In These New Times

A new paradigm for a post-imperial world

Short-Sellers Set For Flame Forum

Posted by smeddum on May 28, 2009

Wall Street

Liz Moyer, 05.27.09, 

Forbes.com

 

 

One year ago, David Einhorn of Greenlight Capital took to the stage at an annual investor conference in New York and skewered Lehman Brothers, claiming its feckless risk taking had put the financial system in peril.

His talk ended with a call to regulators to guide Lehman “toward a recapitalization and recognition of its losses–hopefully before federal taxpayer assistance is required.”

The speech was, of course, a sensation. And Einhorn, who was public about taking a short position in Lehman’s stock (hoping it would decline in value), proved prescient. Its pronouncements about its viability notwithstanding, Lehman collapsed into bankruptcy just four months later.

That same conference, the Ira W. Sohn Investment Research Conference, convenes Wednesday afternoon in Manhattan, and Einhorn is scheduled to speak again. He will present his best investment idea for this year, as will fellow short-seller James Chanos of Kynikos Associates and activist William Ackman of Pershing Square Capital, among others.

It is a big event in the hedge fund world–investors pay $3,000 a seat to hear ideas from big-name money managers and at the same time raise funds to treat children with cancer and other deadly diseases.

The contents of the speeches are kept secret, and media outlets are asked to embargo stories on what was presented until noon the following day. This year, an anonymous donor bought 50 seats for attendees who otherwise couldn’t afford it because of unemployment.

Banks could well be the short-sellers’ target again, even though most bank stocks have been badly beaten down since early 2008. Chanos is already on record saying banks knowingly booked inflated earnings when selling financial products that led to the financial system’s downfall and government bailout.

Earlier this month at a conference at New York University, Chanos called it “one of the greatest heists of all time.”

Bank stocks rallied in March and April after reaching a low point in February on concerns that a broader government bailout might be needed to save the likes of Citigroup and Bank of America. But even regulators are saying the banking system isn’t out of the woods yet.

The Federal Deposit Insurance Corp. said Wednesday the number of banks on its “problem” list rose to 305 in the first quarter from 252 at the end of 2008; the 21 bank failures in the period were the most in one quarter since the end of 1992, and that count doesn’t include last week’s failure of $13 billion asset BankUnited of Coral Gables, Fla., the biggest collapse so far this year.

Troubled loans are accumulating, and losses continue to rise as income falls. The industry’s ratio of reserves to loans rose to an all-time high of 2.5%, surpassing the previous high set in 1992 in the midst of the last real-estate lending crisis. But the increase in reserves isn’t keeping pace with the deterioration in loan books.

The ratio of reserves to non-current loans fell to 66% from 75%, the lowest level since 1992. “We are now in the cleanup phase for the banking industry,” says FDIC Chairman Sheila Bair. “It will take some more time.”

That should give short-sellers more than enough ammunition.

2 Responses to “Short-Sellers Set For Flame Forum”

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