U.S. rating companies face tarnished reputations and legal and regulatory risk after they failed to warn investors about the dangers of complex financial products that contributed to the financial crisis, Greenlight Capital Inc. President David Einhorn said.
“I think they are lousy investments,” Einhorn said today in an interview on Bloomberg Television. “Their brands are ruined, and Congress is already putting in laws that will make it much harder for them to recover toward their former level of profitability.”
Einhorn is betting that shares of rating companies Moody’s Corp. (MCO:US) and McGraw-Hill Cos.’ Standard & Poor’s will decline. Warren Buffett, Moody’s largest shareholder, said yesterday that he has reduced his stake in the New York-based company because its franchise may no longer be “bulletproof.”
The rating companies didn’t often provide much value to investors, and were too concerned about maintaining wide profit margins and gaining market share, Einhorn said.
“There’s a lot of evidence that these guys were very focused on their market share, and they allowed their quest for market share and for profits to compromise their ratings’ objectivity,” Einhorn said.
Moody’s spokesman Michael Adler declined to comment, as did S&P spokesman Chris Atkins.
Moody’s fell (MCO:US) 21 cents, or 1.1 percent, to $19.69 at 4:03 p.m. in New York Stock Exchange composite trading. The shares have declined 27 percent this year. McGraw-Hill shares (MHP:US), which are down 16 percent this year, dropped 3 cents to $28.01.
Moody’s, which gave AAA ratings to mortgage bonds that later collapsed, was one of many firms that failed to foresee the housing slump, Buffett told the Financial Crisis Inquiry Commission, which held a hearing yesterday on the rating companies’ role in the crisis that led to the worst U.S. recession since World War II.
Rating companies often hurt the markets by waiting until firms or countries are already in trouble to announce their downgrades, Einhorn said. Moody’s and Fitch Ratings today cut the ratings of BP Plc, which has lost 33 percent of its market value since an April 20 fire in the Gulf of Mexico killed 11 workers, sank a $365 million rig and triggered subsea leaks that have spewed millions of gallons of crude into the Gulf.
“They are very pro-cyclical,” Einhorn said in an interview on CNBC today. “While things are good, they tell everyone that things are fine even as risks are building, and then when you have a problem, they are there to accelerate the problem by putting on an untimely downgrade.
“Many companies have seen that happen and I’m fearful that many governments are going to see that happen,” Einhorn said.
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