David Einhorn Tells Bloomberg TV Rating Agencies' Brands Are "Ruined"

Hedge fund manager David Einhorn, President of Greenlight Capital, spoke to Bloomberg Television's Betty Liu this morning. He said that the ratings companies' quest for market share may have compromised their ability to provide investors with accurate credit assessments. Einhorn had previously disclosed that he is shorting the rating agencies, including Moody's

. Here are some of the excerpts of the interview, courtesy of Bloomberg TV. The video of Einhorn's telephone conversation with Betty Liu can be found

.

"I think there is two basic issues…One is there is a basic, unchallenged view that the ratings are a public good. In fact I think that the ratings are a public bad. It's very risky to have your business dependent on a single customer…it's similarly dangerous to have your credit determined by one or two centralized official committees." "The market would adjust if we didn't have official ratings."

"I think it's very much to his credit. When he identified Moody's a decade ago, look at the competitive position the company had. I think he made a fine investment for himself. I think from here the risk-reward on the stock is pretty negative, so we're on the other side, but I do understand what his thinking was."

"I think they are lousy investments for several reasons. First of all, their brands are ruined…The brands are ruined, Congress is already putting in laws that will make it much harder for them to recover to former levels of profitability…Ultimately, these guys face enormous legal liability through a whole variety of lawsuits." "When you look at the margins that their credit ratings had during the boom, it was pretty clear that they were charging a lot of money and not doing very much work. And 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. That's what some of the legal challenges are about."

"I don't think it is a particularly relevant example. You had a significant event with BP and the ratings agencies managed to change the credit rating by an entire half notch or something like that -- it is almost humorous if you think about it."

“The bottom line is that the ratings agencies do not really do very much work. Even if they did work, and even if they did figure out their ratings, because of the problematic nature of it, I'm not sure they add that much value. Market spreads are a much better predictor of future defaults or future risks. People who think they need that measure should look at the market spreads and would probably give them better risk-assessment."

"This is the kind of comment that seems to come from all the people who said they don't use ratings agencies themselves. Those people who say they do not use ratings agencies actually love the rating system because they try to identify mis-rated securities, they assume the ratings agencies are probably wrong, they front run what they think the ratings agencies are going to do…They figure out how to buy from forced sellers at artificially depressed prices as a result of ratings agency actions. So basically there is some passive money that is tied to the use of ratings. Basically they get their pockets picked every day by the guys that understand how the system works. They would be better served themselves if they abandoned their own use of the ratings system and if we abandoned the use of credit ratings. They would be much better served to use market spreads."