone say anything?"
Today I got my answer.
Meet David Einhorn, a young hedge fund manager with a conscience. In 2002, he spoke at a prominent investment conference where he discussed a company called Allied Capital and what he believed were their fraudulent business practices. In fact, he was so certain that this company was operating illegally that it wouldn't last and he publicly recommended shorting it's stock. (Shorting: selling without owning so that a drop in price creates a profit.) The results were dismal, for the company, and for Einhorn who was placed under investigation and accused of fraud himself.
Over the last 6 years, Einhorn endured SEC investigation for market manipulation, threat of investigation from Eliot Spitzer, violation of his personal property by Allied, his wife was "mysteriously" fired from her job at financial publication Barron's, and he has felt the ire of many professionals on Wall Street. Going against financial giants would make some people shrink, but like his biblical namesake, David kept going, and recently released a book about his experiences. Fooling Some of the People All of The Time is a book and website where he reveals details about his struggles, his innocence, and Allied's fraud.
This touchy-feely story doesn't end though. David isn't really interested in simply capitalizing on his now-turned-around fortunes, and keeping quiet. This year, he hit another firm between the eyes: Lehmann Brothers. He revealed his concerns about the CDOs (Collateralized Debt Obligations: a type of financial instrument) that were not valued properly, falsely boosting Lehmann's balance sheets. He again recommended shorting the stock. The company tried to privately clear up any confusion David may have had, but by the end of the conversation, David only confirmed his suspicions, the company was in deep trouble. He went public with the nature of the call, which prompted further decline of Lehmann's stock, and we all know how this story ends.
The best part about David's methodology is that while he's been making a lot of enemies, he's also particularly adept at making money. He is a shining example that basic business values and always going for the most ethical solutions can help you turn a profit in the long term. His firm, Greenlight Capital, is known for its rigorous review of any company it decides to invest in, or bet against. New York Magazine put it succinctly, "If you had given him $1,000 in 1996, he’d have turned it into $14,600 by now." That's a 25% annualized return over the last 12 years (figures as of mid-summer, that number may have, uh, shifted by now!) He also happens to be an incredible poker player, winning 18th place in the 2006 World Series, and donating over $659,000 to the Michael J. Fox Foundation.
I think David is an incredible example of how by free market principles, free speech, protecting private property, and taking a stand as an individual guided by a personal moral code can lead to justice being served, and to well-deserved personal gain. I also can't imagine anyone saying that Einhorn, who is undoubtedly wealthy, hasn't earned it. I hope understanding that most people obtain their wealth through honest means, and can do wonderful things in their positions of influence will inspire readers to think twice about what is grossly mis-labeled as class warfare, or that the rich should suffer and sacrifice for the "sin" of their wealth.
And those questions again:
Have you ever witnessed fraud, and what did you do?
Do you think moral people are destined to "lose" in life? Lose opportunity, lose money, get taken advantage of, etc.
1 Comments:
As usual, this is good stuff MelonCamp. I have one word for you. Incentives. Yup. That's it. If you ask a good economist what the root of everything is - that's the answer. Incentives. This is what makes the world go around. I looked it up: "A reward for a specific behavior, designed to encourage that behavior". Well, that sums it up. People act on their best interests. Many would say that this is immoral, but I'd disagree. Where things get immoral is when the incentives are skewed such that we have bad outcomes. Take executive compensation for example. If you offer to pay them stricky the stock price - they manipulate the stock price. What if you paid them on EBITA? Here's another one - real estate. Wouldn't be very relevant if I had left this out. Homeowners are encouraged and told that real estate always goes up. This notion is of course, backed and promoted artificially by their government who guarantees loans that banks make to consumers based on purely hypothetical prices. Hmm. Was Wall Street to blame? Well, who offered the incentive? I suppose I could go on all day, but it's incentives that drive the world. Whether it's picking your groceries or the color of your tie, it comes down to doing what is in your best interest and this is determined by incentives. Incentives are NOT immoral by their nature - they are artificially made that way by immoral people.
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