rssBuffett Defends Credit Ratings Agencies, Concedes System’s Flaws
Wednesday, June 02, 2010 at 5:40 pm
- 82 Comments
Warren Buffett (Xinhua/ZUMA Press)
Testifying before the Financial Crisis Inquiry Commission this afternoon, Warren Buffett — the legendary value investor who heads Omaha-based investment giant Berkshire Hathaway — defended the behavior of the country’s credit ratings agencies and his own role in them, while acknowledging that the model under which they operate creates a flawed system of incentives.
[Economy1] The FCIC, now notorious for its grilling of Wall Street executives, mortgage originators, government regulators and others complicit in the boom and bust, summoned Buffett to discuss the ratings agencies, which assess the chance that a financial product will default and assign it a grade that determines its price and risk. Berkshire Hathaway is a major stakeholder in Moody’s, one of the country’s two main ratings agencies — a lucrative duopoly that gave wildly inaccurate assessments of mortgage-backed securities before the crash.
As a stakeholder, one might have expected Buffett to defend the industry. And he did to a certain extent, arguing that Moody’s executives were not negligent and do not deserve to be fired, for instance. But he also undercut his own defense, noting that he “hates” the ratings agency business model and seemingly admitting that he invested in Moody’s for its profitability rather than its soundness. It made for an anemic stand for a business on the verge of major regulatory changes.
The so-called “Oracle of Omaha” largely shifted the blame from himself and Moody’s, arguing that systemically important financial firms that require government life support should have their shareholders wiped out and managers fired — but not Moody’s. And he did not acknowledge the ratings agencies’ unique role in precipitating the financial crisis, instead saying that Moody’s main mistake was to miss the trillion-dollar housing bubble along with “the rest of America.”
He actually had to be compelled to testify before the commission, declining two invitations before the FCIC subpoenaed him, saying, “YOU ARE HEREBY COMMANDED to appear and give testimony.” Still, the 79-year-old appeared unruffled and energetic, dressed in a dark suit and a red tie, seated alongside the chief executive officer of Moody’s, Raymond McDaniel.
Bill Thomas, the vice chairman of the FCIC, broke the tension in the room as he opened his questioning. “Notwithstanding the subpoena, I want to thank you for coming,” he began.
Buffett quipped back, “I want to thank you for the supboena!”
But the exchange soon became heated, with Buffett providing defensive and gruff answers to questions. Phil Angelides, the head of the FCIC, said that he had found “a lot of fingers pointing away” and “very little self-examination” at the credit ratings agencies. There were “significant failures in the product your company offered,” he said, and ratings “proved to be highly defective, not just by a small measure, but by a large amount.”
Angelides added, “If we flipped a coin, it would have been five times more accurate” than Moody’s ratings of structured products — 90 percent of which needed to be downgraded.
But Buffett said that Moody’s just made the same “mistake that 300 million Americans made” and that he did not believe its business model should change or its management should be fired. “Rising prices are a narcotic,” he said, a narcotic that intoxicated investors including himself.
Angelides pressed him on whether he should have seen the housing bubble, given that government regulators and market participants started sounding the alarm in 2004. “The Cassandras were there,” Buffett conceded. “But who was going to listen to [hedge fund investors] John Paulson in 2005 or 2006 or Michael Burry?” (Both Paulson and Burry called the bubble early and shorted the housing market, making billions as the economy collapsed.) Buffett said, “I recognized something pretty dramatic going on,” but he thought it was a “bubblette” rather than a “four star” bubble.
He also said that while he recognized real faults in the credit ratings business, he did not think that changing the model was necessary. “I hate issuer pay,” he said, describing the system by which the companies that produce financial products pay agencies like Moody’s to rate them — a conflict of interest at the heart of the business, as financial firms pressure agencies to give them better ratings and shop around for triple-A marks.
But Buffett said that he did not think anything else would work better. When asked whether the United States should adopt Sen. Al Franken’s (D-Minn.) proposal to have the government assign a rater to a financial product, he demurred. “I suppose it could happen,” Buffett said. “I’m not arguing this is the perfect model. I’m just saying it’s hard to change.
“The wisdom of somebody picking out raters — is that going to be perfect? I don’t know,” he continued, noting that the Nebraska insurance authorities tell him which ratings agencies he needs to hire to rate his products.
At another point, Angelides criticized the “very structure of credit rating agencies,” saying, “It does seem in the end, there’s lots of upside but very little downside” if Moody’s and Standard and Poor’s misrate financial products. “I think much of corporate America is tilted that way,” Buffett said, before wanly arguing, “We’ve seen significant downside” due to hits to Moody’s stock price.
Buffett also acknowledged that he personally has little investment in accurate ratings. “We hope for misrated securities, because it gives us a chance to earn a profit,” Buffett said. “I think they misrate us! [Moody's] have us a notch below Standard & Poor’s.”
Douglas Holtz-Eakin, the Republican former director of the Congressional Budget Office, repeatedly noted that Buffett’s testimony showed that ratings agencies were profitable due to their duopoly, rather than the usefulness of their ratings. Buffett did not disagree, instead noting that Moody’s and Standard and Poor’s ability to “set prices” — to somewhat arbitrarily name the fee for a rating, due to a lack of competition — made it an attractive business.
Buffett conceded that as an investor, he considered the duopoly “a wonderful economic model for the business.” And he added that Berkshire Hathaway does not rely on credit ratings agencies to analyze financial products, instead doing its own due diligence in-house.
He later said that ratings agencies might function best as a monopoly. “If there were 10 ratings agencies, all equally well-regarded [and] all acceptable to the market, they would compete on price, laxity or both,” he said. “If there were just one ratings agency, they would have no reason to compete.” He also noted that Berkshire Hathaway is reducing its stake in the company.
Follow Annie Lowrey on Twitter
82 Comments
Trackback posted June 2, 2010 @ 6:09 pm
Buffett Defends Credit Ratings Agencies, Concedes System?s Flaws…
I found your entry interesting do I’ve added a Trackback to it on my weblog :)…
Pingback posted June 2, 2010 @ 6:57 pm
[...] This post was mentioned on Twitter by TMC Member Feed, WashIndependent. WashIndependent said: Buffett Defends Credit Ratings Agencies, Concedes System's Flaws – http://bit.ly/acr3kQ [...]
Pingback posted June 2, 2010 @ 7:18 pm
[...] rest is here: Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … By admin | category: Uncategorized | tags: bank-directors, european-commission, [...]
Pingback posted June 2, 2010 @ 7:39 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 7:50 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 7:58 pm
[...] the original post here: Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … Posted in Credit | Tags: before-the, berkshire, country, Credit, defended-the, [...]
Pingback posted June 2, 2010 @ 8:08 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 8:24 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 9:15 pm
[...] Original post: Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 9:16 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 9:37 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 10:05 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 10:15 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 10:16 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 10:52 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 2, 2010 @ 11:44 pm
[...] More here: Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 12:40 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 12:50 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 2:02 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 2:08 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 2:48 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 2:59 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 3:00 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 3:02 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Comment posted June 3, 2010 @ 2:08 am
Well , the view of the passage is totally correct ,your details is really reasonable and you guy give us valuable informative post, I totally agree the standpoint of upstairs. I often surfing on this forum when I m free and I find there are so much good information we can learn in this forum!friednoodle
Comment posted June 3, 2010 @ 2:47 am
Thank you for this very informative article of yours. You have explained everything well. I appreciate that you shared this to us.
Comment posted June 3, 2010 @ 3:19 am
I think they misrate nike air max 90 us! [Moody's] have us a notch nike air max 95 below Standard & Poor’s.”
Pingback posted June 3, 2010 @ 4:51 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 4:55 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 5:09 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 5:10 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 5:24 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 5:54 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System’s Flaws « The Washington Indepe… [...]
Pingback posted June 3, 2010 @ 5:57 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 6:17 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 7:27 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 7:55 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 8:25 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 8:29 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 10:31 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 10:36 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 11:10 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 11:35 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 11:36 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 1:09 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 2:15 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 2:38 pm
[...] ratings agencies are in the news, given Warren Buffett’s ill-received and contradictory testimony to the Financial Crisis Inquiry Commission yesterday. And Franken says that he expects the [...]
Pingback posted June 3, 2010 @ 2:54 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Comment posted June 3, 2010 @ 2:09 pm
air max 1
air max 2009
cheap air max
air max for sale
max 90 shoes
air max 90
air max plus
air max wright
air max tl 2.5
air max light
air max 93
air max 180
air max stab
air max 91
jordan 6 rings
jordan retro 5
jordan retro 3
cheap jordan shoes
jordan retro 1
jordan dub zero
jordan retro 4
jordan fusion 6
Pingback posted June 3, 2010 @ 4:09 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 4:42 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 4:51 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 7:06 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 7:40 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Trackback posted June 3, 2010 @ 8:00 pm
BP Credit Rating Cut As Oil Heads To Florida…
3:27pm UK, Thursday June 03, 2010 Hazel Tyldesley & Alex Watts, Sky News Online BP has suffered a further blow after a gl…
Pingback posted June 3, 2010 @ 8:37 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 9:18 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 3, 2010 @ 9:23 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System’s Flaws « The Washington Indepe… [...]
Pingback posted June 4, 2010 @ 12:23 am
[...] TH-BA1 Soundbar System with Wireless Subwoofer – $239 + free shipping | GadgetReviewBuffett Defends Credit Ratings Agencies, Concedes System’s Flaws « The Washington Indepe…Google Begins Adding VP8/WebM Support to ChromeDorsey Delivers 50,000 Squares, Eyes Global [...]
Pingback posted June 4, 2010 @ 12:51 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 4, 2010 @ 12:53 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System’s Flaws « The Washington Indepe… [...]
Pingback posted June 4, 2010 @ 4:07 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System’s Flaws « The Washington Indepe… [...]
Pingback posted June 4, 2010 @ 6:45 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Comment posted June 4, 2010 @ 9:48 pm
THREE LEGGED BUSINESS STRUCTURE
[Table it]
So, what happened with the Korean Warships having at each other, an investigation, the [BRIC] member the [C] The [PRC] Peoples Republic of China, Apple, Boeing, General Electric, Goldman Sachs, Google, Nike, Rio Tinto, Starbucks, and last but not least [Wally World] Wal-Mart Stores, are what happened and they are not happy campers, some pretty smart people have some really insightful comments about there is going to be an Asian [3] Three Legged solution to this mess that was created by the [SOSE] Secretary of State of the Empire Hillary Diane Rodham-Clinton, and among those was to put a stop to things, now in Parliamentary proceeding you Table a motion, put it into executive committee, or if you’re the Supreme Court you simple don’t hear it, so the boys decided to have an investigation, that will have a very clever answer that will be a short item in some minor news report, end of problem.
[Heads have to roll]
This is to be swept under the rug, a trade war between the three legs of the business tirade, Beijing, Tokyo, and Washington, D.C., have decided that when there is a prolonged economic slump that seems to have no end, it, having military hardliners ruining business. And the next order of business is to clean house, Hillary Diane Rodham-Clinton has to go, Timothy Geithner, has to go, Gary Locke has to go, former [EMPIRE] Ambassador to Japan Thomas Schieffer, and Guam Senator Judith P. Guthertz, who is the chair of the Committee on Military Buildup and Homeland Security in the Senate have had all the political tack of a Bull in a China Shop when it comes to Asian Affairs, especially placing saber rattling military hardliners first over business considerations, and these business concerns aren’t going to put money into the campaigne coffers of hard-liners which with the mood of the electorate for the removal of any incumbent is going to the only life blood that may win them another election.
[Decade’s Business Plan]
Things are going to have to be changes, if the Israeli-American Empire [THE EMPIRE]is going to stay in the [21st] Century economic game. The [Empire] is going to have to acknowledge the existence of the [BRIC] Sphere’s of Influence in the [21st] Century, Brazil, The Russian Federation, India, and The Peoples Republic of China, and the [EU] European Union, that the wars of terror and the wars of economic stimulus are going to have to come to an end, thru negotiation or it will be the Israeli-American Empire against the rest of the world, which is the way things are drifting now, with the Mega-Metropolis Empire of New York City, and Washington, D. C., and Israeli seen as a problem to be dealt within, vise one to be worked with. A Ten and Twenty Year plan a course of action for the next two decades across the board has to be the order of the day. What happened with Asia, it has been awakened, and the world has changed, no more one fire after another to be put out is acceptable, controlled business structured management is the order of the day.
HERCULE TRIATHLON SAVINIEN
Pingback posted June 5, 2010 @ 9:43 am
[...] ratings agencies are in the news, given Warren Buffett’s ill-received and contradictory testimony to the Financial Crisis Inquiry Commission yesterday. And Franken says that he expects the [...]
Trackback posted June 7, 2010 @ 1:01 am
Oracle rolls more Sun heads…
Oracle has laid off additional Sun workers in Europe and Asia, according to a company SEC filing.Back in January, when it ate Sun Microsystems, Oracle bragged that it was hiring 2,000 people to boost its Sparc hardware and Soladfris Unix business, but …
Comment posted June 9, 2010 @ 3:28 am
Hhe article's content rich variety which make us move for our mood after reading this article. surprise, here you will find what you want! Recently, I found some wedsites which commodity is colorful of fashion.
http://www.inin-from.com
Pingback posted June 15, 2010 @ 11:57 pm
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Pingback posted June 17, 2010 @ 7:09 am
[...] Buffett Defends Credit Ratings Agencies, Concedes System's Flaws … [...]
Comment posted June 22, 2010 @ 9:25 am
hi, Buffett defends rating agencies for missing crisis … Buffett Defends Credit Ratings Agencies, Concedes System's!
Comment posted June 26, 2010 @ 7:00 am
Things are going to have to be changes, if the Israeli-American Empire [THE EMPIRE]is going to stay in the [21st] Century
Comment posted July 29, 2010 @ 11:22 am
Things are going to have to be changes, if the Israeli-American Empire [THE EMPIRE]is going to stay in the [21st] Century economic game. The [Empire] is going to have to acknowledge the existence of the [BRIC] Sphere’s of Influence in the [21st] Century, Brazil, The Russian Federation, India, and The Peoples Republic of China, and the [EU] European Union, that the wars of terror and the wars of economic stimulus are going to have to come to an end, thru negotiation or it will be the Israeli-American Empire against the rest of the world, which is the way things are drifting now, with the Mega-Metropolis Empire of New York City, and Washington, D. C., and Israeli seen as a problem to be dealt within, vise one to be worked with. A Ten and Twenty Year plan a course of action for the next two decades across the board has to be the order of the day.
Comment posted September 2, 2010 @ 9:10 am
Great. Now i can say thank you!just love your post!
Comment posted February 15, 2011 @ 3:44 pm
Thanks for the article. This keeps me informed about the topic.
Comment posted February 16, 2011 @ 9:36 am
Thanks for the marvelous posting! I genuinely enjoyed reading it, you may be a great author.I will be sure to bookmark your blog and may come back down the road. I want to encourage you to continue your great work, have a nice holiday weekend!
Trackback posted March 10, 2011 @ 6:08 pm
My Recommended Websites…
[...]some new websites on the web we love, even if they are not related to ours. Check them out[...]…
RSS feed for comments on this post.
Sorry, the comment form is closed at this time.
