Legendary investor Warren Buffett appears this week before a commission searching for the causes of the 2008 financial crisis, to provide his assessment on the role a much-maligned credit rating industry played.
Buffett, who runs Berkshire Hathaway Inc , and Raymond McDaniel, chief executive of Moody's Corp , will appear Wednesday as the Financial Crisis Inquiry Commission examines credit ratings and how investors use them.
The congressionally appointed commission, chaired by former California treasurer Phil Angelides, is examining causes of the worst financial crisis since the 1930s.
It has held hours of closed-door interviews, and hearings featuring some of Wall Street's biggest names, like a fiery Goldman Sachs Group Inc CEO Lloyd Blankfein and a defensive Robert Rubin, once ensconced at Citigroup Inc .
Wednesday's hearing in New York will bring together two men at opposite ends of the investor popularity spectrum.
There is Buffett, the investor icon with a near-Teflon ability to resist criticism. Nonetheless, despite his frequent public appearances, Buffett resisted testifying until he got a subpoena.
Berkshire owns a 13 percent stake in Moody's, but has pared it from nearly 20 percent over the last year.
And then there is McDaniel, who runs a company to which criticism sticks like Velcro. Five other current and former Moody's officials will also testify, including whistleblower Eric Kolchinsky and Brian Clarkson, who drove Moody's expansion in structured products before being replaced in 2008.
Moody's, McGraw-Hill Cos' Standard & Poor's and Fimalac SA's Fitch Ratings are widely criticized for fuelling the crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast. Many subprime and other risky securities lost all or much of their value.
The question is, can we get a better handle of what was going on, and were the securities really misunderstood? said George Cohen, a University of Virginia law professor. The bigger issue is whether we ought to change the entire system.
Critics say the agencies' model of having issuers pay for ratings is rife with conflict and corrupts their assessments.
Hoping to ease pressure on issuers to shop for ratings and agencies to award high marks, the Senate voted on May 13 to create a board overseen by the U.S. Securities and Exchange Commission to assign rating agencies to initially assess debt issues.
It also voted to require regulators to develop their own credit standards rather than rely solely on agencies.
Angelides was not immediately available for a comment.
Buffett has long relied on seeming contradictions in justifying his attitude toward rating agencies.
On the one hand, he loves the business model. There is not much competition, the need for capital is virtually nil, and the agencies are essentially a toll booth for companies needing to raise cash: Without ratings, no money can be raised.
Yet Buffett told tens of thousands of shareholders at Berkshire's annual meeting on May 1: We have never paid any attention to ratings for bonds at Berkshire. We don't think we should farm out, outsource investment judgment.
This is a variation of the surprise argument Buffett used to defend marketing of securities by Goldman, which led to an SEC fraud lawsuit. Buffett said investors should do their own credit homework, and not worry who might bet against them, or what someone else thinks of any securities' credit quality.
He's on several different sides of the issue, Cohen said. He might say the system could be better, but that as long as the system is the way it is, he wants to make money from it.
Berkshire had no comment on what Buffett plans to say, including plans to address wider economic or business ills.
McDaniel has more at stake from ratings reform, given that more than two-thirds of Moody's revenue comes from ratings.
He told a Senate subcommittee on investigations on April 23 there were a number of things that in hindsight I wish we had done differently, absolutely. Among these were an insufficient focus on macroeconomic housing trends, and a shortfall in cross-disciplinary expertise in rating committees, he said.
Moody's in April handed over documents to Angelides in response to the commission's first subpoena. A month earlier, it received a Wells notice indicating possible SEC civil charges over its failure to downgrade some European debt after learning a computer glitch caused inflated ratings.
McDaniel exercised some stock options the day the Wells notice was received. Moody's spokesman Michael Adler said this exercise resulted from participation in a prearranged plan that includes pre-determined time and price triggers.
(Reporting by Jonathan Stempel; Editing by Tim Dobbyn)