Buffett Says Moody's Boss Shouldn't Be Singled Out for Blame
Buffett Says Moody’s CEO Shouldn’t Be Singled Out
Peter Foley/Bloomberg
Raymond McDaniel, chairman and chief executive officer of Moody's Corp., testifies at a hearing of the Financial Crisis Inquiry Commission in New York.
Raymond McDaniel, chairman and chief executive officer of Moody's Corp., testifies at a hearing of the Financial Crisis Inquiry Commission in New York. Photographer: Peter Foley/Bloomberg
June 2 (Bloomberg) -- Bloomberg contributor Robert Pozen, chairman of MFS Investment Management, talks with Matt Miller and Carol Massar about Warren Buffett's appearance before the Financial Crisis Inquiry. Pozen says it's not right to hold Buffett, chairman of Berkshire Hathaway Inc., responsible for the actions of Moody's Corp, a ratings firm whose credit grades on mortgage-related assets proved to be wrong. Berkshire Hathaway is the largest shareholder in Moody's. (Source: Bloomberg)
Warren Buffett of Berkshire Hathaway Inc., testifies at a hearing of the in New York. Photographer: Peter Foley/Bloomberg
Warren Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Moody’s Corp., said the ratings firm’s chief executive officer shouldn’t be singled out for blame over credit grades on mortgage-related assets that proved to be wrong.
“I’m much more inclined to come down hard on the CEOs of institutions” that needed to be bailed out by taxpayers, Buffett said today at a hearing of the Financial Crisis Inquiry Commission in New York. Managers at Moody’s “made a mistake that 300 million other Americans made,” he said. Raymond McDaniel, the CEO of Moody’s, sat beside Buffett at the hearing.
Berkshire’s investments in financial firms have increased pressure on Buffett to publicly discuss the financial crisis, assign blame and recommend remedies. Buffett praised New York- based Goldman Sachs Group Inc. at Berkshire’s annual meeting last month in Omaha, Nebraska, saying he disagreed with regulators’ claims in a lawsuit that the bank misled clients in the sale of mortgage-linked investments.
Berkshire injected $5 billion into Goldman Sachs during the depths of the crisis in 2008 and has held a stake in Moody’s since 2000. Buffett has been lowering the stake in New York- based Moody’s in the past year, and said he would have reduced the holding sooner if he had anticipated the collapse of the housing market.
Missed Signals
“In 2006, I was not sitting there thinking that the housing bubble was going to get as large as it did,” Buffett said. “And if I had, I probably would have sold my stock.” Moody’s has declined by about 68 percent on the New York Stock Exchange since the end of 2005.
The decline in home prices led to some of the biggest bank failures in history, including the collapse of Washington Mutual Inc., and forced the U.S. to commit $700 billion to prop up firms such as American International Group Inc. and Citigroup Inc.
Moody’s ratings of collateralized debt obligations and residential mortgage securities in the past several years have been “deeply disappointing,” McDaniel said in prepared remarks.
McDaniel said the plunge of real estate values and subsequent economic slump were of a magnitude “many of us would have once thought unimaginable,” according to written testimony. He said he is proud of Moody’s reputation and the firm’s record of 100 years of rating trillions of dollars in debt.
‘Deeply Disappointing’
“However, the performance of our credit ratings for U.S. residential mortgage-backed securities and related collateralized-debt obligations over the past several years has been deeply disappointing,” he said. “Moody’s is certainly not satisfied with the performance of these ratings.”
Moody’s and rival Standard & Poor’s have lost some of their competitive advantage, Buffett said in an interview with Bloomberg Television today.
“What was once a bulletproof franchise may not be bulletproof,” Buffett said. “It’s still quite a franchise.”
The credit raters previously benefited from the fact that borrowers had little choice except to go to the firms for grades, giving them the power to raise prices, Buffett said. Their dominance may be threatened as investors look elsewhere for credit analysis and regulators examine their role in contributing to the financial crisis that sparked the recession.
Regulatory Scrutiny
The U.S. Senate in May approved a plan to allow regulators, instead of bond issuers, to choose who grades asset-backed securities after investors said the ratings companies inflated assessments of mortgage bonds because they were paid by Wall Street firms selling the debt. A panel, overseen by the Securities and Exchange Commission, would assign a credit- ratings company to evaluate an offering.
The commission holding today’s hearing was created to investigate the causes of the financial crisis as Congress debates the most sweeping overhaul of banking regulations since the Great Depression. Buffett said in the interview he would have preferred not to have attended the hearing.
“They invited me, and I turned down the invitation,” he said. “And they subpoenaed me, and they have the right to subpoena me.”
Phil Angelides, the chairman of the commission, said Moody’s was a “triple-A factory,” that assigned the top grade to 42,625 residential mortgage-backed securities from 2000 to 2007 and later had to downgrade the assets.
“This comes as close as you can to the very product being fraudulent or of no use to the marketplace in reality,” Angelides said.
‘Big Mistakes’
“I’m not aware of any” fraud, Buffett said in the interview. “They made big mistakes, but who didn’t during the housing bubble.”
He was asked at the hearing about Berkshire’s investments in derivatives, investments he once criticized as “financial weapons of mass destruction.”
Berkshire uses the contracts “to make money,” Buffett said. “When I think they’re mispriced, I buy them.”
He said Berkshire sells credit-default swaps to provide protection to bond investors and doesn’t purchase the contracts. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Matthew Leising in New York at mleising@bloomberg.net;
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