As if the much maligned ratings agencies have not been beaten down enough, serving as just one of many scapegoats for the credit meltdown, outspoken hedge fund manager David Einhorn, founder of Greenlight Capital,
devoted part of a recent interview with Financial Times U.S. market editor Aline Van Duyn to critiquing the agencies.
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Einhorn, who met with FT as part of a media tour promoting his new book, "Fooling Some of the People All of the Time: A Long Short Story," called for serious "structural reform" of the credit ratings agencies and criticized them in their ratings treatment of toxic structured finance securities such as collateralized debt obligations as well as the now troubled large financial institutions.
The hedge fund founder said one of the ratings agencies' greatest flaws is that they are paid by those who they are judging. His solution is for the true beneficiaries of the ratings, the bond buyers, to pay for the ratings.
Einhorn also said that the ratings agencies simply fall short on staff resources. He explained that these "understaffed" agencies have an exemption from Regulation FD, or Fair Disclosure, allowing them to examine confidential company information, which created the perception that they knew more than the common investor. However, because they were understaffed, they "weren't really doing as much work as people perceived them to be doing." As an example, he cited a meeting with an unnamed ratings agency senior executive, who told him that the agency only had three or four staffers rating all of the investment banks.
He also criticized the agencies' use of the VAR, or value at risk, model, saying that this methodology does not take "extreme events" into account when evaluating credit risk. "In my view, risk management is not what happens in the middle of the bell curve, but what happens in extreme events," he said.
Einhorn first gained notoriety through his investments in Allied Capital, but more recently he caught the media's interest when he challenged Lehman Brothers Inc. management on the state of the bank's financial health. - Michael Rudnick
See video from FT.com
