Don’t let that baby face deceive you. David Einhorn has never been shy about picking fights, as Erin Callan learned to her cost.
Einhorn’s op-ed in the NY Times on Thursday was no exception. The hedgie ranged widely, covering everyone from Tim Geithner to Bill Gross, via the rating agencies, Greece, and Long-Term Capital Management.
Excerpts below, emphasis FT Alphaville’s:
Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.
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The recent United States credit crisis was attributable in large measure to capital requirements and risk models that incorrectly assumed AAA-rated securities were exempt from default risk. We learned the hard way that when the market ignores credit risk, the behavior of borrowers and lenders becomes distorted.
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At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?
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One obvious lesson from the economic crisis is that we should get rid of the official credit ratings that inspire false confidence and, worse, are pro-cyclical, aggravating slowdowns and inflating booms. Congress has a rare opportunity in the current regulatory reform effort to eliminate the rating system. For now, it does not appear interested in taking sufficiently aggressive action. The big banks and bond buyers have told Congress they want to continue the current system.
As William Gross, the managing director of the bond management company Pimco, put it in his last newsletter, “Firms such as Pimco with large credit staffs of their own can bypass, anticipate and front run all three [rating agencies], benefiting from their timidity and lack of common sense.”
Given how sophisticated bond buyers use the credit rating system to take advantage of more passive market participants, it is no wonder they stress the continued need to preserve the status quo.
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When Treasury Secretary Timothy Geithner promises that the United States will never lose its AAA rating, he chooses to become dependent on the whims of the Standard & Poor’s ratings committee rather than the diverse views of the many participants in the capital markets
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Book-talking alert: Einhorn, somewhat unsurprisingly, has long been short Moody’s and disclosed on Wednesday that he was also short McGraw-Hill, which owns Standard & Poor’s.
The Greenlight Capital founder fleshed out his thesis on the rating agencies in a speech presented at Ira Sohn’s investment conference in New York. The NYT op-ed is an abbreviated version of his argument.
(H/T @KidDynamiteBlog)
Related links:
David Einhorn vs the bloggers on credit default swaps – FT Alphaville
Einhorn v Lehman, congressional hearings edition – FT Alphaville
From the desk of David Einhorn (When rights issues aren’t so good) – FT Alphaville
Greenlight Q4 2009 letter – Dealbreaker
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