Buffett And Einhorn Downgrade Moody’s, Scene II

As Econgirl and many economists stress, correlation does not imply causation. 

Sure, our Dear and Loyal Readers might interpret our pontifications as harbingers of things to come and dutifully investigate further. Regardless, just because in March we highlighted more troubling signs concerning Moody’s Corporation (NYSE: MCO), doesn’t imply that said revelations caused the stock to plummet by 28%, from $30.23 (March 30) to $21.76 (May 11).  

We merely mentioned the behavior of savvy investors such as hedge fund manager David Einhorn at Greenlight Capital with respect to the investment attractiveness, or lack thereof, regarding MCO. Accordingly, the relationship between our revelations and the plummeting stock price is spurious at best.


Nevertheless, some investors got a wake-up call after reading MCO’s 10-Q filed May 7, or by reading more recent posts by Zero Hedge, published May 8 and May 11, and EconomicPolicyJournal.com that the SEC is investigating MCO.  Here is an extract from its 10-Q (bottom of page 20):

“On March 18, 2010, MIS received a ‘Wells Notice’ from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS…”

Why MCO waited nearly two months to share this material information while Buffett was dumping shares is worthy of another blog post. Incidentally, didn’t another of Buffett’s investees, Goldman Sachs, also delay revealing its own ‘Wells Notice’ and other material information?

The opinion at Coventry League and elsewhere is Moody’s may have difficulties as a going concern if the SEC enforces a cease-and-desist from being a ratings agency. In that case, some might want to paraphrase Friedrich Nietzsche: “Moody’s is Dead.”


Note: MIS is an acronym for Moody’s Investors Service, a reportable segment of MCO.


  1. All good points. Here’s a quote, circa 2008, by Bill Ackman of Pershing Square Capital Management regarding Moody’s leaving MBIA’s rating at Triple A:”Does a company deserve your highest Triple A rating whose stock price has declined 90%, has cut its dividend, is scrambling to raise capital, completed a partial financing at 14% interest (now trading at a 20% yield one week later), has incurred losses massively in excess of its promised zero-loss expectations wiping out more than half of book value, with Berkshire Hathaway as a new competitor, having lost access to its only liquidity facility, and having concealed material information from the marketplace? Can this possibly make sense?”Source link: https://www.gurufocus.com/news.php?id=21323

  2. Bloomberg plans to enter the ratings agency business by using computer modeling alone. Another sign that the current ratings agency model is insufficient

  3. Moody’s CEO also sold shares the day he learned about the Wells Notice. He is claiming it was an automatic sale, others are asking for an investigation especially since the firm didn’t reveal this information to public, enabling others to exit some of their stakes at $30ish versus current pricing

  4. Where was Moody’s Board? A McClatchy investigation stated that Moody’s was handing out Triple-A grades like candy for Wall Street mortgage securities that were backed by pools of home loans that turned out to be junk. Buffett, who understands risk and ratings, said nothing. Buffett said he has been a hands off investor yet McClatchy learned that during this time, as concerns grew about the ratings of complex mortgage-backed securities, two Moody’s executives reached out directly to Buffett to warn him of problems. Fitch and S&P operate similarly.

  5. Rating agencies are compensated by the companies issuing securities – so they seem to be more like advertising agents. Moody’s rated some of the investments that are at the heart of the SEC’s civil fraud investigation against Goldman Sachs and the mortgage-related securities. Oh, and Buffett involved with both.

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