* Greenlight Capital's Einhorn says shorting Moody's stock
* Greenlight says credit ratings lost credibility
* Einhorn says Moody's has negative net worth $900 mln
* $7.2 mln Allied Capital short-sale gain goes to charity
By Joseph A. Giannone
NEW YORK, May 28 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.
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,
Yet 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
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 MHP.N Standard & Poor's and Fitch
Ratings are Moody's rivals.
Immediately after his presentation, 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. 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?"
Einhorn used the Ira Sohn event seven years ago to announce
a short position on business lender Allied Capital Corp
(ALD.N), 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
And one year ago, 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, 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
Tomorrows 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.
(Reporting by Joseph A. Giannone; Editing by Richard Chang,