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Moody's Blues: Time to Short the Agency?

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The only real risk: System may come to the defense of agency - and Warren Buffett.

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David Einhorn -- head of Greenlight Capital (GLRE), perhaps best known for calling "baloney" on Lehman Brothers' financial statements last year -- recently said he's shorting Moody's (MCO). He argues that the investing community doesn't believe in its ratings, and that those who receive the best ratings end up abusing them by borrowing excessively.

He's absolutely right, of course.

In this space, I've been writing for months now about the flaws of the rating agencies. I'm short both Moody's and McGraw-Hill (MHP), parent of Standard and Poor's. McGraw-Hill is nominally a cheaper stock than Moody's, but its other business -- traditional publishing -- is also heading down the tubes, thanks in part to my beloved Amazon (AMZN) Kindle.

The only real problem with being short Moody's is that you're short "the man." By that I mean not so much Warren Buffett himself, who owns 20% of Moody's via Berkshire Hathaway (BRK-A), but the whole system that's conspiring to cover up unpleasant facts - such as the quality (or lack thereof) of the work Moody's has been doing for years.

It's hard to know where to start when finding fault with Moody's:

  • Changing rating standards to fit a model's output after discovering flaws in the model?

  • Having 20% owned by one of the biggest clients you're supposed to somehow be rating objectively?

  • The fact that coming into today, the stock was trading at nearly 20 times this year's projected earnings, even though major regulation that could (and should) crush those earnings, may be on the way soon?
Einhorn is on target. The only real risk I see is the system coming to the defense of its sanctum sanctorum, Mr. Buffett. We shall see.
No positions in stocks mentioned.

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