Greenlight's Einhorn faults rating agencies on MBIA

NEW YORK (Reuters) - David Einhorn, the widely followed hedge-fund manager at Greenlight Capital, said the credit agencies are losing credibility with investors because of their failure to cut flailing bond insurer MBIA Inc's MBI.N triple-A rating.

David Einhorn, president of Greenlight Capital, Inc., speaks at the Reuters Investment Outlook Summit in New York, December 10, 2007. REUTERS/Brendan McDermid (UNITED STATES)

Shares of MBIA, the largest U.S. bond insurer, plunged by 31.2 percent to $9.22 on Thursday and are down from $76 last January, amid speculation the company won’t have enough capital to cover losses on bonds it insures.

The sell-off has reaped Einhorn significant gains because he sold MBIA shares short, a bet they would decline, for the last five years.

“The question today isn’t what is going to happen to MBIA and Ambac, because I think everybody knows,” Einhorn said in an interview on Thursday. “The question today is, ‘What happens to the brand values of the rating agencies?’”

Investors who bought notes issued last week by MBIA that were blessed with relatively strong ratings by Moody’s and S&P have already suffered steep losses.

After the markets closed on Thursday, Moody’s Investors Service said it may cut MBIA’s ratings.

Ambac Financial Group Inc ABK.N is a rival bond insurer that replaced its chief executive and projected a $5.4 billion pretax write-down in the fourth quarter on Wednesday.

Negative news on both MBIA and Ambac has been piling up as well. Just last week MBIA revealed it had guaranteed $9 billion of some of the riskiest mortgage-related securities, $900 million more than it disclosed three weeks earlier.

Meanwhile, Ambac has slashed its common stock dividend by two-thirds and announced plans to raise $1 billion of capital to preserve the prized “triple-A” financial strength ratings it needs to operate normally.

Losing those ratings from Moody's Investors Service MCO.N, Standard & Poors or Fitch Ratings would force Ambac or MBIA to insure fewer bonds, and likely cause prices of bonds they insure to fall, further upsetting financial markets already on edge.

MBIA did not immediately return a call seeking comment. Ambac spokesman Peter Poillon declined to comment.


Einhorn, who oversees $5 billion, said major rating agencies need to be held accountable for their actions in the current credit crisis.

He pointed out that Moody’s and S&P just last week rated $1 billion of surplus notes issued by MBIA “Aa2” and “AA,” respectively, despite the company’s problems.

MBIA sold the notes to raise enough capital to maintain its triple-A credit ratings. The two ratings are different because the triple-A measures MBIA’s ability to guarantee bond payments on bonds it insures while the surplus notes rating measures MBIA’s ability to repay its own debt.

Ratings in the “double-A” category typically go to corporations believed to have a very strong capacity to meet their obligations.

Einhorn finds it perplexing that MBIA could belong to that group.

“They blessed MBIA to issue surplus notes at a double-A rating that priced at a 14 percent yield, which is worse than a triple-C rating,” he said. “Now the investors in those notes have big losses because they are trading down a lot.”

Those MBIA surplus notes, sold Friday at 100 cents on the dollar with a 14 percent coupon fixed for five years, were trading late Thursday at about 80 cents on the dollar, yielding at about 20 percent.

S&P spokeswoman Mimi Barker responded: “It is important to understand that an S&P rating is an independent, impartial opinion on the credit-worthiness of a security. Ratings are not recommendations to buy, sell or hold a particular security, nor do they speak to market performance of a security.”

Standard & Poor’s is owned by McGraw-Hill Cos Inc.


Moody’s did not immediately return calls seeking comment.

Einhorn has said it is a “horrendous idea” to delegate most responsibility for assessing credit risk to credit rating agencies paid for by the issuers, rather than by buyers of bonds they rate.