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Money managers under the microscope

Einhorn: Moody’s broadside lacks usual punch

June 2, 2009


David Einhorn again sent markets scurrying last week when he told investors he was shorting Moody’s Corp, but the Greenlight Capital manager’s latest thumbs down packed a weaker punch than his past, celebrated broadsides.

To be fair, Einhorn had a tough act to follow. A year ago, he boldly said Lehman Brothers was in much worse shape than its management would admit. Four months later — the bank went bankrupt and the shares were wiped out. It took more than six years, but his warnings about business lender Allied Capital also proved accurate and ultimately very profitable.

Last week, the soft-spoken Einhorn turned his sights on the parent of credit rating agency Moody’s Investors Service. Investors dutifully followed Einhorn’s lead and sent Moody’s shares down as much as 8 percent before they closed at $26.89.

Yet in the three trading days since, Moody’s stock has recovered its Einhorn losses and more. The shares traded at $28.66 a share Tuesday.

In a speech titled “The Curse of the AAA,” Einhorn said Moody’s credibility was wrecked after perfection-rated companies like AIG, bond insurer MBIA and Fannie Mae, not to mention the mortgage- backed securities market, all collapsed.

“Investors who bought AAA-rated structured products thought they were buying safety, but they instead bought disaster,” he said. “Investors have figured this out and many deny that they buy bonds based on rating, unless they are forced to by law.”

But that is hardly news to all the people who though Enron was a solid bet … until it went belly up. Einhorn told Reuters he has contemplated a ratings agency short since Pershing Square’s Bill Ackman publicly questioned the AAA rating of MBIA in 2002.

Einhorn declined to elaborate on the reasoning for his Moody’s short, though his speech indicates it boils down to a bet that the U.S. government changes the rules that created the Moody’s/Standard & Poor’s/Fitch Ratings oligopoly. He called on regulators to eliminate this system.

Compare that with his Lehman call, when Einhorn unleashed a barrage of details that showed Lehman’s financial statements were riddled with problems.

Einhorn, speaking last week to more than 1,000 hedge fund investors at the annual Ira Sohn Investment Research Conference, observed that Lehman made investors dig through tables and footnotes to find its exposure to CDOs – mortgage-related assets that had been the subject of scrutiny for months.

When the bank actually took write downs, he showed they were low-balled. He blew the whistle on a $1.1 billion discrepancy — positive to Lehman — between Level 3 assets in its 10-Q filing and former CFO Erin Callan’s description of them in a conference call with analysts.

He raised red flags when the bank booked a more than $400 million gain for a nonexistent round of capital raising and when it did not mark down Suncal, a large California land developer slammed by the housing slump.

Yes, Moody’s trades at a healthy 19 times earnings, but the stock is already down 61 percent from its 2007 peak — a fall twice as hard as the S&P 500 index.

So, David, we see the smoke, but where’s the fire?

(Einhorn, in an e-mail response, observed that short term stock movements are not the best barometer of the quality of an investment call. Lehman shares rose on the morning of November 28, 2007, the first time he spoke about his negative views on the bank, and continued to climb for months thereafter. Allied Capital, of course, saw its shares climb for five years before the credit crunch exposed its weaknesses in latye 2007.)

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