David Einhorn was the guest on Bloomberg’s “In The Loop” program last Friday for two hours. Most of what he said about the European debt crisis, Apple (AAPL), St. Joe Company (JOE) and the gold market was covered by the media. But his remarks about the rating agencies were overlooked. He essentially said the credit rating agencies’ inaptitude facilitates big banks to pickpocket passive pension funds by front-running them or dumping their bad bonds on them. That’s why big banks want the rating agencies to stay. Here is what Einhorn said:
“There are a bunch of high profile investors, bond investors who said ‘look we don’t rely on credit ratings for what we are doing, but those pension funds and stuff like that they need these credit ratings to protect themselves’. But the fact of the matter is it’s those people who say that they are not relying on credit ratings who are most depended on the credit rating system. Because what they do is they look at the credit ratings, they compare that to their own analysis, and they are looking for inefficiencies. And they know how the people who depend on credit ratings are going to behave. So, essentially by analyzing the credit better, they know how the other market participants are going to behave and essentially they pickpocket these passive pension funds both coming and going.”
Warren Buffett owns a bunch of Moody’s (MCO) shares and he has been dumping them for the past year and a half. Insider Monkey, your source for free insider trading data, agrees with David Einhorn. For instance, all three major credit rating agencies rate Turkey’s credit rating below investment grade. S&P rates Turkey as BB+, the same credit rating as Greece. Turkey however, never defaulted in her 87 year history, has one of the lowest debt/GDP ratios in Europe (around 40%), and has one of the lowest budget deficits (around 3%). CDS properly rates Turkey’s credit rating as AA (derived from the spreads). But according to credit rating agencies, Turkey’s credit rating is BELOW investment grade. Those are the same credit rating agencies that rate Spain, Portugal, Italy, and Russia several levels above Turkey. If a country is going to default, it’s not going to be Turkey. Even doomsayer Nouriel Roubini doesn’t include Turkey among his predictions of countries that may default.
So, yes, credit rating agencies are ridiculously incapable of providing unbiased and accurate ratings. They do more harm than good.