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Einhorn, Ackman Take Aim at Ratings Agencies

Thursday, 27 May 2010 | 5:17 AM ET

Investing legends and hedge fund elite came together Wednesday afternoon for the 15th annual Ira Sohn Investment Research Conference, arguably the Super Bowl showdown of the hedge fund industry, where the world's leading managers come to present actionable ideas to a crowd of sophisticated investors for charity.

David Einhorn
CNBC
David Einhorn

The lineup is always composed of the investment industry's A-team. This year's speakers included Sam Zell, David Tepper, Steve Rattner, Jamie Dinan, David Einhorn and Bill Ackman.

While there were no major bets put on the table this year to the measure of Einhorn's now famous Lehman Brothers short position that he spoke about at the conference two years back, Einhorn did reiterate his short stance on Moody's that he specifically zeroed in on last year.

He took it a step further this year by suggesting that the rating agencies be eliminated altogether, while fellow manager and activist investor Bill Ackman of Pershing Square proposed the agencies "wait to rate."

Ackman noted that the crux of the issue with the rating agencies has been misaligned incentives. In consideration of this, he suggests rating agencies should be banned from issuing a rating within 60 days from the security's issuance and that they should instead roll out with a prospectus that fully reflects all pertinent information from the issuer.

He also said he thinks it would be wise to enforce fee reserves to be paid to the agencies if they do their job right and the rating sticks.

Fed Desirous of Bubbles?

During his speech, Einhorn reiterated his very cautious stance on the U.S. financial system by saying that "the (Federal Reserve) has a desire to foment a fresh asset bubble, feeding a collection of new, larger bubbles" and that "the worst of the last crisis has past yet the Fed continues with an emergency zero rate policy."

David Tepper of $13 billion distressed-asset hedge fund Appaloosa Management ($14 billion as of the beginning of the month), was one of this year's highly-anticipated return speakers after raking in $4 billion in profits last year on performance of 117.3 percent on bank stocks.

Financials were a popular topic in the land of stock picks this year.

Tepper said he saw great opportunities across the credit spectrum, including the $4 billion issue of AIG's 8.175 percent junior subordinated debt and a multitude of opportunities across the Commercial Mortgage Backed Securities, or CMBS market, but emphasized that investors should do their homework and look into the critical issue of whether or not the issuer can indeed pay out their coupons.

Another big-time distressed investor, Jamie Dinan of $14.4 billion York Capital, one of the largest event-driven hedge funds in the space, also had a bank in mind: Amsterdam-based ING.

In addition, Dinan recommended stocks of companies coming out of bankruptcy, like LyondellBasell Industries.

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Tepper also gave investors two of his long-running favorite picks in financials. He likes Bank of America , where he estimates normalized earnings of $2.65 a share and gave a $27 price target one year out, and Spanish bank Banco Santander, which he said was "one of only a handful of AA rated banks in the world."

Tepper forecasted normalized earnings of $1.50 a share for Santander and double share potential on the "emerging market bank."

Ackman generated additional buzz by finishing his presentation with the disclosure that he had purchased 146.5 million shares of Citigroup in recent weeks.

Tepper backed Ackman, saying, "I really like and have a significant position in Citigroup too. I think it's a very complicated firm but it could end up being the best financial institution in the U.S. They have a huge emerging-markets operation and presence. It all depends on how they execute things. We will see what happens."

Balancing out those views, Einhorn maintained his outlook that "there still are many insolvent banks and it's difficult to get an accurate gauge on the system, especially when they are very likely taking advantage of accounting forbearance."

And considering his continuously cautious outlook on global and domestic markets, Einhorn disclosed he recently acquired shares of African Barrick Gold , a spinoff of gold miner Barrick Gold, and that he believed that management's incentives are well aligned with the stock and that the company will be added to the FTSE-100 index.

"People think I'm bullish in this environment just because I don't think it's the end of the world," Tepper added. "I'm just the voice of reason."

Comments or questions? Email us at hedgestories@cnbc.com

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