Last week, on Wednesday night, I listened to the testimony of Warren Buffet -- the sage of Omaha -- and that of the man from Moody, Raymond McDaniele, at the Financial Crisis Inquiry Commission, broadcast live by CNBC.
To say I was unimpressed by either's testimony is to put it mildly. The issue was about whether rating agencies did their job well when they gave AAA-OK's to bonds and derivatives of bonds and options, swaps and what-have-you structured out of these instruments.
McDaniele's testimony was most telling.
Moody's took the assumptions from the issuers; its staff never went to the ground and tested by sight, sound and interviews whether the assumptions on the subprime mortgages were sound, perhaps even sane. None of that was done because why would the big-name issuers lie, right? Also, with the billions $ of products being churned out, there just weren't enough grunts to do the leg work. It was like money for jam; rubber stamping other people's formulae and algorithms.
For a full, more incisive and devastating account of what the rating agencies did (Sweet, F-all, it seems), read Michael Lewis latest hot-seller, The Big Short.
The fact that Mr Buffet could have taken such a large stake in Moody's while the subprime worms were multiplying fast and furious may explain why he couldn't bring himself to give voluntary testimony to the crisis commission -- he had to be subpoenaed!
Below is a Business Times report of Wednesday's testimony:
Business Times - 04 Jun 2010
Buffett fails to impress panel on rating agencies
Reforms should target financial firms with too much leverage, he says
(NEW YORK) The Oracle of Omaha, for once, may have failed to impress his audience.
Warren Buffett, the billionaire whose investments are followed religiously on Wall Street, had no easy remedies when grilled on Wednesday about the role of credit rating agencies in fuelling the financial crisis.
Testifying before the Financial Crisis Inquiry Commission, Mr Buffett did not meaningfully retreat from his defence of Moody's business model, though his Berkshire Hathaway has cut its stake in Moody's to 13 per cent from nearly 20 per cent a year ago.
Moody's shares have fallen 74 per cent since February 2007, and Mr Buffett said he would have sold more shares had he foreseen the housing downturn. Yet the 79-year-old appeared to dismay panel members in offering no clear fixes to one of the rating industry's most criticised practices - the payment by issuers for ratings.
'I'm not sure he fully comprehends the range of questions raised about Moody's business practices and culture,' chairman Phil Angelides said in an interview after the hearing.
During the hearing, vice-chairman Bill Thomas appeared exasperated as Mr Buffett hesitated to endorse specific reforms.
'You've got to do more,' Mr Thomas, a former chairman of the House of Representatives Ways and Means Committee, told him.
'Certainly I could have done more,' Mr Buffett responded.
Testifying under subpoena after resisting entreaties to come forth voluntarily, Mr Buffett said rating agencies and others miscalculated the housing market after being lulled by the 'narcotic' of seemingly ever-increasing home prices.
Admitting he had been no more prescient, Mr Buffett said Moody's and McGraw-Hill Cos' Standard & Poor's unit 'made a mistake that virtually everybody in the country made.
'It was the granddaddy of all bubbles,' he added.
Mr Buffett declined to advocate harsh remedies such as the removal of top executives from credit raters. He said reforms should instead target financial companies with too much leverage, and punish chief executives and boards that require unusual government aid. Rating agencies did not take taxpayer bailouts during the crisis.
'I am much more inclined to come down hard on the CEOs of the institutions that caused the United States government to necessarily bolster them, than I am on someone who made a mistake that 300 million other Americans made,' he said.
Congress is weighing legislation to curb the agencies' power, and up-end their decades-old model of having issuers pay for ratings and shop around among agencies.
Moody's, S&P and Fimalac SA's Fitch Ratings are widely faulted for fuelling the crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast.
Also testifying was Moody's chief executive Raymond McDaniel, a lightning rod for criticism of the industry. More than two-thirds of Moody's revenue comes from ratings.
'We believed that ratings were our best opinion at the time that we assigned them,' Mr McDaniel testified. 'The regret is genuine and deep.' He also said there is an 'important public good' served by the current issuer-pays model, saying that ratings are later released publicly for free. Mr McDaniel blamed the financial crisis mainly on weakened housing and tightened credit.
For his part, Mr Buffett said he still loves credit raters' business model, citing a 'duopoly' that Moody's and S&P enjoy, but said investors should do their own credit homework rather than rely on agencies to do it for them, perhaps incorrectly.
Mr Buffett has used a similar argument to defend Goldman Sachs Group Inc's marketing of securities that led to a US Securities and Exchange Commission civil fraud lawsuit against the Wall Street bank in April.
Berkshire owns US$5 billion of Goldman preferred securities and warrants to buy an equal amount of common stock.
'Buffett continues to talk his book,' said Joshua Rosner, managing director of Graham Fisher & Co in New York. 'He appeared to own Moody's not because it was either a well-run or fundamentally defensible business, but rather because it was legislated and mandated into being.'
The billionaire also had supporters. Panel members were 'looking for someone to hang, and they were trying to enlist Buffett in their lynch squad,' said Jerry Bruni, who oversees US$425 million at JV Bruni in Colorado Springs, Colorado. 'Buffett was not taking them up.'
The crisis panel has held several hearings featuring top finance officials, including Goldman chief executive Lloyd Blankfein. Its findings are due by Dec 15.
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