Einhorn Says CDO Investors Poised to Copy Justice’s S&P Lawsuit
David Einhorn, the investor known for betting against Lehman Brothers Holdings Inc. before its 2008 collapse, says credit raters are poised to face more lawsuits after the U.S. filed its case against Standard & Poor’s.
“When you look at the government complaint, it’s like a road map,” Einhorn, the co-founder of hedge fund Greenlight Capital Inc., said today in an interview at Bloomberg LP headquarters in New York. “It shouldn’t take too much effort for the people who bought the CDOs who aren’t banks to essentially copy the government and sue for further damages.”
The Justice Department filed a civil lawsuit against S&P and its parent, McGraw-Hill Cos., on Feb. 4, claiming that the world’s largest ratings firm deliberately understated the risk of bonds backed by mortgages made to the riskiest borrowers to win business from Wall Street banks. S&P rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the complaint.
CDOs package assets such as mortgage bonds into new securities with varying risks.
Ed Sweeney, an S&P spokesman in New York, said in an e- mailed statement that the company has had “great success defending these types of cases, with 41 cases dismissed outright or voluntarily withdrawn.”
Einhorn has been wagering against the shares of ratings firms for more than five years.
“I would expect there to be a large amount of private actions from people not named in this complaint who bought these CDOs in 2007, who suffered the same fate as the bank victims,” Einhorn said.
Private litigants often file similar lawsuits following a case brought by the federal government.
McGraw-Hill fell 23.5 percent this week through yesterday from a five-year high. The shares have dropped 1.6 percent to $43.89 as of 3:25 p.m. in New York trading.
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