Interview With Jim Chanos

Bill McIntosh at the Hedge Fund Journal has an interview with Chanos. True to form, Chanos mentions Enron as the example of his brilliance in detecting abnormalities in balance sheets.

Besides that, it’s a pretty good interview.

Chanos Dislikes New SEC Short Selling Rules

Chanos’s statement reads:

“Rebuilding investor confidence should be the primary objective of any new regulatory effort and it is not clear that today’s proposals will meet that simple goal. Skeptics, independent research and critical analysis must continue to play a vibrant role for our markets to grow sustainably and with integrity. Short selling is integral to improving the efficiency of markets and enhancing market quality through narrower spreads, deeper liquidity, less volatility, and greater price discovery. In recent years, short-sellers have publicly warned the marketplace about the dangers at AIG, Lehman Brothers, and Enron, as well as sounding the alarm over the credit ratings agencies, non-bank subprime lenders, and credit insurers. Proposals to inhibit short-selling have the effect of limiting this vital market-based antidote to corporate fraud and speculative bubbles, and must be carefully weighed against the clear harm that comes from ill-conceived government intervention in basic market functions.”

How frustrating to have to agree with this jagoff. Jim Chanos is an unethical piece of crap, but the last thing we need is more government intervention in the markets. Shorting is ethical when an investor believes a company is weaker than it appears. He makes money when the stock declines. But Chanos and a few others like him don’t necessarily ascribe that definition. Chanos attacks the shit out of a stock with reports through surrogates, including Bethany McLean, to create the impression of weakness in the general public, then spreads malicious rumors through the financial system, spooking institutional investors. Then, after he’s ripped the stock to shreds, he stands back and collects billions.

So he’s right – investors should be permitted to go short on a stock without government intervention. On this one point, I will stand with Jim Chanos and say to the gov, “Step off bitch.”

It’s Hard To Negotiate With A Crazy, Rich Person

Oh my goodness, this is one of the best Enron stories we’ve seen in months. (Background is here.)

Goldman Sachs MD Marc Spilker wanted to widen his path to the beach at his house in the Hamptons. Unfortunately, his neighbor, Kynikos founder Jim Chanos had a problem with this, since his row of hedges would have to be taken out in order for Spilker’s family to be able to “maximize their beach enjoyment.” Spilker cited a deed that said he could have 15 feet, Chanos produced one that said otherwise. Then this week they went to court to negotiate; Spilker claimed to only want a few feet (i.e. 6-7), Chanos gave it to him and asked for it to be put in writing.

The (soon-to-be-promoted?) Goldman Sachs employee apparently then had a change of heart, re: abiding by the terms of the agreement, and yesterday afternoon decided he’d rip down the remaining hedges on Chanos’s property. Oh, and new neighbor Stevie Cohen, who shares the path to the beach, has thrown his support to Spilker.

I like this because its petty and silly. Objectively Jim Chanos doesn’t seem to be at fault here, but I can’t help but feel a bit of schadenfreude from this. I like knowing he’s annoyed. It’s not total financial meltdown like I am hoping for, but it’s something.

Chanos Bites Skilling’s Style

In a ridiculous article today, short seller Jim Chanos completely plagiarizes Jeff Skilling:

“We’re not the most popular people in the world. We understand that,” Jim Chanos told Politico. “But we’re on the side of the angels here.”

For the love of cheese doodles.

Do I need to remind anyone that Jeff Skilling said this as early as May 2001?

“We are the good guys. We are on the side of angels.”

I know that he’s not the only person in history to utter the words, but I feel personally violated that Chanos would use the good, correct and truthful words of Jeff Skilling for his own evil purposes.

Bethany McLean On The Daily Show

All I kept thinking was… oh my god, her hair.  What happened?

But once you get past that, and you should because she’s otherwise a very pretty, soft-spoken young woman, she starts contradicting herself again. She says it was impossible to know how Enron made its money. She said nobody had an incentive to question the money they were making. This infuriates me for two reasons:

- Her incentive in investigating the article was to help Jim Chanos make a cool billion when Enron collapsed. Everyone overlooks this. I have no idea if McLean benefited financially from the collapse (and frankly I tend to doubt it) but she acts as if she’s free of motive or influence when this is just not true.

- Analysts and banks also had billions of dollars to drill down into the guts of Enron and discover how they made their money. Enron’s analyst conferences were legendarily thorough. The financial statements were clear as vodka. There was no attempt to hide the methodology of their moneymaking, yet this mistake (or lie) has been allowed to harden into something that is taken for granted, a natural truth.

In this clip, she identifies Chanos as “a good source of mine”. I understand that its important to protect your sources, and this clip aired very soon after the collapse of Enron so its entirely possible she didn’t want to expose Chanos just then. There’s nothing really nefarious about her not naming him, other than the fact that a few weeks later, during a different interview, she lied about the source and gave a fake name. I’m curious why. And I’m also curious, again, why she’s so incurious about Chanos’s motives.

She talks about the meeting with Andy Fastow, “the Fifth Amendment guy.”

Man. That’s an awesome nickname. I wanna be known as the “Second Amendment girl.”

Then Bethany, who has never made a direct personal attack on any of them (to my knowledge), mocks the Enron executives by rolling her eyes and saying, “I don’t recall!”

Then she completely takes leave of her senses and says she was too trusting of Enron, not cynical enough.

At the end, Jon Stewart says, “we’ll have you back after they go to jail, and you can explain this.”

Bethany replies, “I hope so.” I’ll give her the benefit of the doubt and assume she meant that she hopes she’ll be invited back on the show to discuss Enron again. However, Jon Stewart then turns to the camera and says, “Big men try to kiss them.”

The recalls California Attorney Genera Bill Lockyer who said he wants to see Ken Lay raped in prison. Jon Stewart is sort of funny, but when he said that, he gave me the creeps.

Check it out.

The Long and Short of Short Selling

Economist has a typically comprehensive article about short sellers. Naturally, Jim Chanos is quoted defending his profession.

A fun fact in the article: in 1995 Malaysia’s finance ministry reportedly proposed caning as a punishment for abusive shorting.

Awesome.

Chanos To Financial Media: Quit Making Stuff Up

Oooh this is rich.

Now Chanos is taking aim at another train wreck: the financial media. In a speech yesterday, Chanos trashed the broadcast and on-line media for breathlessly reporting rumor as legitimate news and called for more regulatory investigations into whose who feed the gullible or nefarious media rabble.

Jim Chanos is pleading with the online and broadcast media for making crap up? Like, oh, say the summer of 2001, when he set off a flurry of unfounded rumours about a certain energy giant headquartered in Houston, Texas?

Also, we should assume he doesn’t include Bethany McLean in this horror show of hypocrisy since he’s working in tandem with Bethany McLean to destroy an Australian bank.

Chanos cited recent travails at a well-known New York investment bank that’s still around (yes, that one) that was the subject of repeated unsourced reports on a certain well-known business television channel (guess). The reports hammered the bank’s share price.

Chanos said he happened to be on his firm’s trading desk on that particular day, right in the thick of trader-land, where rumors are as rife as market positions.

“I run the world’s largest short-selling fund,” Chanos told the SIFMA conference. “We hear everything. That day we didn’t hear any rumors (about the bank).”

“Some of our financial journalists are MAKING the news,” said Chanos. “And blogs are saying things and reporters are reporting it as news.”

Whatever could he mean by this? [Note to self: cancel next year's attendance at the Bears In Hibernation meeting.]

Chanos is calling for more government investigations into where journalists are getting phony tips that they foist on the market as news. “There are IM messages, email records, taped phone calls. This is not hard. Inspector Clouseau could do it.”

Hm. Chanos was friends with Spitzer; they shared Spitzer’s little prostitute – so I must assume that by “government” he means “prosecutors who will attack the companies I am shorting and therefore make me more billions of dollars. Like Spitzer.”

“A lot of this is just being manufactured to sell stories and get ratings.”

I am sick of this allegation. Not just for me [I have never been accused of manufacturing stories] but for blogs in general. There is simply no way to make up something and then have it broadcast as news. There are too many fact-checkers. Even friendly ones. If I reported something exciting, I’m sure the other right wing/ financial blogs would look into it, and either verify it or not. This allegation is one reason I always put the source link in my news posts; that way readers can see exactly where I’m getting my information. This “no editorial control” argument is silly and unfounded.  Paul Berliner, for instance, was a Wall Street trader, charged with securities fraud and market manipulation for intentionally spreading false rumours about The Blackstone Group’s acquisition of Alliance Data Systems (ADS) while selling ADS short. He spread his rumours via Instant Message – not blogs. Paul Berliner is the last rumour-monger I’ve heard about – so if there is a blogger out there manipulating markets, I don’t know about it.

I think Chanos’s complaint is not really directed at bloggers anyway; it’s a way for him to scare off the shorting competition.  He knows that bloggers will report this and see him advocating government involvement, and information will constrict, thereby giving Chanos and his short seller cronies another advantage. 

But Chanos actually is at a disadvantage when it comes to using the internet. Based on his comments, it’s clear he doesn’t really understand the internet and the fact that the great thing about it is that we can double-check each other.  We can check the mainstream media, then we can pick up the phones and call the sources ourselves to verify.   There’s really no such thing as a rumour on the blogs because as soon as somebody puts out something questionable, a thousand people jump on it and either debunk or verify.  And if its verified, it goes viral.  Beautiful.

Jonathan Weil’s Six Business Lessons

Jonathan Weil was one of the first mainstream journalists to question Enron’s use of mark to market accounting in a September 20, 2000 Wall Street Journal article. The questions Wiel raised had Enron-friendly answers – at the time. In a Bloomberg opinion article Weil  analyses the current Lehman problems by looking back at Enron, and this time he’s not quite so rosy about the company. In fact, he seems to have been acquired by short-sellers to shill against Lehman.

He has six lessons for companies:

Lesson No. 1: When a company attacks short-sellers, run.

You didn’t need to know much about Lehman’s financial statements to see it was in trouble. All you had to know was that the fourth-largest U.S. investment bank was jousting in the press with a fund manager named David Einhorn, who had bet against Lehman’s stock and told a bunch of other investors (and journalists) why.

Good management teams embrace criticisms, address them, and move on. Lehman attacked the messenger. “Mr. Einhorn cherry- picks certain specific items from our 10-Q and takes them out of context and distorts them to relay a false impression of the firm’s financial condition, which suits him because of his short position in our stock,” Lehman said last month.

The smart read on that line, it’s now obvious, was that there were cherries to be picked. And for a guy whose compensation last year was $34.4 million, you’d think Lehman’s chief executive officer, Richard Fuld, would have known better.

This is the same strategy once embraced by stock-market flameouts like Overstock.com Inc., MBIA Inc., Biovail Corp. and, yes, Enron Corp. Now you can add Lehman’s name to that list.

First of all, anyone with a grain of interest in the markets understands just how incestuous Wall Street really is, as evidenced here in this piece. I posted earlier this week about an email conversation between Bethany McLean and Patrick Byrne of Overstock.com. In the article I referenced, you see this convoluted relationship:

Bethany McLean wrote a book review of a book by David Einhorn. David Einhorn is a short seller, though he’s often called a “fund manager”. David Einhorn’s wife, Cheryl Strauss-Einhorn, is an editor at Barron’s. As a quoted article by Cheryl Strauss-Einhorn makes clear, Jim Chanosis a favorite source and an luminary in shorting-circles. Jim Chanos was the short seller who told Bethany McLean to look into Enron’s financials. Presently Chanos and McLean are working in tandem to destroy an Australian bank.

Wiel’s mention of Overstock.com seems a little snide in this context.   By the way, Lehman is holding tough so the final chapter has yet to be written.  But this article is certainly exerting pressure on the stock.   The relationship between financial journalists and short sellers should be suspect.

But to address Weil’s premise directly: bollox.  Of course a CEO is going to attack those who are attacking his stock.  Lehman’s quote that “Mr. Einhorn cherry- picks certain specific items from our 10-Q and takes them out of context and distorts them to relay a false impression of the firm’s financial condition, which suits him because of his short position in our stock,” could pretty much be a defense template.  Insert “Mr. Chanos” or “Mr. Grubman”  for “Mr. Einhorn”, and you have a perfectly correct, legitimate defense of Enron.

Lesson No. 2: There’s no such thing as an economic hedge.

Linda Richman, the chronically “verklempt” host of Coffee Talk on “Saturday Night Live,” would have loved this one. “Economic hedges are neither economic nor hedges. Discuss,” she might say, if only Mike Myers hadn’t left the show.

Lots of banks have downplayed their writedowns by stressing net figures that include gains on so-called economic hedges, or as Lehman calls them, “economic risk mitigation strategies.” In fact, the only thing these terms tell you is that the company made some bets that don’t qualify as bona fide hedges under the accounting rules. The words mean nothing, because there is no uniform standard.

Witness Lehman’s second-quarter results. The company said its gross writedowns were $3.6 billion. Including hedges, its writedowns were $3.7 billion. In other words, some of the hedges, uh, misbehaved. How’s that for managing risk?

Bollox. I don’t know the details of Lehman’s financials but I do know that economic hedges are real things. Denying this fundamental truth, this basic observation, seems less an attack on Lehman (or Enron) and more an gaping hole in Weil’s financial education.

Lesson No. 3: Don’t eat the Level 3 mystery meat.

As I noted in an April 23 column, Lehman would have shown a loss for the quarter ended Feb. 29, were it not for $695 million of non-cash gains on $9.4 billion of corporate equities that it classified as Level 3 assets.

The designation, which I like to call mark-to-make-believe, means the values included estimates that couldn’t be observed in the marketplace. Lehman didn’t disclose the names of the company or companies where these gains appeared. Meanwhile, the Standard & Poor’s 500 Index fell 10 percent during the same period.

If you had concluded this was a tip-off that Lehman’s earnings power was declining, you were correct.

I’ll hold off on commenting until the next “lesson”.

Lesson No. 4: Gains on declining debt values mean something.

The Financial Accounting Standards Board has taken a lot of flack over new rules that let companies book earnings based on declines in their own creditworthiness. And there’s much to be criticized, namely the wide latitude the rulemakers gave companies to pick and choose which balance-sheet items they want to measure at fair value, and which ones they don’t.

That said, from the start of fiscal 2007 through Feb. 29 of this year, Lehman posted $1.9 billion in gains from writing down the value of its own debt. It reported $3.3 billion in net asset writedowns during the same period.

Now look at Citigroup Inc. Since Jan. 1, 2007, it has booked $1.7 billion in gains on its own debt. Yet its asset writedowns were $37.3 billion.

While there’s no way for outsiders to know what the right proportion at a given company should be, there’s a message in those gains: When the fair value of a company’s debt slips, the market is telling you the company’s assets must be deteriorating, too. And if you had guessed from the ratio at Lehman that its asset values had further to fall, you wound up with the right answer.

WTF? Seriously: WTF? This article is full of allegations about a company – and by Weil’s own admission he can’t know what was really going on. Again, I do not have an opinion on Lehman, but I feel protective of any company being attacked like this by some journalist with an axe to grind.

Lesson No. 5: Beware CEOs saying “the worst is behind us.”

Fuld uttered those words at Lehman’s annual shareholder meeting in April. (What was he thinking?!?)

It wasn’t then. And he doesn’t know any better than you do now. Some folks just have to learn things the hard way.

As of this moment, Lehman is still alive. It’s hurting, but it’s alive. And Weil is writing about the company as if its ending is already a forgone conclusion. As if it’s impossible that “the worst” really could be behind a company. Remember Bear Stearns? It had a “worst” moment and recovered, albeit with the help of the federal government.

Weil’s commentary is nothing as much as a hit piece on an already floundering company. It’s a shame – he showed a lot of promise back in the day.

Shortseller Charged With Spreading False Rumors

The SEC charged Paul Berliner, a short-seller, with spreading false stories about Blackstone’s acquisition of Alliance Data Systems while selling ADS shares short, according to Financial Times.

According to the complaint, Mr Berliner on November 29 sent instant messages to traders at brokerage firms and hedge funds and elsewhere suggesting that Blackstone’s agreed deal to acquire ADS for $81.75 was being renegotiated at $70 a share. The rumours were picked up by the media and caused ADS’s shares to fall 17 per cent, according to the complaint, which did not identify the media outlets.

The case comes as the SEC faces growing pressure to investigate allegations that false rumours about Bear Stearns may have had contributed to its collapse last month.

Perhaps this new scrutiny comes too late for Enron – but maybe not for Jeff Skilling. If the dirty acts of these short sellers comes to light and are accepted for the crimes that they are, it might be possible to take a new look at the activities of the Wall Street Journal, Jim Chanos, Richard Grubman, and others who consistently talked down Enron stock during the summer of 2001. If the general opinion changes to allow the possibility Dr. Lay was correct when he accused the WSJ of being malicious with their stories, it might not be too late for Jeff Skilling to win his freedom.

Stories like this will continue. It’s just a matter of the public being willing to see the truth when it’s right in front of their faces.

Enron Short-Stock Trader Jim Chanos Befriended Spitzer Hooker

NYP has a deluxious story on Jim Chanos, the short-seller who originally told Bethany McLean to look at Enron (resulting in the Fortune article, “Is Enron Overpriced?”  and later the travesty, The Smartest Guys In The Room). It seems he knows the hooker that brought down Eliot Spitzer. While stopping short of accusing Chanos of using Ms. Dupre’s services, the article makes it clear they knew each other.

James Chanos, 50, a billionaire hedge fund manager who runs Kynikos Associates in Manhattan, says he met Ashley Alexandra Dupre – the girl at center of the gov love scandal – at a nightclub several years ago and often invited her to parties, but he denied introducing her to Spitzer.

“I know her. She’s a nice person,” Chanos said by phone from the Bahamas late Friday night. “She is one of many young ladies I have spent time with around town. I have had her to my home [in the Hamptons], but I never dated her and I never introduced her to Eliot Spitzer. I had no idea she was a high-priced call girl.”

Are you like me, thinking that sounds exactly like a stack of lies? I don’t really have a comment on the rest of this. I read it with a smirk on my face – the smirk of knowing Chanos is about to be outted. Perhaps you too will enjoy the tale of “sultry young women” and money.

Chanos, who was called “Uncle Jim” by Dupre, pumped close to $100,000 into Spitzer’s campaigns over the past five years. He is well known on Long Island’s East End for hosting weeklong Fourth of July beach parties, to which he invites scores of sultry young women.

During a clambake last summer, Chanos – who is also on the board of Manhattan’s elite Browning School – introduced Dupre to other partygoers as his house-sitter.

“I met Ashley there. Jim said she house-sits his house,” said Varshini Soobiah, who attended the party and became friends with Dupre, now 22.

“This was a very formal, fine dining event. There were only limos, sitdown dinners, chefs, and fancy rooms for all guests. The girls were staying together. We were always together – changing together, going out together.”

Soobiah, who runs an orphanage in India, said it “never occurred to us at all” that Dupre was a hooker, but another attendee – who said she knows Dupre from the Manhattan club scene – said the young woman stood out like a sore thumb.

“She was wearing a silk shirt as a dress. You could see every body part. She looked like a hooker there,” said the friend, who asked not to be identified.

She added that it was very clear Dupre and Chanos were close.

“She always called him her Uncle Jim.”

The friend said Dupre always had her eye on rich men in the clubs, and that Chanos would have been the perfect type for her to pursue.

“She always said, ‘You know what my favorite thing is, money.’ She would hop around from rich guy to rich guy,” the friend said.

Chanos characterized his now-infamous friend differently.

“She was the type of girl at my clambakes that my housekeeper said, while everyone was out on the beach partying, she was in the kitchen helping her with the dishes,” he said. “She’s got her heart in the right place, but maybe not her head.”

One club promoter, who asked her name not be published, said Chanos often invited pretty young women he met in nightclubs to his Hamptons home.

“He’s a nice guy, a gentleman. Pretty girls would come to his table and he gave them a glass of champagne and invite them to the Hamptons,” the woman said.

“Does he know [Dupre]? I’m sure. She’s a party girl who dances on tables every single night. She’s young, she’s got a lot of energy, and every single promoter would call her because she always brought hot girls.”

Chanos admitted that having such deep pockets had its benefits.

“When you’re a Wall Street guy and you go out to clubs, young girls have a tendency to find you,” he said.

But Chanos said the only time Dupre ever asked him for anything was in furtherance of her music career.

“She once asked me to use my influence to help her get time with a top vocal coach,” he said.

Noted on Wall Street as a “short seller” who excels at spotting overvalued stocks right before they tumble in value, Chanos finalized his divorce from wife Amy in November 2006.

While Amy ended up with the couple’s Upper East Side apartment and use of the Hamptons home, Chanos has hit the clubs with gusto since their split.

He’s a longtime donor to Democratic candidates. He recently gave $10,000 to “Spitzer 2010,” the governor re-election campaign fund.