The Oracle of Omaha suddenly seemed short of answers. Warren Buffett, the billionaire whose investments are followed religiously on Wall Street, had no easy remedies when grilled on Wednesday about the role of credit rating agencies in the financial crisis.
In this particular case, they made a mistake that virtually everybody in the country made, Buffett told the Financial Crisis Inquiry Commission, when asked how Moody's and its rival Standard & Poor's failed to foresee the scope of the U.S. housing crisis.
Buffett, who said he had been no more prescient about the crisis, did not significantly retreat from his previous defense of the business model for Moody's Corp, though his Berkshire Hathaway Inc has cut its stake to 13 percent from nearly 20 percent a year ago.
Buffett said he would have sold more sooner had he foreseen the housing downturn. Moody's shares peaked at $76.09 in February 2007. They traded Wednesday afternoon up 3.1 percent at $19.90.
The 79-year-old investor, usually celebrated for his folksy and straightforward explanations of investing, exasperated at least one commission member after Buffett said there were no clear fixes to one of the industry's most criticized practices -- the payment by issuers for ratings.
You've got to do more, to promote financial reform, panel vice chairman Bill Thomas, the former chairman of the House of Representatives Ways and Means Committee, told Buffett.
Certainly I could have done more, Buffett responded.
Buffett said Moody's and McGraw-Hill Cos' Standard & Poor's were lulled into miscalculating the housing market by the narcotic of seemingly ever-increasing home prices. It was the granddaddy of all bubbles.
He nonetheless declined to advocate harsh remedies such as the removal of top executives from credit raters.
Buffett said reforms should instead target financial companies with too much leverage, and punish chief executives and boards that require unusual government aid. Rating agencies did not take taxpayer bailouts during the 2008 crisis.
I am much more inclined to come down hard on the CEOs of the institutions that caused the United States government to necessarily bolster them, than I am on someone who made a mistake that 300 million other Americans made, he said.
Buffett testified under subpoena after resisting entreaties to come forth voluntarily.
Moody's, S&P and Fimalac SA's Fitch Ratings are widely faulted for fueling the crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast.
Congress is weighing legislation to curb the agencies' power, and up-end their decades-old business model of having issuers pay for ratings and shop around among agencies.
Also testifying was Moody's Chief Executive Raymond McDaniel, a lightning rod for criticism of the industry. More than two-thirds of Moody's revenue comes from ratings.
We believed that ratings were our best opinion at the time that we assigned them, McDaniel testified. The regret is genuine and deep.
He also said there is an important public good served by the current issuer-pays model, saying that ratings are later released publicly for free. McDaniel blamed the financial crisis mainly on weakened housing and tightened credit.
For his part, Buffett said he still loves credit raters' business model, citing a duopoly that Moody's and S&P enjoy, but said investors should do their own credit homework rather than rely on agencies to do it for them, perhaps incorrectly.
TALKING ONE'S BOOK
Buffett has used a similar argument to defend Goldman Sachs Group Inc's marketing of securities that led to a U.S. Securities and Exchange Commission civil fraud lawsuit against the Wall Street bank in April.
Berkshire owns $5 billion of Goldman preferred securities and warrants to buy an equal amount of common stock.
Buffett continues to talk his book, said Joshua Rosner, managing director of Graham Fisher & Co in New York. He appeared to own Moody's not because it was either a well-run or fundamentally defensible business, but rather because it was legislated and mandated into being.
The billionaire also had supporters. Panel members were looking for someone to hang, and they were trying to enlist Buffett in their lynch squad, said Jerry Bruni, who oversees $425 million at JV Bruni and Co in Colorado Springs, Colorado and owns Berkshire stock. Buffett was not taking them up.
Derivatives do remain a concern for Buffett. Asked by panel member Brooksley Born whether that market is still a time bomb, ticking away, Buffett said, I would say so.
Speaking earlier on CNBC television, Buffett said he did not know that Moody's in March got a Wells notice indicating possible SEC civil charges related to a failure to timely downgrade some European debt.
The crisis panel has held several hearings featuring top finance officials, including Goldman Chief Executive Lloyd Blankfein and former Bear Stearns Cos chief James Cayne.
Phil Angelides, a former California treasurer who chairs the commission, criticized Moody's for bestowing thousands of high ratings on risky debt that later became unhinged.
To be blunt, the picture is not pretty, Angelides said. He called Moody's a triple-A factory whose expansion drove a sixfold jump in its stock price from 2000 to 2007. Investors who relied on Moody's ratings did not fare so well, he said.
The panel is required to issue its findings by December 15, a month after mid-term Congressional elections.
Next week, Congressional negotiators will try to reconcile proposed House and Senate financial reform bills, including measures to tighten oversight of credit raters, reduce investor reliance on ratings, and allow more lawsuits against agencies.
One proposal by Senator Al Franken, a Minnesota Democrat, would create a board to match the agencies with debt issues, preventing issuers from shopping their business around.
Some former Moody's officials said they felt intimidation from bosses to assign rosy ratings to win new business and appease investment bankers who arrange securities offerings.
It was very clear to me that my future at the firm and my compensation would be based on the market share, testified Eric Kolchinsky, a whistleblower who once ran a unit that rated subprime collateralized debt obligations.
Asked whether pressure to keep up with large business volumes was like the scene in the television show I Love Lucy where Lucy Ricardo struggles to package chocolates speeding down a conveyor belt, he answered, Oh yes, all the time.
Gary Witt, a former Moody's managing director, expressed concern that Moody's, prior to the crisis, lacked resources to rate debt correctly.
Angelides echoed this later in a discussion of structured finance, telling McDaniel: It seems to me the resources were not applied to understanding these products.
Brian Clarkson, a former Moody's president credited with driving the company's structured finance growth, canceled his testimony Wednesday to undergo what the crisis panel called emergency surgery. He was replaced at an afternoon session by Richard Michalek, a former Moody's senior credit officer.
(Reporting by Elinor Comlay, Kim Dixon and Jonathan Stempel; Additional reporting by Christian Plumb, Helen Kearney, Michael Miller, Walden Siew, Dan Wilchins and Karey Wutkowski; Editing by Tim Dobbyn)