Buffett Makes Excuses

Warren Buffett, the Oracle of Omaha, was just as clueless as the rest of us when it came to the housing bubble.

“I blew it,” Buffett told the Financial Crisis Inquiry Commission at a hearing in New York today. He was embarrassed to admit that he called the housing bubble a “bubblette” at one point.

Buffett’s opinion matters because he not only is known for his financial acumen, but also because his company, Berskshire Hathaway, is the largest investor in Moody’s, one of the credit ratings agencies that gave AAA ratings to securities composed of subprime mortgages that turned out to be junk. Buffett defended Moody’s by saying almost everybody else failed to anticipate the collapse of the housing market as well.

Moody’s, however, was paid for their supposed ability to analyze risk. So were other ratings agencies. Their failures cost investors in mortgage-backed securities billions of dollars and helped lead to the financial crisis that nearly crippled the U.S. economy.

One of the commission’s jobs is to find out why this happened. Today’s hearing focused on how credit ratings agencies are paid—by the issuers of the securities the agencies are rating—and the conflicts of interest that this system creates. One former Moody’s lawyer testified that the company’s culture discouraged analysts from being too tough on the deals that they were rating because they would lose business if they did.

Moody’s executives defended the firm, saying they thought their judgments were correct at the time. The analysts who rate securities don’t know anything about the fee structure that Moody’s works under in return for these grades, they said.

The commission is just a fact-finding organization. It can’t do anything about conflicts of interest. Congress can, however. As Buffett gave excuses for Moody’s failures, two members of Congress held a press call on their efforts to make sure the final version of financial regulatory reform includes changes to how credit ratings agencies are chosen.

“I don’t think we need a commission to tell us that the present system is unacceptable,” said Representative Brad Sherman, Democrat of California.

The Senate bill includes an amendment sponsored by Senator Al Franken, Democrat of Minnesota, which would establish an independent board at the Securities and Exchange Commission to pick which credit ratings agency would provide initial ratings for particular financial products. This board would be composed primarily of investors such as pension fund representatives. It would pick ratings agencies based on the accuracy of their past ratings and their expertise in certain areas. Ratings agencies besides the three that now dominate the market would get a shot at more business, Franken said. This would end the conflicts of interest inherent in the current payment system, he said.

“The incentive will be accuracy instead of overinflating the rating,” Franken said.

Franken noted that he had two Republican co-sponsors for his amendment, and nine more GOP senators voted for it.

He said he’s “very confident” it will remain in the financial regulatory reform bill after the House and Senate merge their two bills.

Sherman, however, fears that Representative Barney Frank, the Massachusetts Democrats who chairs the House Financial Services Committee, will oppose the amendment. Sherman tried to get a similar amendment included in the House bill, but Frank said the House should instead hold hearings on the proposal first.

Franken said he has talked to Frank about his amendment, and the House chairman didn’t say he was against it—he just wanted to read it first.

Ohio Attorney General Richard Cordray has filed a lawsuit against Moody’s, Standard & Poor’s, and Fitch, contending their inflated ratings led to $457 million in losses to state retirement funds. These kinds of losses will occur again, he said, unless the “corrupt system” that leads credit rating agencies to give inflated grades is changed.

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Kent Hoover is the Washington bureau chief for bizjournals.