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Einhorn: Shorting Moody's, Taking Refuge in Gold

Thursday, 28 May 2009 | 12:05 PM ET

One year after urging regulators to guide Lehman Brothers toward a recapitalization and recognition of its losses, hedge fund manager David Einhorn is making more potentially prescient speeches.

At this year's Ira W. Sohn Investment Research Conference, the Greenlight Capital president said he's shorting Moody's, the bank stress tests were a sham, gold is his safe-haven, he's investing in pharma and the government still doesn't have it right. (Watch the videos below)

Shorting Moody's, and How Banks are Faring

Einhorn on Credit Ratings Agencies
David Einhorn, Greenlight Capital president, discusses Moody's and the credit ratings agencies.

Einhorn said Greenlight is short Moody's Investor Service and thinks the rating agencies have failed to prove their continued significance as a trusted source of fundamental credit research. He feels investors continue to include it as a part of their due dilligence in a government-created oligopoly, and because they are required to by law.

The hedge-fund manager doesn't think the banks are materially more solvent today than they were two months ago, and attributes the recent rally in bank stocks to regulatory forbearance.

Regarding the bank stress tests, Einhorn says, "If Saturday Night Live could figure out that the bank stress test was a sham, it's unlikely anyone else was fooled either."

Taking Refuge in Gold, Investing in Pharma

In line with a number of managers, Einhorn has taken a position in gold to preserve capital since the fourth quarter of last year, investing in gold ETFs among other investments in the precious metal.

Einhorn on Gold
David Einhorn, Greenlight Capital president, discusses gold as an investment.

Einhorn is also investing in some pharma stocks, as he discusses in the video below.

Those Lehman Comments and the Government in General

As for his comments about Lehman last year, Einhorn said he didn't think Lehman's fate was sealed at the time. He also laid blame on regulators for the bank's ultimate demise.

"The authorities did not want to be held responsible for intervening and causing losses to Lehman equity holders," the president of Greenlight Capital said. "Instead they waited and hoped. Hope is a nice human emotion, but does not make for good public policy."

Einhorn said he also thinks the Obama Administration has been failing the nation by following the misguided legacy of "hope" from the Bush Administration.

Einhorn on Pharma
David Einhorn, Greenlight Capital president discusses Pfizer and Wyeth, and the market for pharmaceuticals.

"The basic strategy appears to be to try to bring us back to 2006 by propping up asset prices and reflating the popped credit bubble, subsidizing bank creditors and shareholders, and delaying needed bank recapitalizations, while hoping for an economic recovery," he said.

In lieu of steadily siphoning taxpayer money towards supporting the banks, Einhorn thinks there really is a better alternative. Citing friend and fellow hedge fund manager William Ackman of Pershing Square Capital Management, he says the banks already have plenty of capital, they just don't have the right type of capital.

"Too much of the capital is debt or hybrid equity and not enough is common equity," Einhorn said. For most of the large banks there are lots of non-depositor liabilities that can be converted into equity, as needed, to enable the banks to be properly capitalized without requiring the taxpayers to put in any more money."

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