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Moody's is down 21% since my CAPS short and there's likely more to come...



July 20, 2010 – Comments (2) | RELATED TICKERS: MCO

I was just looking over David Einhorn's most recent quarterly letter to his funds' investors (link).  They are always a fantastic read for any investor, not just one who shares several positions with him, like myself.

One particular passage in the piece caught my eye, Einhorn's reference to his short position in Moody's (MCO).  I have been outraged at how the credit ratings agencies played as large a role in the recent credit crisis as anyone yet they seemed to get off without even a simple slap on the wrist for some time.  I finally tried to put my money where my mouth is on April 16th and I initiated a short position in MCO here in CAPS at $18.07/share.  I also attempted to short MCO in real life, but not surprisingly my broker, Schwab, did not have any shares available for me to short so I had to make due with watching the company implode here in CAPS.  Since I gave it the thumbs down, MCO has dropped 21%.

Anyhow, here's what Einhorn had to say about the company:

The other significant winner during the quarter was our short of Moody's Investors Service (MCO), which reversed some recent gains and fell from $29.75 to $19.92 per share.  The proposed financial reform bill raises the ratings agency legal liability more than the bulls expected.  Additionally, the Financial Crisis Inquiry Commission held hearings where former MCO's [sic] employees alleged that the company had, in fact, compromised ratings quality for market share.  This evidence should put meat on the bones of the fraud claims in the ongoing litigation against the ratings agencies that is ever so slowly working its way through the courts.  We believe that an eventual, but likely, legal loss will have a significant negative impact on MCO shares.

I completely agree.  I plan on holding onto my MCO short in CAPS for a while and wish that I was along for the ride in real life, for both financial gain and pure the satisfaction of watching this company that played such a large part in the country and world's financial problems be punished.


2 Comments – Post Your Own

#1) On July 20, 2010 at 6:04 PM, leohaas (29.47) wrote:

Agree 100%.

Make that 99. I don't see how the financial reform bill raises MCOs legal liability. Did we abolish the First Amendment behind which the ratings agencies usually hide?

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#2) On July 20, 2010 at 8:52 PM, TMFDeej (97.93) wrote:

I see your point about the First Amendment, leohaas.  MCO's actions, which certainly seem to involve intentionally and knowingly giving junk AAA ratings in an effort to win future business is not covered by the Freedom of Speech.


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