The Oracle Speaks; William Blair Listens
Aaron Goldzimer, through Andrew Ross Sorkin: Given role of rating agencies in the current economic crisis, their use of flawed models…why do you retain such a large holding in Moody’s?
In terms of selling their [Moodys’] stock, the odds are the ratings agencies are still a good business…. There are very few people in it, it affects a large portion of the economy, and it’s a business that doesn’t require capital, so it has the fundamentals of a pretty good business. Capital markets are gonna grow over time.
—Berkshire Hathaway Shareholder Meeting, May 2, 2009
So Andrew Ross Sorkin asked, and Warren Buffett responded to, one of the better questions asked at this year’s Berkshire Hathaway shareholder meeting.
And exactly 80 days later, The Oracle of Omaha changed his mind.
In a 13D that hit the tape last night after the market close, Berkshire disclosed the sale of precisely 7,986,300 shares of Moody’s common, at prices ranging from $26.59 to $28.73 over the course of July 20 to July 22, leaving Berkshire with a still nothing-to-sneeze-at 40 million share ownership position in what Buffett told shareholders remained “a pretty good business,” and some of Wall Street’s Finest wondering what it means
Interestingly enough, the prices Buffett chose to sell at (and he is an extremely price-sensitive investor) were lower than prices available the week after the Berkshire meeting, when the stock traded above $30.Clearly, something has changed.
Perhaps Buffett has come to concur with David Einhorn.
Einhorn is proprietor of hedge fund Greenlight Capital, and readers may recall that Einhorn was the genius who tried to warn the Feds and anyone else who would listen that Lehman Brothers was primed to fail.By way of thanks for that unheeded warning, naturally, the Feds have decided to regulate more hedge funds.In any event, by way of notes that circulated around Wall Street the following day, here’s how Einhorn explained why his firm was short Moody’s stock at the Ira W. Sohn Investment Research Conference, just a few weeks after Buffett reassured shareholders at the annual meeting:
The theme of David Einhorn’s presentation was the curse of the AAA…. Einhorn took to task Chairman Bernanke’s assertion that AIG failed because there was a hedge fund at the top of an insurance company. AIG failed because it was not a hedge fund, but a AAA-rated highly rated regulated insurance company. This status gave false security to investors and counterparties. Hence the curse of the AAA: most of the institutions that ran into major trouble were AAA rated entities. Fannie, Freddie, AIG, monolines, GE all were AAA-rated.
Einhorn says he is betting against Moody’s (MCO). He describes the situation as such: if your highest rating is a curse of those who have it, what value do you have? If your goal is to destroy the brand, would you do anything differently than Moody’s has done? Why reform them if we can get rid of them? Ratings system is inherently pro-cyclical and destabilizing. Regulators can improve the stability of the financial system by eliminating the ratings agencies. Company is 19x estimated earnings, balance sheet is upside down with negative shareholder equity. Perhaps Buffett now agrees with Einhorn: if ratings are useless, what’s the value of a ratings agency?
In any event, William Blair, a sober investment house if ever there was one, isn’t waiting around to learn what changed Buffett’s mind.
Only two days after reaffirming an “Outperform” rating on the stock, they’ve downgraded Moody’s shares—“Reluctantly,” according to the headline of the piece (you never want to alienate management, even after the Crisis of 2008)—to a “Market Perform.”
The reason? “News of Buffett Sale.”
Curse of the Triple-A, indeed.
Jeff Matthews I Am Not Making This Up
© 2009 NotMakingThisUp, LLC
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