McGraw-Hill (Stock Quote: MHP) President Harold "Terry" McGraw better get his "house" in order. Otherwise, big, bad short-seller David Einhorn will huff and puff and blow it down.
McGraw rebutted criticisms leveled against the bond-rating side of his business during a CNBC
interview Tuesday maintaining that "fraud does not live in our house." His latest defense comes in the wake of a federal judge's ruling last week that said the ratings of securities distributed to a limited number of investors do not carry the same constitutional protections as ratings distributed more widely.
Shares of McGraw-Hill and Moody's sold off sharply as a result of the judge's decision, as shareholders fretted that the firms would be open to fraud claims for their horrific ratings decisions during the housing boom.
McGraw acknowledged his company "had the housing recession wrong," but he found the bright side for CNBC-viewers saying that the judge actually rejected 10 of the 11 claims in the suit.
Close, Terry, but no cigar. And you needed to go a perfect 11 for 11, especially with the wolflike Greenlight Capital's Einhorn knocking at your door.
Einhorn, famous for predicting Lehman's demise, called the court ruling a "game-changer" for the industry on CNBC
later that day. The hedge fund manager, who is short both McGraw-Hill and Moody's, questions whether the bond raters have the capital to defend against future lawsuits.
"Because they violated the trust by loosening standards and concentrated on their fees and their shares, there were ... securities that were created and sold that shouldn't have been and the ratings agencies knew that at the time," charged Einhorn.
Said McGraw, who was not responding to Einhorn but a question from his host, "The fact that a lot of other people had it wrong doesn't help, but we don't like that. That's where our problems began."
No, Terry, your problems began when your firm sold its credibility to the Wall Street CDO-making machine and started giving triple-A ratings to toxic mortgage securities. Or, as one of your staffers put it in a now-infamous instant message: "We rate every deal. It could be structured by cows and we would rate it."
You can plead your innocence -- or your ignorance -- until the cows come home, but we know what really happened. Einhorn quite clearly does, too.
Dumb-o-meter score: 80 -- The folks at Moody's must be in a foul mood. First Berkshire Hathaway starts dumping the stock, and now Einhorn is on the attack.