Buffett AGAIN DoubleTalks re Derivatives, Credit Ratings Agencies

Warren Buffett – It Wasn't Me!

03 June 2010.

Warren Buffett, the supposed Oracle of Omaha, is supposed to be an investment apostle of the writers’ cliche, "write about what you know."

But on Wednesday, Street. Warrren of Buffett testified that he did not know all that much about the credit score market,

even though the holding company he controls, Berkshire Hathaway, is the largest shareholder in Moody’s Investors Support, one of the three companies that master the business.

“I’ve never been to Moody’s,” he said at a listening to of the Financial Crisis Inquiry Commission, that is investigating the causes of the global crisis that led to the government bailout of big banks.

“We don’t even know where they’re located. I just know that their business design is extraordinary.”

Mr. Buffett’s remarks regarding Moody’s business, of course, might be interpreted not so much as a plea associated with ignorance but rather as a rhetorical flourish meant to put distance between him and the company.

He appeared prior to the panel under subpoena after very first declining an invitation, according to this article in the New York Times.

Pressed to explain how it was possible that he or she did not have an intimate knowledge of Moody’s operation,

Mr. Buffett offered the illustration of another of his holdings, Manley & Johnson.

Citing the recent recall of some of the company’s Tylenol products, he said that he did not know the inner workings of the drug maker’s laboratories

but that he had faith in the company’s reputation for solid administration.

Likewise, he said that Berkshire Hathaway had Two hundred and sixty,000 employees and at least one of these was doing something wrong at that moment. He just wished he knew who it was.

To that, Phil Angelides, the actual commission’s chairman, said, “There’utes a difference between that and systemic failure.”

Moody’s was the subject of the daylong hearing, held in Brand new York, as part of the commission’s study of

why rating agencies like Moody’utes, Standard & Poor’s and Fitch gave leading investment grades to mortgage-related bonds that were later downgraded to junk after the housing collapse. 

Berkshire owns about 13 percent of Moody’s, down from a peak of approximately 20 percent.

Appearing for two hours of questioning alongside Moody’s main executive, Raymond W. McDaniel Jr.

Mr. Buffett rejected several times to say that Mr. McDaniel must have been fired for what proved to be inaccurate ratings.

He did say that Mister. McDaniel and Moody’s were no much better or worse at predicting the financial fiasco than just about any other player on Walls Street.

“The entire American community was caught up in the belief that real estate prices could not fall dramatically,” Mister. Buffett said.

Moody’s “made the actual wrong call,” he said, but he counseled humility simply because “I was wrong on it, too.”

Before the catastrophe began, he called the housing percolate a “bubble-ette,” he said, a term lucrative regrets:

“It was a four-star percolate.”

Mr. Buffett was the marquee loudspeaker at the event, held in a large room around the second floor of the Brand new School in downtown Manhattan.

The listening to had the feel of a Congressional road show, including the ritual swearing in, as well as a raised platform ringed with blue bunting for the panel people.

Most of those testifying were former or current Moody’s employees, and much of the day was spent going through the pressures that analysts as well as managing directors felt to maintain market share against its competitors.  

Perhaps not surprisingly, the former employees tended to be much more critical than those still on the Moody’utes payroll.

Mark Froeba, a onetime senior v . p ., told the panel that the culture of Moody’s was transformed after the company was spun off from Dun & Bradstreet in 2000.

Quickly, the quasi-academic atmosphere of Moody’s vanished, he said.

Analysts suddenly felt their first priority was to assist the company maintain market share, not get the ratings right.

“Cooperative experts got good reviews, promotions, higher pay, bigger bonus deals, better grants of investment and restricted stock,” Mr. Froeba said in a prepared statement.

Uncooperative analysts, he added, were often fired.

Mr. Buffett’s large risk in Moody’s has brought him an unusual level of criticism

largely because he has a history of denouncing practices on Wall Street that he considers reckless or even geared toward short-term gains.

The commission’s questioning of Mr. Buffett was not particularly harsh, though panel members were scornful, at times, of Moody’s.

Mr. Angelides said in his opening statement that 89 percent of the securities provided a top triple-A rating by Moody’s were later downgraded.

“The actual miss was huge,” he said. “Ninety percent downgrade. Even the dumbest child gets 10 percent on the exam.”

Mr. McDaniel fell back on a defense that has been heard often from top executives at rating agencies:

the drop in housing prices was without precedent and therefore all but impossible to predict.

“We believed our ratings were our best opinion at the time we assigned them,” he explained. “I’m deeply disappointed using the performance of ratings associated using the housing sector.”

Mr. Buffett sounded his most sober note when asked by a panel member,

Brooksley Born, the former chairwoman of the Item Futures Trading Commission,

if the actual derivative market was "still a time bomb ticking away."

"I would say so," he said.

And yet he continues to pal around with the biggest derivatives players on all of Wall Street – Goldman Sachs.

How much longer is he going to get away with this particular obvious double game he or she keeps playing ???

David Caploe PhD

Chief Political Economist

EconomyWatch.com

President Or acalaha.com