Buffett Backs Moody’s After Goldman Sachs Defense (Update1)
June 03, 2010, 11:18 AM EDT(Updates with Buffett’s comments on the narcotic of rising prices from the seventh paragraph.)
By Andrew Frye
June 3 (Bloomberg) -- Warren Buffett, compelled by subpoena to testify, backed Moody’s Corp. at a hearing yesterday, the second time in two months he defended a Berkshire Hathaway Inc. holding against criticism it misled investors.
Moody’s, which gave faulty AAA-ratings to mortgage bonds, was simply one of many firms that failed to foresee the housing slump, Buffett told the Financial Crisis Inquiry Commission. On May 1, he said Goldman Sachs Group Inc. wasn’t to blame for client losses and disputed the conclusions of the Securities and Exchange Commission, which sued the bank for fraud.
Buffett, Berkshire’s chairman and chief executive officer, built a reputation for ethics by warning how the pursuit of short-term profit can compromise longer-term performance. His 2003 views on the danger of derivatives were invoked by President Barack Obama in an April speech. Last month, more than 30,000 people attended the Berkshire annual meeting in Omaha, Nebraska, to hear his views on the company, the economy and public policy.
“Even though he’s a financial savant, he’s not in a position to be candid,” said Elizabeth Nowicki, a former SEC lawyer and a visiting professor at Boston University. “Buffett has a dog in the fight, both with respect to his relationship with Goldman Sachs and his relationship with Moody’s.”
Berkshire’s investments in financial firms have increased pressure on Buffett to publicly discuss the financial crisis, assign blame and recommend remedies. His celebrity gives him a platform to share his views. Before testifying at yesterday’s hearing at the New School in New York, Buffett completed at least three live television interviews.
Credit ‘Narcotic’
Warning signs of the housing slump appeared as early as 2004 with revelations of widespread mortgage fraud, said Phil Angelides, chairman of the commission. From the start of 2006 to February 2007, at least 23 mortgage lenders were sold or shut down, according to a Bloomberg tally at the time. In February 2007, HSBC Holdings Plc announced it was adding to loan loss reserves against U.S. mortgages.
Managers at Moody’s “made a mistake that 300 million other Americans made,” Buffett said. Investors and homeowners had their judgment impaired during the boom by the “narcotic” of rising prices which encouraged people to live above their means, Buffett said. Angelides said ratings firms are looked to as authorities and should be held to a higher standard than other market participants.
“You don’t want your police trading in crack,” said Angelides, a former California treasurer.
Missed Signals
Buffett buys stocks in companies that he says have lasting competitive advantages and superior management. His stake in the rating firm, whose founder John Moody created credit grades about a century ago, dates from 2000 and had a value of more than $3.5 billion at its high in 2007. Moody’s has since dropped by more than half amid criticism from politicians and regulators that it inflated credit ratings during the housing boom.
“In 2006, I was not sitting there thinking that the housing bubble was going to get as large as it did,” Buffett said. “And if I had, I probably would have sold my stock.”
Investors have said the ratings companies inflated assessments of mortgage bonds because they were paid by Wall Street firms selling the debt. New York-based Moody’s was a “triple-A factory,” that assigned the top grade to 42,625 residential mortgage-backed securities from 2000 to 2007 and later had to downgrade the assets, said Angelides.
‘No Use’
“This comes as close as you can to the very product being fraudulent or of no use to the marketplace in reality,” Angelides said.
Buffett turned down an invitation to the hearing before the commission issued a subpoena. Angelides said in an interview that the U.S. system of capitalism relies on shareholders and boards of directors to execute oversight of companies. Jesse Fried, a professor of law at Harvard Law School, said investors with non-controlling stakes shouldn’t be blamed.
“The real problem, it seems to me, is that people counted on Moody’s interest in its reputation to give more accurate ratings,” Fried said in an e-mail. “In hindsight, we see that was a mistake.”
Buffett told the commission that he was more inclined to lay blame on the heads of firms that needed taxpayer bailouts. Neither Moody’s nor Berkshire, which owns more than $50 billion in U.S. stocks and businesses selling insurance, energy and consumer goods, took U.S. aid. New York-based Goldman Sachs repaid the $10 billion in bailout cash it took.
Political Hay
“He never influenced their ratings process, he never told them what to do, he’s a shareholder,” said Guy Spier, a principal at hedge fund Aquamarine Funds LLC, and an investor in Berkshire. “I guess they want to make political hay out of it.”
Buffett, who injected $5 billion into Goldman Sachs during the depths of the crisis, became one of the bank’s most visible advocates amid public outrage over the firm’s pay practices and conduct with customers. The bank denied the charges in the lawsuit, brought by the SEC in April, that it misled buyers of mortgage-backed securities.
Berkshire makes $500 million a year in interest on its Goldman Sachs preferred stock. The warrants Buffett negotiated as part of the deal give Berkshire the option to buy $5 billion of common stock for $115 a share. The shares closed at $144.83 yesterday. Berkshire’s paper profit on the warrants is about $1.3 billion based on that price, down from about $3 billion before the SEC lawsuit was announced.
--With assistance from Peter Eichenbaum, Matthew Leising and Sapna Maheshwari in New York. Editors: Dan Kraut, Dan Reichl
To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net
To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net;
