Panel grills ratings services executives, Buffett about housing meltdown
Billionaire investor Warren E. Buffett told a panel investigating the financial crisis on Wednesday that if he didn't see the housing bust coming, he can't blame credit-rating companies much for missing it, either.
The ratings industry came under more fire Wednesday for its role in the market meltdown as the Financial Crisis Inquiry Commission questioned former and current executives at Moody's and Buffett, chief executive of Berkshire Hathaway, which is Moody's biggest shareholder.
The hearing in New York focused on how firms such as Moody's Investors Service and Standard & Poor's gave high ratings to complex securities packed with risky mortgages that went bad when the housing market collapsed in 2007.
Buffett, who declined to testify until he received a subpoena last week, said the ratings firms weren't the only ones blindsided by the crisis. "Looking back, they should've recognized it," Buffett said, "but, like I said, I didn't recognize it, and nobody I know recognized it."
The Omaha-based financier testified alongside Raymond W. McDaniel Jr., chief executive of Moody's Corp., parent of the ratings firm, who conceded his company made mistakes.
"The regret is genuine and deep with respect to our ratings in the housing sector," said McDaniel, who has run the company since 2005.
Critics say the ratings companies failed to grade financial products accurately because their business model has a built-in conflict of interest: The firms are paid by the issuers of securities, not investors, to rate financial products. Banks can shop around for a firm that will assign their products the highest grades.
Former Moody's executives described a culture where agencies were lax in their ratings to win more customers on Wall Street.
"When I left Moody's, an analyst's worst fear was that he would do something that would allow him to be singled out for jeopardizing Moody's market share, for impairing Moody's revenue or for damaging Moody's relationships with its clients, and lose his job as a result," wrote Mark Froeba, former senior vice president of U.S. derivatives at Moody's Investor Service, in a statement submitted ahead of his testimony.
Buffett's company has a 13 percent stake in Moody's, or 31 million shares, according to Berkshire Hathaway's most recent quarterly filing to the Securities and Exchange Commission. Since last summer, Berkshire Hathaway has cut its holdings by one-third.
Moody's stock is down nearly 30 percent over the past year, and at close of market Wednesday, Berkshire's stake was worth about $617 million. Yet Buffett did not have harsh words for the agencies.
"I am much more inclined to come down hard on the CEOs of institutions that caused the United States government to come in and necessarily bolster them than I am on someone who made a mistake that 300 million other Americans made," he said. (Buffett is a director of The Washington Post Co.)
The commissioners didn't just ask Buffett about the ratings agencies. They wanted his opinions on the government bailout, Fannie Mae and Freddie Mac, and derivatives, too. Brooksley Born, the former chair of the Commodity Futures Trading Commission who famously warned other government officials about the dangers of derivatives in the mid-1990s, asked Buffett if the derivatives market was still a "time bomb." Buffett said yes.
Former California treasurer Philip Angelides leads the bipartisan 10-member FCIC, which is required to submit a report on the causes of the 2008 financial crisis by Dec. 15. The FCIC is modeled after the 9/11 Commission, although it also draws frequent comparisons to the Senate's Depression-era Pecora Commission, which examined the stock market crash of 1929. The panel has also heard testimony from J.P. Morgan Chase chief executive Jamie Dimon, Goldman Sachs chief executive Lloyd Blankfein, former Federal Reserve chairman Alan Greenspan and former Treasury secretary Henry M. Paulson Jr.
The financial regulatory bill addresses some concerns about the ratings agencies. The Senate passed an amendment from Sen. Al Franken (D-Minn.) that would create a ratings board within the SEC that would assign ratings firms to securities, rather than let banks choose their graders. Both the Senate and House versions of the bill would make it easier for investors to sue the agencies.