Thursday, May 28, 2009

David Einhorn versus Warren Buffet on Moody's (MCO)

Battle Royale in Moody's (MCO) it appears after David Einhorn engages on the short side versus Warren Buffet's long position. For those not familiar with David Einhorn he is a youngish hedge fund manager who exposed Lehman Brothers in a very public way - that said his hedge fund lost 22% last year but still a very bright mind just from watching his TV appearances and reading some of his work. He has been a big buyer of gold of late [Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug] If you read one thing this week, please read this opinion piece Einhorn co-wrote with Michael Lewis [Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn]

As any of us who have followed this financial disaster know, the credit agencies (who are being PAID by the people who have products they want rated - laughable) have been asleep at the wheel for years and a major complicit factor in this blowup. It appears Einhorn wants them gone...
  • David Einhorn, the hedge-fund manager who bet against Lehman Brothers Holdings Inc. four months before the firm collapsed, is shorting Moody’s Corp., whose flawed ratings on asset-backed debt helped fuel the credit crisis.
  • “Even Moody’s largest shareholder, Warren Buffett, has said he doesn’t believe in using ratings,” Einhorn, 40, said in a speech last night at the Ira W. Sohn Investment Research Conference in New York. “We are short Moody’s.”
  • Moody’s, whose founder created credit ratings in 1909, reported a 25 percent profit drop last month as the recession sapped demand for debt grades. Rating companies have been criticized by the European Union, members of the U.S. Congress and the U.S. Securities and Exchange Commission for ignoring conflicts of interest and risks that contributed to the worst financial crisis since the Great Depression.
  • Einhorn, who runs New York-based Greenlight Capital Inc., said regulators could improve the stability of the financial markets by eliminating the formal rating system. He titled his speech “The Curse of the AAA.”
  • Greenlight, which Einhorn started in 1996, manages about $5.1 billion in assets. The firm’s Greenlight Capital LP fund gained 4.4 percent in the first quarter, after losing 23 percent last year. Greenlight has returned an annual average of 20.8 percent from its Greenlight Capital LP fund since its inception.
  • The truth is that nobody I know buys or uses Moody’s credit ratings because they believe in the brand,” Einhorn said. “They use it because it’s part of a government-created oligopoly and often because they are required to by law.” (I love when truth is spoken)
  • “If your product is a stamp of approval where your highest rating is a curse to those that receive it and it’s shunned by most who are supposed to use it, you have problems,” he said.
  • Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., said earlier this month that assigning ratings to debt and other securities “is still a good business.” Berkshire owns about 20 percent of Moody’s shares. Still, Buffett said he doesn’t rely on the major credit rating companies to make his own investment decisions.
  • “We do not think the people of Moody’s, Standard & Poor’s, Fitch or anyplace else should be telling us the credit rating of a company,” Buffett said May 2 when Berkshire had its annual meeting in Omaha, Nebraska. “We don’t believe in outsourcing investment decisions.”
Buffet owns it because as Einhorn says - the government has decreed 3 companies should have all the power in assessing credit risk. Even though much smaller competitors like Egan Jones who are not part of the oligarchy nailed things. Frankly in this case Buffet is coming off a bit 2 faced... he has an investment here because he knows it has a wide, government protected moat - but he does not use the conclusions from his investment for his own decisions. That pretty much sums up the usefulness of these major credit agencies. Remember AIG (AIG)? One of a handful of AAA rated companies this decade. Bought and paid for...

What's that? Oh yes, the USA is a free market capitalist system where competition is supported and large political donors don't get government protection. Yep.

More from Reuters here
  • Einhorn contends that investors have learned not to rely on Moody's, which for years has been criticized because it earns fees from the companies it rates. And after the mortgage market melted down in 2007, Moody's came under fire for giving top grades to bonds and derivatives backed by subprime loans.
  • Einhorn noted equity investors still believe in the agencies. Moody's shares trade at 19 times estimated earnings, he said, though he said the company has a negative net worth of $900 million.
  • Moody's had long been a favorite among investors because the limited number of firms approved by the U.S. government to rate debt lets these firms generate fat profit margins. McGraw-Hill Cos Inc's (MHP.N) Standard & Poor's and Fitch Ratings are Moody's rivals.
  • "Why reform them if we can get rid of them?" he said. "Are we waiting for then to blow up the Lunar economy as well?" (But David, they contribute so much to certain politicians - we really need to keep them)
Must be nice to push a stock down 7% just with the power of 1 speech - that's "Street" Cred

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