Billionaire investor Warren Buffett distanced himself from embattled credit rating agencies, saying they have lost some of their appeal as an investment amid criticism over their role in propelling the financial crisis.
I think they were wrong like everyone else, Buffett told CNBC television on Wednesday ahead of testimony to a government panel probing the causes of the crisis.
Some former officials at Moody's Investors Service told that hearing they felt intimidation from bosses to assign rosy ratings to risky debt products in an effort to win market business.
It was very clear to me that my future at the firm and my compensation would be based on the market share, said Eric Kolchinsky, who once ran the Moody's Investors Service unit that rated subprime collateralized debt obligations and is now a whistleblower on Moody's alleged faults.
Wednesday's hearing by The Financial Crisis Inquiry Commission is examining the role of credit rating agencies in the financial crisis, and investors' reliance on ratings themselves to make investment decisions.
Credit raters such as Moody's Corp and McGraw-Hill Cos' have been widely faulted for fueling the crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast. Congress is weighing legislation that could curb their power to win and retain business.
Rating agencies sort of evolved into this national duopoly, said Buffett, whose company Berkshire Hathaway Inc is one of Moody's largest investors. The market will continue to demand from the brand names. I wish it weren't the case, he told CNBC
Buffett repeated that he loves the agencies' business model, but that investors like himself should do their own credit homework and not depend on agencies to do it for them.
The 79-year-old 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.
Buffett also distanced himself from Moody's management, saying he has had no recent contact with it, and did not know that Moody's in March got an SEC Wells notice indicating possible civil charges related to a failure to timely downgrade some European debt.
Berkshire owns a 13 percent stake in Moody's, down from nearly 20 percent less than a year ago, and sold some shares shortly after Moody's got the Wells notice.
Buffett said Moody's is not as bulletproof as it once was, and that this is a reason for some of the sales. He said he wished he sold more shares sooner.
Phil Angelides, a former California treasurer who chairs the crisis panel, opened the hearing by criticizing 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 that expanded rapidly in structured finance, causing its stock to rise more than sixfold from 2000 to 2007. Investors who relied on Moody's ratings did not fare so well, he said.
Gary Witt, a former Moody's managing director, expressed concern that before the crisis hit, Moody's lacked the resources to be sure that its ratings on complex debt, including in the mortgage area, were correct.
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. It is required to issue its findings by December 15.
Next week, congressional negotiators will attempt to reconcile House and Senate versions of financial reform legislation, including measures that would tighten oversight of the ratings industry.
One proposal by Senator Al Franken, a Minnesota Democrat, would create a panel to match issuers with rating agencies on a semi-random basis, in an effort to foster competition.
Moody's Chief Executive Raymond McDaniel defended the company's business model of having issuers pay for ratings. He also sought to clarify that rating agencies are not gatekeepers that can stop securities from being issued.
Markets can and do grow without ratings, McDaniel said in prepared comments, citing the market for credit default swaps.
McDaniel got support from Brian Clarkson, a former Moody's president credited with the agency's expansion in structured finance before he unexpectedly left the company in 2008.
Calling the integrity of Moody's analysts beyond dispute, Clarkson in his written testimony suggested that the commission look to Wall Street itself as a target for reform.
Uniform and meaningful standards for brokers and underwriters are something for this commission to consider, he said.
Jay Siegel, another former managing director, said that while market share was important, analysts did not need to meet a hard and fast number in generating business.
But Kolchinsky, the Moody's whistleblower, said the pressure was extreme.
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.
Former Moody's derivatives vice president Mark Froeba said management used intimidation to create a docile population of analysts afraid to upset investment bankers.
(Reporting by Elinor Comlay, Kim Dixon and Jonathan Stempel; Additional reporting by Christian Plumb, Helen Kearney, Michael Miller and Karey Wutkowski; Editing by Tim Dobbyn)