Greenlight’s Einhorn Predicted Lehman Brothers’ Fall; Buying Gold

By Jennifer Ablan and Joseph A. Giannone

Mon Oct 19, 2009 5:17pm EDT

NEW YORK, Oct 19 (Reuters) – David Einhorn, the hedge fund
manager who had warned on Lehman Brothers’ precarious finances,
on Monday said he is buying gold and betting that interest
rates will rise as he lambasted the U.S. government’s financial
chiefs for short-sighted policy decisions.

The exploding size of the national deficit, which reflects
government policies that have simply rewarded bad behavior with
massive bailouts, will make gold and gold stocks as well as
call options on higher rates good investments, said Einhorn.

Speaking at the fifth Annual Value Investing Congress in
New York, Einhorn had harsh criticism for Federal Reserve
Chairman Ben Bernanke and Treasury Secretary Timothy Geithner.

“Although our leaders ought to be making some serious
choices, they appear too trapped in short-termism and special
interests to make them,” he said, calling Bernanke and Geithner
“quintessential short-term decision makers.

“They explicitly do whatever it takes to solve one problem
at a time and deal with the unintendend consequences later.”

Einhorn, the president of Greenlight Capital, with more
than $5 billion in assets under management, advocated buying
both physical gold and gold stocks “if monetary and fiscal
policies go awry.”

He noted, “Gold does well when monetary and fiscal policies
are poor and does poorly when they are sensible.”

Gold rose to a record high last Wednesday above $1,070 an
ounce.

Of the government’s recent policies, he said, “Over the
last couple of years, we have adopted a policy of private
profits and socialized risks — you are transferring many
private obligations onto the national ledger.”

According to a joint analysis by the Center on Budget and
Policy Priorities, the Committee for Economic Development and
the Concord Coalition, the projected U.S. budget deficit
between 2004 and 2013 could grow from $1.4 trillion to $5
trillion.

Einhorn explained further why he favored investing in gold
in the current economic and policy climate.

Last week, when Bernanke, Geithner and White House economic
adviser Larry Summers spoke in interviews and on panel
discussions, he said, “My instinct was to want to short the
dollar, but then I looked at other major currencies — euro,
yen and British pound — and they might be worse.”

“Picking these currencies is like choosing my favorite
dental procedure,” he said. “And I decided holding gold is
better than holding cash, especially now that both offer no
yield.”

THE WAY TO AVOID “TOO BIG TO FAIL”

Among structural issues that U.S. policymakers also need to
address is avoiding another disaster of Lehman proportions,
Einhorn said.

“The proper way to deal with too-big-to-fail or
too-interconnected-to fail is to make sure that no institution
is too bigger, interconnected to fail,” he said.

The test, he said, should be that no institution is ever so
individually important that if the U.S. were faced with its
demise that the government would be forced to intervene.

“The real solution is to break up anything that fails that
test,” he said.

“The lesson of Lehman should not be that the government
shouldn’t have prevented their failure; the lesson of Lehman
should be that Lehman should not have existed at a scale that
would have allowed it to jeopardize the financial system,” he
said. “And the same logic applies to AIG (AIG.N), Fannie,
Freddie, Bear Stearns, Citigroup (C.N) and probably a dozen of
others.”

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