This is an investment book that should not be missed (as long as your accounting and financial analysis skills are well-honed -- the critical analysis is detailed). This would be excellent reading for a CFA/MBA/CPA.
David Einhorn writes the detailed story of his investigations into malfeasance at Allied Capital. He makes the case, with all the back-up detail, that this company is essentially a "Ponzi" scheme (like a financial chain-letter). Allied books SBA (and other Federal Agency) guaranteed loans, violating origination-risk criteria, front-ending income, managing and delaying loan write-downs while inflating earnings on the pretext of lack of objective value impairment (though they do manage to write-down their equity investments earlier!), increasing portfolio size which hides higher bad-debt experience on seasoned loans which they do not disclose, and distributing capital (if the accounting had been more conservative) through increasing dividends funded by new equity. All this, as well as documented fraud.
These technical details and analysis are worth the price of admission alone. However, the most frightening thing about the book is the lack of interest in the Allied malfeasance shown by the SBA and the SEC, Congressional oversight committees, sell-side analysts and journalists, all for their own self-serving reasons. If you had any faith in government by-and-large acting in our best interests before, this book could well destroy that act of faith.
As well as the Allied Capital story (most of the book), the early chapters describe how Greenlight Capital (David's Hedge Fund) works. That's a fascinating revelation in its own right. What is most impressive, though, about the book is the quality of analysis David has done. Why are Hedge Funds who sometimes run short-positions so reviled these days by regulators? David is anything but a shoot-from-the-hip trader, neither is there any indication whatsoever he is trying to manipulate the market in Allied stock with rumours (everything is backed up with hard evidence and detailed analysis). By the way, David is the person who publically took on the ex-CFO of Lehman and won. If you are a financially sophisticated shareholder in Allied Capital, please do read this book -- you most probably won't be afterwards.
At the end of the book, I was left with one puzzling question: why has David devoted so much of his time to researching and telling this story (early on in the events, he even says he thought of quitting because it was becoming so time-consuming)? It's almost as if he is now a dog with a financial bone and just can't let go any more. Admittedly, he's doing us all a big favor in the process (and has agreed to give any proceeds from his short position to charity, so he has no personal conflict of interest).
If anyone from the management of Allied Capital or SEC enforcement reads this review and thinks of bringing a lawsuit, do think again. I am only summarising David's book, which is in the public domain, and I never have had, neither do I, nor will I ever have any position in Allied Capital's stock. But then, of course, as David makes the point near the end, the SEC only seems to be interested in high visibility enforcement when a big company has actually failed (Enron, Worldcom), unlike Allied Capital (yet!), or it involves a well known figure (Martha Stewart). Where is the justice that we are all supposed to put our faith in?
Many congratulations, David. I hope there can be more financial books of this quality in the future.
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Manual do analista de equity, perfeito!
Reviewed in Brazil on May 8, 2019
