Warren Buffett, Moody's & The FCIC

Watching Warren Buffett's testimony before the FCIC yesterday was somewhat surreal. Called before the panel ostensibly due to his firm's substantial stake in Moody's parent corporation, Buffett did precisely what yesterday's lead Wall Street Journal editorial cautioned against,

"but America's most famous investor won't do his reputation any good if he endorses an oligopoly that has done so much economic harm."

Given the chance to criticize Moody's and its CEO, co-witness Ray McDaniel, Buffett punted rather spectacularly.

He gave the ratings firm a pass, saying that the recent financial crisis involved such a large bubble, in which everyone, even, aw shucks, Buffett, got fooled, that you just can't blame Moodys.

Therefore, it follows, McDaniel, too, is blameless, despite the fact that the ratings agencies were the government-appointed, enshrined keepers of risk ratings.

McDaniels, for his part, showed that, if nothing else, he and his public relations advisers have viewed the videos of various bank CEOs and senior executives testifying before Congress, the TARP oversight panel and the FCIC during the past year or more.

"I care about market share. I also care deeply about ratings quality," was the quote this morning's Journal attributed to the Moody's CEO.

That's pretty hard for me to believe, given what I've read and learned elsewhere about what happened with the rating of structured financial instruments during the housing finance frenzy. For example, there is this post, as well as several others found under the label 'Ratings Agencies,' in the sidebar to the right of this post, and the stories a ratings agency executive of my acquaintance related to me a few years ago. In the latter instance, he portrayed the process of rating structured instruments as one of high-flying, smart guys from investment banks engaging in intimidation, intellectual bullying and the lure of large fees for rating the securities AAA. When the ratings employees would demure, the investment bank staffers would impugn the former's intellect and skills, claiming they 'just didn't get' the nature and risks of the prospective instruments.

Read my post about Terry McGraw's little problem involving a push for growth at S&P's ratings unit. Still think Moodys and/or McDaniel weren't following S&P down a curve of declining ratings quality?

I think the truth of the entire matter was well-captured in yesterday's lead Journal editorial entitled Buffett and the Ratings Cartel.

The agencies' best defense is to claim that what occurred was historically unparalleled and, gosh, they sure are sorry if they were in any way to blame. But, you know, the whole financial universe was wrong about the housing bubble....Warren even says so!

Buffett, for his part, as the editorial contends, wants the legal buffer of inept, corruptible ratings agencies. He and other institutional investors want that government-appointed buffer on which to lean, and behind which to hide, should their own investors or shareholders ever feel like suing them for breach of fiduciary trust.

I particularly enjoyed the Journal's editorial's quote by PIMCO's Bill Gross, from a recent investor letter, that,

"the raters' credit models call to mind "an idiot savant with a full command of the mathematics, but no idea of how to apply them." "

Gross' view is much closer to my own regarding the ratings agencies.

It's very clear from yesterday's FCIC testimony that anyone within arm's length of those agencies, e.g., Buffett, and the agencies themselves, are running for cover, claiming widespread failure of credit quality assessment, and generally ducking all responsibility.

When he wasn't evading any connection with Moodys, Buffett interjected various comments displaying his rapacious desire to make money in any way he could. Remarks like his would have been met with scorn and anger, had they come from, say, Lloyd Blankfein. But Congress and its appointed demi-gods always seem to treat Buffett differently.

Call it, oh, I don't know, crony capitalism?

I wonder how much longer Buffett can gee whiz and aw shucks his way out of these tight corners before he uses up all his cachet?