Einhorn has shorted S&P and Moodies. Some take-aways:
Rating agencies are a “public bad,” not a public good.
We need a systemic change to reject the idea of centralized official ratings.
The market would adjust if we didn’t have them.
On Buffett: “He still made a very nice investment for himself.”
“The brands are ruined.”
The companies may lose their equity in (much-deserved) lawsuits.
Margins during boom reflected compromised objectivity, competing for market share.
Without official ratings the market would adjust to risks itself. Official ratings create an arbitrage opportunity: real credit risk is often higher than ratings imply (look at BP: downgraded by just “1/2 notch or something like that.” Ratings allow sharpies to front-run downgrades or prepare to take advantage of depressed prices following downgrades.
Agencies add little value. Market spreads are a much better indicator of risk.