Valuing mortgage bonds: Don't ask, don't tell

(Fortune) -- Ever hear of a 20/90 bond? According to David Einhorn, head of hedge fund Greenlight Capital, that's a security for which would-be buyers are bidding 20 (that is, $200) and would-be sellers are offering 90 ($900).

Einhorn is talking tongue-in-cheek, of course, but in today's credit markets, he's on the rim of reality. Rafts of investors who own mortgage-backed securities aren't willing to put them up for sale, for fear of finding out what prices truly are.

"So the fear," says Einhorn, "is that the new prices are actually disclosed." He calls that the "don't ask, don't tell" method of security valuation.

Einhorn, 38, spelled out his criticisms at a speech sponsored last week by Columbia Business School's Heilbrun Center for Graham and Dodd Investing. His 11-year-old fund, Greenlight, manages $5 billion in assets and has had average annual percentage gains that he says are in "the mid-20s."

Einhorn is labeled a value investor, though he's also known as a short seller. In fact, he implicitly suggested in his speech that one of his current short positions is Moody's (Charts), the securities-rating agency. Moody's and Standard & Poor's, the ratings arm of McGraw-Hill (Charts, Fortune 500), have recently been accused of contributing to the credit crisis by putting high-grade ratings on fixed-income securities that didn't deserve them.

At the heart of today's crisis, Einhorn said, is that lenders have lent too much money without demanding sufficient compensation. The problem, he said, goes far beyond that ballyhooed villain, subprime: "There has been a colossal undercharging for credit across the board." The sins, he said, extend to prime mortgage loans, commercial real estate, and corporate lending.

"The only difference between these areas and subprime residential is that we haven't seen the losses yet," says Einhorn. That makes him marvel at "how fast the world is trying to go back to business as usual."