Warren Buffett to Break His Silence about Moody’s

Warren Buffett usually loves talking about his investments — both the successful ones and his few flops.

But Buffett’s relationship with Moody’s Investment Services is unusual. The CEO of Berkshire Hathaway has said very little about his 13% stake in the rating firm, which has come under heavy fire for its role in the financial crisis. You know the complaints by now: That Moody’s and rivals S&P and Fitch negligently inflated ratings on mortgage securities, as they grew ever keener to win business from Wall Street banks and other underwriters.

But through it all, Buffet has said bupkes. For instance, has not weighed in on the multiple proposals to reform ratings firms, including a recent bill sponsored by Sen. Al Franken, which would put a government committee in charge of selecting the raters. Nor has he addressed the inherent conflicts in the ratings industry’s business model, in which the ratings firms are being paid by the companies that hire them to provide impartial ratings. Buffett has often sounded off on similar conflicts.

Like it or not, Buffett will have his chance tomorrow when he testifies before the Financial Crisis Inquiry Commission along side Moody’s CEO.

Alice Schroeder, author of “The Snowball,” a biography of Mr. Buffett, told the NY Times in 2009 that Buffett “deserves credit for his candor in admitting mistakes. But he chooses which mistakes to discuss. It also pays to listen for the ‘dog that didn’t bark.’”

“He hasn’t discussed publicly what he might be doing to influence the management at this time of crisis ,” she told the Times.

So, as he takes the stand, here are five things to know about Buffett and Moody’s:

How many shares does Buffett own? He owns 30 million of Moody’s shares, valued at $600 million. Berkshire spent $499 million to buy those shares in 2000, according to company reports.

He was recently a seller. Berkshire cut its stake in Moody’s to 16.98% from 20.02% in July 2009, marking the first time Buffett sold shares in the company since he acquired the stake in 2000. Buffett told shareholders in his annual letter that he sold the stake to raise money for acquisitions such as Burlington North Railroad.

What has Buffett said about the problems with Moody’s? Buffett made one oblique reference to “ratings agencies” in his 2008 letter to shareholders. He blamed the raters and others, without naming Moody’s, for failing to heed the crash in the manufactured housing industry at the beginning of the decade. “Investors, government and rating agencies learned exactly nothing from the manufactured-home debacle. Instead, in an eerie rerun of that disaster, the same mistakes were repeated with conventional homes in the 2004-07 period: Lenders happily made loans that borrowers couldn’t repay out of their incomes, and borrowers just as happily signed up to meet those payments.”

What is his exit plan? Even with all of Moody’s current problems, Buffett is still way up on his initial investment. But if he wanted to cash in on his stake, a big sale could drive down the company share price. He may have to hold on to the shares or wait for take over.

Buffett’s Challengers:
It’s not often that investors bet against Buffett. But Moody’s has become the target of well known short sellers such as David Einhorn and Jim Chanos, who think the firm’s legal troubles over its role in the financial crisis will weigh on the stock for the foreseeable future. “Warren Buffett makes mistakes, too,” Chanos told Bloomberg.

How is Moody’s Stock Holding Up? The shares fell nearly 6% to $19.30 today, they are down 12% over the past week, and down 32% from a year ago.

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    • Just wonder if I missed anything with the arithmetic.

      The article first states: “…48 million of Moody’s shares, valued at $3.39 billion…” That’s approx. $70 a share.

      Then it says down near the bottom, “The shares fell nearly 6% to $19.30 today”. If it’s around $19, where did that $3 billion plus stake come from?

    • A lot of these discussions and news items always seem to discuss what is wrong with the existing system, but very little is said on how the situation could be corrected.

    • If they run out of topics then can go back to the Enron days. What role did Moody’s play in downgrading
      Enron’s credit rating – the catalyst for Enron’s insolvency. How coincidental was it that BH/WB was acquiring energy assets after the downfall. Think of the price BH/WB would of had to pay if Enron didn’t go down, versus the price they paid post Enron bankruptcy.

    • poor research here. Berkshire owns 31m shares (13% of the company) according to Bloomberg, as of 3/31/10.

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