Buffett denies that Moody's executives flagged bad bonds

Warren Buffett addresses the  Financial Crisis Inquiry Commission
Warren Buffett addresses the Financial Crisis Inquiry Commission Kevin G. Hall / MCT

NEW YORK — Billionaire investor Warren Buffett told the Financial Crisis Inquiry Commission Wednesday that concerned executives from Moody's Corp. didn't tip him off to problems with bonds that Moody's had rated highly, directly contradicting evidence presented privately to the panel.

Testifying before the panel mandated by Congress to find out why the financial world quaked in 2008, Buffett — the largest shareholder in Moody's — denied ever being warned.

"No," Buffett said, responding to a question from panel chairman Phil Angelides about a McClatchy report earlier this year that two senior Moody's officials had warned Buffett about complex bonds backed by junk U.S. mortgages. He also said he had no idea how Moody's rated bonds.

"I've never been in Moody's. I don't even know where they're located," Buffett said.

However, a former Moody's executive who told McClatchy earlier this year that he'd shared documentary evidence about his contact with Buffett with panel investigators, stands by his assertion, which McClatchy verified independently.

"I reached out to him, and I've got the e-mail sent to him and the commission has it as well," the former senior executive said Wednesday. He requested anonymity to protect his current job, which isn't with Moody's.

Whether Buffett was aware of problems at Moody's is important because as the firm's largest shareholder and a larger-than-life figure in the investment world, he was in a position to push for changes. There's also the question of whether he had inside information unavailable to the public.

Buffett, through his company, Berkshire Hathaway, at one point owned more than 20 percent of Moody's. He's since pared his investment to about 13 percent.

Angelides got Buffett to admit that he wasn't aware whether Moody's investigated the quality of the mortgages that were pooled into the complex bonds that it gave investment-grade ratings.

Angelides scolded Buffett for his lack of curiosity about the workings of a company in which he was the largest shareholder, asking him, "If we can't count on corporate shareholders, then who can we count on?"

Buffett defended mistakes made by credit-rating agencies such as Moody's, whose job is to signal risk to bond investors by rating the quality of the securities. Moody's gave top investment-grade ratings to many mortgage-backed securities, but many proved to be junk, triggering the financial crisis that sent the U.S. economy into its worst tailspin since the Great Depression.

Buffett said he doesn't rely on ratings given by Moody's or other credit-rating agencies.

Earlier, Angelides, a former California state treasurer, grilled Moody's Chief Executive Raymond McDaniel about why the executive should keep his job, noting that the ratings agency was wrong on 90 percent of its initial ratings of mortgage-backed securities.

"Even the dumbest kid in the class gets 10 percent of the exam" right, Angelides said.

Alluding to a McClatchy investigation that found that Moody's board of directors were passive and uninvolved in policing the firm's activities, Angelides confirmed that Moody's board member Nancy Newcomb told the commission that her colleagues didn't question the methodology used in rating complex bonds.

These bonds are part of what's called structured finance, and that division of the company grew at one point to account for 53 percent of Moody's revenue. They also were the catalyst for the near-meltdown in financial markets in fall 2008.

"Should there have been a management change at Moody's?" Angelides asked.

McDaniel responded that the company "believed that our ratings were appropriate when they were assigned. I recognize that those ratings have not performed well in the housing-related sector, and as a result we did make management changes."

Angelides interrupted: "But not at the top. No board or CEO changes."

McDaniel answered: "If you are asking with respect to me, it's a fair question." He said that decision is up to the directors and shareholders.

Buffett had rejected a request to appear before the panel, but was compelled to testify by a subpoena. Asked repeatedly whether McDaniel should keep his job, he avoided giving a direct answer.

"There was the greatest bubble I've ever seen in my life. The entire American public was caught up in a belief that housing prices couldn't fall back," Buffett said at one point.

One former Moody's executive told McClatchy that Buffett's explanation doesn't hold up.

"The excuse that the rating agencies simply misjudged the housing bubble like everyone else misses the point — they weren't just like everyone. The market and the public looked to the rating agencies to have a deep and well-informed look at the market," said Scott McCleskey, who was forced out as Moody's compliance chief and replaced by an executive from the structured finance division. "They were the ones who were supposed to tell everyone else it was a bubble."

McDaniel told panel members that the ratings of complex bonds backed by U.S. mortgages "clearly have exhibited very poor performance. I am deeply disappointed with the performance of ratings associated with the housing sector. That is injurious to the reputation of the firm and the long-term value of the firm. So, the regret is genuine and deep with respect to our ratings in the housing sector," McDaniel said.

However, he denied any wrongdoing by Moody's.

Brian Clarkson, the former Moody's president, also testified in writing. A McClatchy investigation in October detailed how he bullied analysts and compliance officials when their decisions threatened market share and the lucrative earnings Moody's garnered from rating the complex securities.

Clarkson, who'd been scheduled to appear but was rushed to the hospital late Tuesday with pain later diagnosed as a kidney stone and had surgery Wednesday, was unapologetic in his written testimony.

"During the period of 2000 to 2006, Moody's structured finance revenue grew from approximately 35 percent to 43 percent of Moody's Corporation's overall revenue. This is significant growth," Clarkson said. "I reject any suggestion, however, that Moody's sacrificed ratings quality in an effort to grow market share."

E-mails made public in a late April hearing by the Senate Permanent Subcommittee on Investigations showed how Moody's and its chief competitor, Standard & Poor's, compromised quality to win ratings business from Wall Street investment banks. During the housing boom, when the complex bonds were widely sought, Moody's share prices ran up from about $13 a share to peak at $72 a share. At the end of trading Wednesday, Moody's share price stood at less than $20.

Former Moody's executives told McClatchy last year that Clarkson, who resigned in August 2007, intimidated them whenever they raised obstacles to rating a complex deal, often boasting that he and not they brought in revenues.

"The only person who thinks that Brian Clarkson acted appropriately in pushing revenues above all else is Brian Clarkson," said another former high-level Moody's executive who gave sworn testimony last week to the inquiry commission and demanded anonymity to protect his reputation. "He has a lot to answer for, and Ray McDaniel and the board are responsible for letting him run the place."

One former Moody's managing director, Eric Kolchinsky, described the effect of such pressure to the inquiry commission.

"It was harder to say no than to say yes," Kolchinsky said. He said he was pushed out for raising concerns about several complex deals that got investment-grade ratings.

Legislation moving through Congress would impose tougher rules on ratings agencies, perhaps even having an outside body assign which one of them would rate a given complex deal, instead of having Wall Street firms select them.


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