“Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not.’ If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise. The rating agencies have been mislabeling the goods for a long time. A lot of investors have been eating pork recently and they’re not too happy about it.”

-Frank Partnoy, a professor of law at the University of San Diego

>

The NYT asks the above interesting question of Mr. Buffett. Given he is the largest shareholder (~20%) in Moody’s, its a fair query.

“In recent months, Moody’s Investors Service and its rivals, Standard & Poor’s and Fitch Ratings, have been prominent in virtually every account of the What Went Wrong horror story that is the financial crisis. The agencies put their seals of approval on countless subprime mortgage-related securities now commonly described as toxic. The problem, critics contend, is that the agencies were paid by the corporations whose debt they were rating, earning billions in fees and giving the agencies a financial incentive to slap high marks on securities that did not deserve them.

At least 10 of the big companies that failed or were bailed out in the last year had investment-grade ratings when they went belly up — like deathly ill patients bearing clean bills of health.

Moody’s rated Lehman Brothers’ debt A2, putting it squarely in the investment-grade range, days before the company filed for bankruptcy. And Moody’s gave the senior unsecured debt of the American International Group, the insurance behemoth, an Aa3 rating — which is even stronger than A2 — the week before the government had to step in and take over the company in September as part of what has become a $170 billion bailout.”

As noted in Bailout Nation:

While the investment banks that sold the junk paper, it was the rating agencies that tarted up the bonds. It was the equivalent of putting lipstick on a pig: This paper could never have danced its way onto the laps of so many drooling buyers without the rating agencies’ imprimatur of triple-A respectability.

Yet considering the massive damage they are directly responsible for, the rating agencies have all escaped relatively unscathed. Given their key role in the crisis — were they corrupt or incompetent or both? — one might have thought an Arthur Anderson-like demise was a distinct possibility. Warren Buffett should consider himself lucky — he is Moody’s biggest shareholder, and is fortunate the scandal hasn’t tarnished his reputation.

>

Source:
Warren Buffett Unusually Silent on Credit Rating Agencies
DAVID SEGAL
NYT, March 17, 2009

http://www.nytimes.com/2009/03/18/business/18buffett.html

Category: Bailouts, Credit, Derivatives, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “When is Warren Buffett going to fix Moody’s?”

  1. any Journalist, worth their Salt, should be dogging WEB with, exactly, these types of Q’s.

    As well, Moody’s, S&P, and Fitch, might serve best as examples 1, 2, &3, for a new regime of Corporate Charter revocation..

    Also, the statute, giving rise to NRSROs, needs to be interred.

    Past that, Partnoy’s allegory, above, is well, and truly, apt.

    http://www.thefreedictionary.com/interred
    http://www.thefreedictionary.com/allegory

  2. Kyle says:

    Mark, you use, way too many, commas.

  3. Bruce in Tn says:

    It is early in East Tennessee, and I have a long day ahead. But I just could not keep my peace about this..

    “U.S. Treasury to make AIG pay back $165 mln in employee bonuses, with the amount to be taken from the $30 bln in government assistance soon to go to the firm.”

    I didn’t put the link, but everyone is aware of this…and what I want to bitch about it not the AIG bonuses, although this shows again how little public relations training some of these banking idiots have..rather it is the response of our government…

    Guys, 165 million divided by 30 billion is 1/2 of one per cent…! It is a pimple, a zit…..and if AIG needs more money in two months..it will be another 30 billion, the 165 million is ABSOLUTELY INSIGNIFICANT…

    So what does that say to me? Well, to me at least, it says hypocrite…but it also says…hopeless governance…”no clue” comes to mind also…

    OT rant over…Barry, just delete it…thanks though…

    Long day ahead…..

  4. hawleyl says:

    @Bruce

    Yes, as the saying goes: keep your eye upon the donut and not upon the hole. If you agree with this then some other questions come to mind.
    Is this a diversion to keep us from seeing other bigger frauds?
    What other larger implications may exist, e.g. making it more difficult for Congress to take subsequent actions due to public sentiment against Wall Street?

  5. farmera1 says:

    Buffett has been asked over the years in many annual meetings “Why didn’t you do this or that about company xxx” when he owned shares in a company. His stock answer is that he will not get into a proxy fight with a company in which he owns stock. He has sold out of some companies stock (Fannie comes to mind) when he disagreed with something the company was doing. But largely as far as I can see he is a passive stock holder/investor when he owns just part of a company (no. given above was that Berkshire hold 20% of the Moody stock. )

  6. Bob_in_MA says:

    Barry,

    I hope that line didn’t make it by your editor: “While the investment banks [that?] sold the junk paper,”

  7. MRegan says:

    Bob beat me to it. I’ll add the following:
    You should provide access to the text or fragments and let/ask the readers of your blog pick out the lice. Chop it into pieces and offer a 10% coupon on the purchase of the book. Many would help out just to help out.

    Additionally, regarding the lipsticked pig, the triple A was a just another ruse like the Trojan horse. Find out what the people worship or venerate and sneak in a fake one, count to ten and then initiate the slaughter.

    MH- no journalist is ‘allowed’ to be worth his/her salt because the structure affords them two things- a quick trip to the outside or a gilded cage with plenty of heroin, I mean, wages. Also, I suspect your comma tic is intended to replicate the rhythms of speech in order to bring an additional dimension to your posts. Am I uuuuh right? (that’s my professorial Obama-ian hiato)

  8. jritzema says:

    Buffet is someone who knows how to talk his book, or at least avoid trashing the value of his investments. He is not a politician, who apparently are very interested in destroying what little value is left in the insurance company that the US owns 80%. Who in their right mind would do business with or work for AIG?

  9. krice2001 says:

    @ Bruce — “Guys, 165 million divided by 30 billion is 1/2 of one per cent…! It is a pimple, a zit…..and if AIG needs more money in two months..it will be another 30 billion, the 165 million is ABSOLUTELY INSIGNIFICANT…”

    Yes, of course it is… The Republicans in Congress made hay from a similar % of ‘pork’ that was in the stimulus package. It was also, ‘statistically’ pretty insignificant. But it’s the impression that’s created that makes a disproportionate impact far beyond the actual physical or monetary impact. And in this case, most people feel appalled by that small percentage of the bailout money going to such seemingly undeserving individuals.

  10. wally says:

    “The agencies put their seals of approval on countless subprime mortgage-related securities now commonly described as toxic.”

    Of course – that’s what they were paid to do. They weren’t paid to be right, just to put their seal on… so they did.

  11. Mannwich says:

    @Bruce in TN: Of course you’re right but part of the reason this “outrage” has gone viral, I think, is because the bonus issue is far more easily understandable to the average person who doesn’t really pay a whole lot of attention to this stuff. For the average person who feels uneasy about what’s gone on but doesn’t understand the details or its implications, I think it just really hammers home the point of just how effed up the bailouts have been.

  12. mknowles says:

    why aren’t they in jail? why isn’t this fraud?

  13. mknowles,

    the Law of Torts, save the exception, seems to be on hiatus..

    Jeff,

    speaking of “Home Improves”, you might want to check this:
    http://www.eia.doe.gov/cneaf/solar.renewables/page/ghpsurvey/geothermalrpt.pdf

    MR,

    re: , ‘s , yes, it’s, a lot, like that.. ~

  14. Hal says:

    Uh–Buffett? I looked at the brk financials and do think he underrecorded his loss on his put position–probably no more than 5 billion or so. Not materal for a company with tangible net worth of 75 billion.

    then the matter of talking his book–his life insurance business stands to benefit from keepingestate taxes high and repealing the step up basis at death.

    Its nice to be a Presidental advisor. Sames time of dealing with subordinates.

    Same true for Jeff Immelt–he became an agent for NBC by booking Obama to the Leno short–which will not harm ratings.

    the reality is we have always joked that is who you know, not what you know–the one constant in life.

  15. willid3 says:

    we are probably more offended by the large amounts to individuals who didn’t really deserve it. it might even make it so that the executive pay issue gets resolved

  16. gnomic says:

    @ Bruce in Tn: This same logic could be applied to the earmarks that some are making such a stink about.

  17. gnomic says:

    I wonder if, as a now-broke and debt-ridden taxpayer, I have the standing to sue Moody’s and S&P. Of course, if I win, the government will just bail them out and tax me to pay for it.

    Makes me wonder how long a cannibal can survive on an island by himself.

  18. wisedup says:

    weird, Barry raises a good question can there is little useful discussion. OK. He and others have been focusing on the payment model but there is a bigger more fundamental problem.
    Here goes, the rating agency model is completely irrational since the detailed information needed to “truly assess” the health of a company is – of necessity – exactly the information the companies cannot release as it would trigger the demise of the company.
    We must assume that in the lifespan of any company there are events that would appear to bring the company close to failure and indeed would cause its failure if the information was made public.
    Anyone have any solution?
    No wonder Buffet is quiet.

  19. Moss says:

    S&P, Moodys are all simply cogs in the institutionalized deception that capitalism has morphed into.
    Should GE ever have been a triple A credit? Highly doubtful.