Warren Buffet Says Don’t Blame the Ratings Agencies

Investment sage Warren Buffet told the federal commission investigating the causes of the financial crisis that finger-pointing at the big three credit ratings agencies should be directed elsewhere.

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The credit ratings industry â€" of which Standard & Poor's, Moody's Investors Services, and Fitch Ratings own the bulk of the market share â€" has come under some heavy fire from lawmakers and regulators for assigning top credit grades to mortgage-backed bonds that later turned out to be lemons.

But in testimony before the Financial Crisis Inquiry Commission (FCIC) last week, Buffet said, ""I'm much more inclined to come down hard on the CEOs of institutions"" that originated the risky loans and then accepted big government bailouts. He said the managers and analysts at Moody's ""made a mistake that 300 million other Americans made,"" by not seeing the housing bust coming.

Buffet focused his defense on Moody's. His company, Berkshire Hathaway, is Moody's largest shareholder, and photos taken of the FCIC hearing show Buffet and Raymond McDaniel, Moody's CEO, seated side-by-side.

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Interestingly enough, the billionaire investor told the FCIC that he knew little of the business of ratings agencies, yet he dumped a heap of cash into Moody’s back in 2000 and now owns 31 million shares â€" this from the same financial advisor who tells other investors to stick to the basics and steer clear of businesses they aren’t familiar with.

Buffet himself is known for staying on the sidelines during the dot-com boom and bust because, as the _New York Times_ put it, he said he did not understand the industry well enough.

But even those entrenched in the ins and outs of mortgage bond investments weren’t ready for the earth-shattering downturn that hit in 2007. McDaniel told the commission that the housing collapse and the economic turmoil that followed were on a scale that “many of us would have once thought unimaginable.”

""The regret is genuine and deep with respect to our ratings in the housing sector,"" McDaniel, who has run Moody’s since 2005, said in testimony.

FCIC Chairman Phil Angelides, commented at the opening of the hearing, “To be blunt, the picture is not pretty.” He added that “Moody’s did very well. The investors who relied on Moody’s ratings did not do so well.”

Angelides described Moody’s ratings service as a “triple-A factory,” pointing out that the agency assigned a top grade of AAA to 42,625 residential mortgage-backed securities (RMBS) between 2000 to 2007.

“In 2006 alone, Moody’s gave 9,029 mortgage-backed securities a triple-A rating,” Angelides said. “To put that in perspective, Moody’s currently bestows its triple-A rating on just four American corporations.”