Buffett, Einhorn Fight Breaks Out as Government Charges S&P With Fraud
In September, a ruling by U.S. District Judge Shira Scheindlin on the lawsuit against Moody's and S&P's casts doubt on whether ratings opinions can be protected by First Amendment free speech rights if a fraud can be proven.
After the ruling expunged all but a fraud charge against Moody's and S&P on the Cheyne SIV, Einhorn said at the Value Investing Congress in October 2012 that the suit could subject ratings agencies to legal issues that would destroy their business models and financial position this year.
"It's a matter of time before they all disappear," Einhorn said of the rating agencies in response to an audience question asking for an update on his short thesis on Moody's.
In a Jan. 22 investor letter, Einhorn noted the poor performance of Greenlight Capital in the fourth quarter , and attributed the fund's woes to a backfiring short position in Green Mountain Coffee Roasters (GMCR) and the falling shares of Apple(AAPL) . Einhorn didn't mention a short position in Moody's in the letter. A voicemail left with a Greenlight spokesperson wasn't immediately returned.
In Tuesday trading, McGraw-Hill shares fell over 10% to close at $44.92 as details on the DoJ's suit were released. Moody's shares were down nearly 9% in Tuesday trading.
Einhorn, who correctly predicted the demise of Lehman Brothers , stuck with the short bet against Moody's despite the fact that it's lost ground since being unveiled in the wake of the crisis. Buffett, meanwhile, has slightly pared his Moody's stake since Einhorn conveyed his short bet, and he's even defended the company in front of congressional panels to stinging criticism.
Now, with only one private investor count remaining against Moody's and its competitor, S&P, the score between Einhorn and Buffett is likely to be settled once and for all.
The contest between Einhorn and Buffett pits conflicting opinions on the extent to which Moody's and S&P can be held financially responsible for mortgage bond ratings that proved to be wildly inaccurate after the housing bust.
Cutting against Einhorn's short bet on Moody's, many remain unconcerned about the lawsuit and are just one verdict away from having significant legal risk from the crisis removed. Buffett also appears highly confident.
Since 2010, The Oracle of Omaha, as Buffett is known, pared his stake in Moody's to roughly 13%, but he remains a top shareholder, according to recent filings with the Securities and Exchange Commission .
One-year share gains in excess of 25% and analyst optimism on Moody's long-term prospects signal that some are advising against Einhorn's bearish views.