Reporting from New York — —
The federal Financial Crisis Inquiry Commission wanted so much to hear Warren E. Buffett's views on debt ratings that it compelled his testimony. The panel may have been disappointed by what he had to say.
The billionaire, whose holding company owned 20% of rating giant Moody's Investors Service as the crisis unfolded, made clear Wednesday that he regretted losing a bundle on Moody's stock since 2007.
But the so-called sage of Omaha, widely revered for his plain speaking and ability to make money, disagreed with numerous critics of the rating industry, saying he saw no need to tweak its business model.
"They made a mistake that virtually everyone in the country made," Buffett said of the top ratings that the industry gave to mortgage-backed securities that subsequently plunged in value.
"I'm not arguing that this is the perfect model — I'm just saying that it's very difficult to think of an alternative," he testified at a hearing of the commission in Manhattan.
Buffett initially declined invitations to appear before the commission, which was created by federal law to probe the causes of the crisis. He testified only after receiving a subpoena. Still, he was questioned with a respectful tone that generally hasn't been accorded other high-profile witnesses at commission hearings and similar sessions of congressional committees.
"Notwithstanding the subpoena, I want to thank you for coming," the commission's vice chairman, Bill Thomas, told Buffett.
"I want to thank you for the subpoena," Buffett replied, eliciting laughter from the audience.
"We wanted you to have a framed copy for your wall," commission Chairman Phil Angelides chimed in.
Rating companies have come under scrutiny not only for their overly optimistic assessments of mortgage-related securities but also for their business model, under which they are hired and paid by banks and other debt issuers that benefit from high ratings.
"There is this tremendous tension between short-term profits and the quality of ratings over time," Angelides, a former California state treasurer, said soon after the hearing began.
Congress is considering imposing stricter controls on the three big rating companies, which include Standard & Poor's and Fitch Ratings as well as Moody's.
A provision of the financial overhaul bill approved by the Senate would make it impossible for a company to shop around for the rating firm willing to supply the highest grade.
Buffett, however, said he did not think such an innovation would have prevented the problems with ratings that the financial crisis uncovered.
Berkshire Hathaway Inc., the holding company that Buffett runs, held 13% of Moody's shares outstanding at the end of March, down from 20% in mid-2009. Based on Moody's closing price Wednesday, Berkshire's current stake is worth $613 million. In February 2007, when Moody's stock price peaked, those shares were worth $2.3 billion.
Like nearly everyone else, Buffett said, he too didn't foresee the housing crash and credit meltdown.
"In 2006, I was not sitting there thinking that … the housing bubble was going to get as large as it did, or as it was actually, and that it was going to burst," he said. "Like I say, if I had, I probably would have sold my stock."
Buffett did not touch upon some of the more explosive allegations made during the hearing by former Moody's employees, who depicted a breakdown in the integrity of the rating process.
The panel did not press Buffett to talk about the testimony early Wednesday of the former Moody's employees. The commissioners, however, did ask him whether he had had a responsibility as a major shareholder to look more deeply into how Moody's had been grading collateralized debt obligations and other complex securities before the crisis.
Buffett said he doesn't get into that level of detail with the companies he owns.
"We own a significant position in Procter & Gamble. I don't know what their internal controls are. I don't know how they make Tide, you know, and whether the processes are proper," he said.
Although he declined to harshly criticize Moody's and its rivals, Buffett was scornful of the chief executives of companies that were bailed out by the federal government, and of the sophisticated financial instruments known as derivatives, which he said still "pose system-wide problems" because of their complexity and distribution throughout the financial system.
Later in the hearing, Mark Froeba, a former senior vice president at Moody's, said he and others had been pressured by higher-ups to assign high ratings to securities issued by investment banks.
"They used intimidation to create a docile population of analysts afraid to upset investment bankers and ready to cooperate to the maximum extent possible," Froeba said.
Raymond McDaniel, the chairman and CEO of Moody's, appeared with Buffett before the commission.
McDaniel said he was "deeply disappointed" by the failure of the ratings that Moody's had issued before the crisis, but he attributed the firm's errors primarily to the unprecedented collapse in housing prices.