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. will fall because he believes the market no longer gives its ratings any credit.
Mr. Einhorn, whose Greenlight Capital manages $5-billion (U.S.), said 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 , nationalized mortgage banker Fannie Mae and bond insurer MBIA Inc.
"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," Mr. Einhorn told some 1,200 hedge fund executives at the annual Ira Sohn Investment Research Conference.
Moody's, whose shares were down nearly 5 per cent in premarket trade, was not immediately available for comment.
Mr. 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.
"The truth is that nobody I know buys or uses Moody's credit ratings because they believe in the brand," he said at the conference, which raises funds for the treatment and cure of pediatric cancer. "They use it because it is part of a government-created oligopoly and, often, because they are require to by law."
Moody's largest shareholder, Warren Buffett of Berkshire Hathaway Inc. , has said he does not rely on credit ratings, Mr. Einhorn said.
Yet Mr. 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 Standard & Poor's and Fitch Ratings are Moody's rivals.
Immediately after his presentation, Mr. Einhorn told Reuters he began thinking about Moody's and the quality of credit ratings in 2002, when a fellow activist William Ackman started shorting MBIA. He declined to say when he began shorting Moody's, only noting it was a "considerable" amount of time ago.
Regulators and lawmakers for years talked about reforming the ratings system, questioning the issuer-funded business model that critics say conflicted with the interests of investors who buy company debt, municipal bonds or asset-backed securities. Mr. Einhorn called for sterner measures.
"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?"
Mr. Einhorn used the Ira Sohn event seven years ago to announce a short position on business lender Allied Capital Corp. , questioning the values it assigned to assets. Allied, which in February defaulted on a credit line and in March suspended its dividend, recently announced its fifth straight quarterly loss.
And one year ago, Mr. Einhorn boldly accused investment bank Lehman of understating losses on its real estate assets and ignoring its need for more capital. Four months later, Lehman filed the biggest bankruptcy in U.S. history.
In related news, Mr. Einhorn closed the book on his Allied transaction, making good on a promise to donate the firm's profits from the trade to charity.
He announced that Greenlight would donate $2.5-million to Tomorrow's Children's Fund, on top of $1-million donated to the charity four years ago, as well as $1.8-million each to two government watchdog groups: the Center for Public Integrity and the Project on Government Oversight.