By Josh Fineman
May 28 (Bloomberg) -- 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 financial markets by eliminating the formal rating system. He titled his speech “The Curse of the AAA.”
Moody’s, which climbed 40 percent on the New York Stock Exchange this year before today, fell $2.36, or 8.4 percent, to $25.79 in composite trading at 10:27 a.m., the biggest drop in more than three months. Investors who sell short borrow shares with the expectation that they can be repurchased at a lower price to pay back the loan.
Moody’s spokesman Anthony Mirenda said the company’s research and credit opinions play an “important role” in the markets. “Moody’s opinions are a vital source of information and continue to be widely sought by market participants of all types,” Mirenda said in an interview.
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.”
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.
Relying on Ratings
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.”
Einhorn said opinions like that undermine the rating companies’ business models.
“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.
Einhorn criticized Lehman’s accounting during a speech at last year’s conference. Four months later, Lehman filed the largest bankruptcy in U.S. history. Einhorn said Lehman hadn’t disclosed its holdings of collateralized debt obligations properly and wasn’t valuing its commercial mortgage-related assets based on market prices.
Last night’s conference raised $5 million for cancer research, compared with about $3 million last year.
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