Thursday, July 23, 2009

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?

Warren Buffett:

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

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

9 comments:

market folly said...

good stuff Jeff, saw that filing as well but you beat me to it haha. I'll just link to you tomorrow instead of writing a post about it as well.

My initial thought was: I wonder if Buffett read Einhorn's stuff or talked to him. Either way, interesting stuff and it will become even more interesting if he reduces it further.

Jay (market folly)

Anonymous said...

Another possibility might be that thanks to MCO buying back stock, he had more than 20% and wanted to bring it down below that level for accounting purposes (20% is the threshold requiring equity method accounting)....

Jeff Matthews said...

That may be the case, and the William Blair analyst mentioned this...except Buffett has never, to my knowledge, done anything for accounting purposes.

For tax purposes, yes. For accounting purposes, no.

JM

Anonymous said...

One other point to note is the recent commentary by Barney Frank regarding the ratings agencies. Specifically, he spoke of getting rid of the the "investment grade" mandate that is so pervasive. Doing so would go a long way to neutering the NRSROs.

Anonymous said...

Buffett's investment in Moodys shows his venal side. He must have known that they were manufacturing ratings for the sake of profits and couldn't be touched until now.

If you've ever dealt with GEICO, you'll witness sales reps stressed to the point of crossing ethical lines.

And his investment Petro-China? He must have gotten wind of the corruption charges that were coming.

Buffett ain't clean and never has been.

sb said...

Another interesting thought is that Buffett had come around to selling it even before the shareholders meeting. On other hand he may not have been willing to articulate the fact he is going to sell in front of shareholders !!

Anonymous said...

I find it hilarious that you've actually formed an LLC to trademark blog posts read by, at most, a couple hundred people per post. Get real, nobody will care enough about any of your posts to infringe, dude. Time to reconnect with REALITY, bro.

Jeff Matthews said...

Aside from the fact that "Anonymous" is hilariously off on his estimate of the readership of NMTU, he is also painfully naive when it comes to IP.

Let's hope our Anonymous "bro" doesn't work for a software company.

JM

deaner said...

They are possibly differnt people, but why do the posts that exhibit the least thought and the most vituperation all come from "Anonymous?"