Berkshire Hathaway (BRK-A, BRK-B) CEO and investment icon Warren Buffett defended rating agencies in testimony in New York today before the Financial Crisis Inquiries Commission. Legislators and regulators critical of rating agencies like Moody’s (MCO) and McGraw-Hill (MHP) division Standard and Poor’s wanted an explanation as to why mortgage-backed securities could get high grades but still be so toxic. Buffett’s response was simple: “They made the wrong call. I was wrong on it too.”
Of course, as one of Moody’s largest shareholders it’s hard to say otherwise. Buffett defended MCO stock management and tried to deflect claims that raters like Moody’s, S&P and Fitch moved too slowly when risks subprime mortgage securities became evident. Unfortunately, other MCO insiders told a different tale. Eric Kolchinsky, former managing director with the company’s derivatives division, hinted that market share trumped accuracy and the company rarely turned away products even if they were less than stellar.
“While there was never any explicit directive to lower credit standards, every missed deal had to be explained and defended,” Kolchinsky told the commission.
Conspiracy theorists may say that Buffett was in on the fix, that Berkshire conspired to profit from the toxic mortgage market. However it’s most likely that Buffett’s worst transgression has been holding on to his stake in MCO stock even when it was clear a firestorm of criticism was about to descend on the company.
The FCIC’s examination of Moody and subpoena of Warren Buffett will certainly not be the last we hear about the rating agency industry. Lawmakers are currently considering a number of proposals, including one by former comedian and Minnesota senator Al Franken, which threaten to shake up the industry and the stock market.
As of this writing, Jeff Reeves did not own a position in any of the stocks mentioned here.
