Greenlight Capital’s David Einhorn on Financial Reform

Greenlight Capital’s David Einhorn is no stranger to financial companies. He revealed Lehman Brothers’ financial shenanigans long before its collapse, and he benefitted by shorting its shares. Lehman Brothers didn’t collapse because Einhorn or other short sellers were selling Lehman shares. Lehman collapsed because of the enormous risks it had taken. Lehman’s collapse revealed weaknesses in our once mighty financial system.

David Einhorn previously expressed his opinions about financial reform in various platforms. He told us no one from the government approached him for his insights about the financial reform. It makes sense. If the government wasn’t this dysfunctional, we wouldn’t have these problems in the first place.

Previously David Einhorn came out against too-big-to-fail financial institutions which are part of a huge asymmetric risk-return structure. When these institutions take enormous risks and succeed, their managers and employees benefit the most. When they fail, taxpayers foot the bill. David Einhorn also criticizes rating agencies such as Moody’s (MCO), Standard & Poor’s (MHP), and Fitch. These rating agencies have serious deficiencies in their ratings and big banks have taken advantage of pension funds who use their ratings.

Insider Monkey interviewed David Einhorn about his book Fooling Some of the People All of the Time and asked him whether he has anything to add to his previous comments about financial reform. This is what he said:

“I think I would go harder into the derivatives issue. In the sense that people who are writing options, whether it’s credit default swaps or other types of over the counter options that have low up fronts but high payouts I would suggest that they post far far more capital collateral to the point where it would probably make that market less attractive . And the other is I would do something about the money markets.

“Money markets are unrated. Basically they are competing for deals and yet they are not allowed to take any losses. You know, there’s one dollar NAVs (net asset value) just sort of reinforced through the crisis. And that obviously doesn’t make any sense. You can’t compete for higher returns but be unwilling to take losses. You probably need to fix these. Structure should be forced back into the banking system, or they can have loss reserves and other ability to take losses.”

We also asked Einhorn about the SEC’s deficiencies. “ There seems to be a real bias against enforcing accounting rules against corporate abusers, and I think that’s still true,” he said. “I think they’re still sort of worried about doing things that cause shareholders to lose money in the short term. And there’s just a loathness to take on corporate managers, particularly post-Enron. It’s really been going back since Enron. And it is sort of hard to understand.”