NEW YORK Three and a half years into his bet against credit rating agencies, hedge fund manager David Einhorn says if businesses that rate bonds for corporations and local governments went away tomorrow "nothing bad would happen."
"We began shorting the rating agencies in 2007 so we're only three and a half years into this and I figure it will be a while longer," Einhorn told the Reuters 2011 Investment Outlook Summit in New York, referencing his short position on Moody's Corp (MCO.N) and McGraw-Hill Companies Inc MHP.N, the parent of Standard & Poor's.
While Einhorn, who founded $6.5 billion hedge fund Greenlight Capital, said he does not think rating agencies would disappear immediately, he said he still believes in his bet against them, largely because the litigation against them stemming from the credit crisis has not fully played out.
"When you think about the litigation, and in particular, the money lost on bonds by people who may have been defrauded by the rating agencies -- obviously they have to prove that in court -- but it is very large relative to the rating agencies' ability to pay out damages," Einhorn, told the summit.
Einhorn, who became well-known for questioning the health of Lehman Brothers four months before its collapse, said he discounts arguments by the rating agencies that they are winning their legal battles. He said the worst cases typically get thrown out first, while stronger cases are continuing to work their way through the courts.
"From my perspective, the rating agencies have to win every case," Einhorn said. "If they lose even a single case, you're going to have a significant negative outcome to the share prices."
Historically, rating agencies have argued that their ratings are opinions, protected by the First Amendment, but some investors have sued the agencies for damages, claiming they knowingly disseminated false information prior to the credit crisis.
Einhorn also said that he believes investors' willingness to use and pay for ratings has eroded, the amount of competition in the area has increased, and the backlash against the agencies among governments is not over.
Part of that is because some of the biggest users of ratings -- like pension funds -- actually lose when they rely on the ratings, Einhorn said. Other investors, he said, arbitrage against the ratings by doing their own analysis and betting whether a rating is right or wrong, and force the pension funds that relied on the ratings to take the other side of their trade.
"It's the passive pension money that is really being victimized by the continuation of the use of the ratings," Einhorn said.
"There are options and if credit rating agencies disappeared tomorrow, nothing bad would happen," he added.
Moody's shares are up about 0.2 percent since January and McGraw-Hill shares are up about 7.6 percent over the same period.
(Reporting by Emily Chasan; Editing by Andrew Hay)