Steve Spruiell passes this on:
NEW YORK, May 28 (Reuters) – Hedge fund manager David Einhorn, who questioned the health of Lehman Brothers four months before its collapse, is betting that shares of Moody’s Corp (MCO.N) will fall because he believes the market no longer gives its ratings any credit.
Einhorn, whose Greenlight Capital managed $5 billion, said on Wednesday the parent of Moody’s Investors Service squandered the value of its business after giving perfect AAA ratings to now-fallen giants like struggling insurer AIG (AIG.N), nationalized mortgage banker Fannie Mae (FNM.N) and bond insurer MBIA Inc (MBI.N).
“If your product is a stamp of approval where your highest rating is a curse to those that receive it, and is shunned by those who are supposed to use it, you have problems,” Einhorn told some 1,200 hedge fund executives at the annual Ira Sohn Investment Research Conference.
Moody’s, whose shares were down nearly 5 percent in premarket trade, was not immediately available for comment.
Steve had a lot about Einhorn in a very interesting piece, here.
I’ve been trying to understand the ratings business myself for a while. This (NRD subscriber link) is most of what I’ve learned:
Lawrence White, a professor at NYU’s Stern School of Business, offers an economist’s deadpan assessment of the situation: “There was insufficient attention to risk.” Risk isn’t always easy to get your head around. The bank and insurance regulators in the 1930s and 1940s tried to make things easier for themselves by insisting that the institutions they oversaw keep their money in “safe” assets, and the SEC wanted the same for the broker-dealers under its jurisdiction. So in 1975 it created the NRSRO designation and immediately conferred it on Moody’s, S&P, and Fitch. A few new players have come and gone over the years, but these three have basically owned the market. The SEC didn’t mean to create a cartel — like much that goes wrong in public life, it was an unintended consequence of well-intended regulation. “They’ve got a lock,” says White, “a protected oligopoly. They think, ‘No matter what we do, we’re going to get paid.’ And it’s even more so in the case of structured finance.”
“Structured finance” means things like collateralized debt obligations, mortgage-backed securities, credit derivatives — all the head-clutchingly complex stuff that has bled out of the Financial Times into USA Today. The role of the credit-ratings agencies in structured finance is particularly important, White explains, because those assets are more difficult to value than plain-vanilla corporate bonds.
“General Motors has public information, there’s the annual report, there’s newspaper stories, there’s lots of stuff you can gather to assess the company, and you can look it up,” says White. “Structured finance is all about the underlying collateral, so you have much more limited information. It’s a dense and complicated story, much harder to absorb than the balance sheet and operating statement of General Motors.”
Nobody thinks the ratings agencies did a very good job in the run-up to meltdown. What isn’t clear is whether they are capable of doing a better job.
The first question that came to mind for me was, Why isn’t somebody suing the striped pants off these guys? Not that I necessarily think they should be sued, but this is America, and when somebody loses money, somebody gets sued. The answer: the First Amendment. The ratings agencies, the argument goes, aren’t selling a business service, they’re just sharing their opinions. I’d bet on Einhorn’s opinion before I’d bet on Moody’s.