Shares in Moody’s Investors Service and McGraw-Hill Cos Inc, which owns Standard & Poor’s, could drop if ratings agencies’ business models were forced to change in the wake of the credit pullback, an executive told Reuters on Monday.
„The shares could fall farther in the event that there is some kind of forced change into the business model, such as getting rid of the issuers pay system,” David Einhorn, president of investment firm Greenlight Capital said at the Reuters Investment Outlook 2008 Summit in New York. Einhorn told Reuters it is a „horrendous idea” to delegate most of the responsibility for assessing credit risk to a group of credit ratings agencies paid for by the issuers rather than the buyers of bonds.
„I think that the shares are pricing in the sort of the loss of some of the high margin of the structured finance business,” Einhorn said at the Reuters Summit. „I think that that is kind of what the shares reflect.” But shares in Moody’s and McGraw-Hill could drop if „it turns out that their role in creating - and effectively participating - in the underwriting of the some of structured finance proves to create legal liability for them,” Einhorn added. „That is something I am sure plaintiff lawyers are looking at and it is unclear at this point as to whether they will ultimately be found liable,” he told Reuters.
McGraw-Hill shares have fallen from a high of $72.50 in early June - before credit concerns reached the spotlight - to trade at $45.99 on Monday on the New York Stock Exchange. Similarly, Moody’s shares have dropped from a 2007 high of $76.09 in February to trade at $40.76 on Monday. Einhorn compared the current credit situation with that of the collapses of communications company WorldCom Inc. and energy trader Enron Corp., both of which were rated as though they wouldn’t default. Similarly, rating agencies have given investment-grade ratings to MBIA Inc., which has insured risky bonds backed by subprime mortgages.