The past eighteen months or so have provided an endless supply of news stories about financial failures, scams and reports of general mis-management. Regular readers of this blog will recall several months ago, that I railed against the watchdogs of the industry – Moody’s, Standard and Poor et al for being practically criminally negligent as they continued to highly rate the financial products of many of the now infamous companies as they were about to collapse. Freddie Mac and Lehman Brothers are only two of many examples. It seems that there might not be a need for the government to get involved with a punitive action against these institutions. It seems, as is often the case, that the market is taking care of that situation internally.
I am referring to an article that came out that reports that David Einhorn has revealed that his current short-selling target is Moody’s, the credit rating firm. www.dealbook.blogs.nytimes.com/2009/05/28/prominent-short-seller-puts-moodys-in-his-sights . Why is this newsworthy? Mainly because Mr. Einhorn , who runs the New York hedge fund, Greenlight Capital, is the same man who sold Lehman Brothers short many months before it collapsed last fall. Mr. Einhorn declined to say how long he had been selling Moody’s short, but the share price was down 7% as the story broke. “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.”
In explaining his rationale, Einhorn said, “The truth is nobody I know buys or uses Moody’s credit ratings because they believe in the brand. They use it because it is part of a government –created oligopoly and, often, because they are required to by law.” The “oligopoly” surely refers to the practice of being paid by the very people you are hired to rate, one of my own problems with the rating system as spelled out in past blogs.
Those who favor less government regulation can tout this development as an example of how the market self-corrects without government micro-managing. It is a classic case of the problem being fixed from within -a modern version of taking the criminal into the back room and beating the crap out of him. By the time “the law” gets there, they might find that justice has already been served. It’s an amusing idea, really – the notion of selling short as vigilante justice. But it does have a certain old world charm nonetheless.
By the way, shortly after this story broke, Einhorn told Reuters that he had been watching Moody’s since 2002, which is explanation enough as to why his actions are gathering so much attention.
By Myron Gushlak
