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Warren Buffet and Moody's CEO On Ratings

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Today the Oracle of Omaha, Warren Buffett, was subpoenaed to testify as a witness in front of the U.S. Financial Crisis Inquiry Commission (FCIC). The FCIC is examining causes of the collapse of the major financial institutions that failed or would likely have failed had they not received exceptional government assistance. Today’s hearing focused on the credibility of credit ratings and the investment decisions made based on those ratings. Seven of the eight witnesses were former employees at Moody’s Investors Service, including Ray McDaniel, the CEO of Moody’s Corporation. Warren Buffett was asked to testify because of his 13% stock ownership in the company and his reputation as a savvy investor.

McDaniel made it clear to the members of the FCIC that despite his firms’ best efforts there was no way in predicting the severity of the housing crisis, stating, “I am deeply disappointed with the ratings, with the performance of ratings associated with the housing sector. And that is injurious to the reputation of the firm, and to the long-term value of the firm. The regret is genuine and deep with respect to ratings in the housing sector.”

One former Moody’s Managing Director, Eric Kolchinsky, told the FCIC that, “Despite the increasing number of deals and the increasing complexity, our group did not receive adequate resources” to do enough research in full depth and scope and that he felt pressure to close as many deals as possible to earn the company’s respect.

Video: Warren Buffett On Credit Ratings

In response, McDaniel later addressed this issue and others that were made by the other former Moody’s employees about the changing culture, compensation process, and lack of resources, saying that it is simply not true that the firm switched from a company focused on providing solid, factual ratings, to one that was more reckless—providing ratings for the sake of increasing market share and churning profits.

When FCIC Chairman, Phil Angelides, asked Buffett whether McDaniel should still be at the helm of the company, Buffett evaded the question, stating, "In this particular case I would say they made a mistake that virtually everybody in the country made.”

Buffett who currently owns 30 million shares of Moody’s and has recently sold 18 million shares, worth about half a billion dollars, says he doesn’t put the entire blame of the financial crisis on the ratings agencies, saying to journalists before the hearing that the housing bubble was, “a 4-star bubble and the rating agencies missed it…Looking back they should have recognized it. But like I said, they didn’t recognize it and neither did I…there are many to blame, financial institutions, investors, the media.”

Buffett also emphasized to journalists that investors shouldn’t rely on rating agencies, saying he rarely follows them, and encourages investors to do their own thorough due diligence before making an investment.

Additionally, Buffet said that it is unclear if the FCIC’s formal report to Congress and President Obama on December 15, 2010 would change the business models of credit rating agencies.

“It depends what comes out of the hearings and legislative processes like this. They [credit agencies] had a bullet proof franchise and they still have an unusual franchise, and the question is, ‘Will it get changed in some material way?’ The only way it will get changed is by some type of governmental action.”