June 2, 2010
Buffett: Rating Companies Participated in Financial Crisis
Berkshire Hathaway CEO Warren Buffett on testifying before the financial crisis commission on the creditability of credit ratings and his 13% stake in Moody's.
FOX Business Network’s Liz Claman interviews Warren Buffett
June 2, 2010
DAGEN MCDOWELL, FBN ANCHOR: Barbara, if you could just -- deep apologies, if you could just hang tight we need to go to our very own Liz Claman who is with Warren Buffett -- Liz.
LIZ CLAMAN, FBN Anchor: Yes, in fact, he's been subpoenaed to be here today at the new school in downtown Manhattan and he is here to discuss his ownership of about 13 percent stake in Moody's, the ratings agency which is very much at the store of, of course, the financial crisis and he has testified before the Financial Crisis Commission today. Before that, he speaks with us here on FOX Business.
Thank you for being here.
WARREN BUFFETT: My pleasure
CLAMAN: Well, they have to subpoena you. Why didn't you just agree to speak with them?
BUFFETT: Well, I've had requests from eight Congressional panels or panels that they authorized in the last 12 or 15 months and if I -- if I went to one without a subpoena, I'd have a hard time explaining to the other eight why I don't show up in Washington, and I have a job at Berkshire in Omaha.
So, I've always offered with any of these panels to tell them anything I know by phone, be interviewed as long as they want, they can call me back. I just did it for Elizabeth Warren's commission last week and they asked a bunch of questions about AIG, and I told them everything I knew and I said if you'd like more information call me back. So --
CLAMAN: You're cooperating.
BUFFETT: Well, I didn't cooperate willingly because like I say, if I cooperate with one, I've got to cooperate with eight that want me to show up for television.
CLAMAN: They're going to ask you here why did you own the largest stake of any shareholder in Moody's, which is the ratings agency that, Warren, so badly got these credit ratings wrong on so many levels that eventually blew up in the faces of investors. You, being the largest shareholder, what was so attractive to you about Moody's when you don't even use their products?
BUFFETT: Well we are forced to use it in terms of our own ratings. I don't use it in terms of making my own credit judgments about other credit --
CLAMAN: That's what I'm talking about.
BUFFETT: And 10 or 12 years ago, we bought Dun & Bradstreet, which consists of two really good businesses, Dun & Bradstreet and Moody's, Moody's being the better business because Moody's basically earns extraordinary returns on invested capital, it has the freedom to price and it's got a wonderful business and that's why we -- and Dun & Bradstreet is a good business too so we bought it 10 or 12 years ago.
CLAMAN: So it's purely, look, I don't smoke, but I own Phillip Morris kind of decision.
CLAMAN: OK, that much I get. A lot of people here today are saying that the business model is so conflicted at these ratings agencies, specifically Moody's where it's issue or pays, meaning the very business or product that is getting rated, that's the organization that pays Moody's to rate it. Should the business model be changed?
BUFFETT: It's pretty hard to change it, Liz. I mean, just imagine if you're my sister out in Omaha and you want to buy a triple-A bond. Are you going to make a payment to Moody's for it? You know, you're going to hear that it's rated triple-A, you know, by listening to your network or something of the sort and you're not going to pay.
So, it's not very feasible to have the people who buy triple-A bonds one by one -- $10,000 bond here, 5,000 bond -- to make them pay for it.
CLAMAN: Should the government mandate ratings agencies be nationally recognized, sort of the Good Housekeeping Seal of Approval?
BUFFETT: Well, in a sense, states have done that already in terms of -- and actually, the banking authorities have done it because they've already said that you needed to be rated -- you need to own securities of a certain rating if you ran a life insurance company or that sort of thing.
So there has been a mandated rating arrangement and that's the reason that we have no price flexibility when we -- when Standard & Poor's or Moody's come to rate Berkshire and they say we're going to charge you a million dollars, and I say, gee, I'd like to do it $900,000. And they say, well, look around down the street, you won't find somebody.
CLAMAN: Well, we all know how wrong they got it when they were rating triple-A what turned out to be total and utter junk. Warren, do you think that the ratings agencies are culpable for the financial crisis?
BUFFETT: No, I don't think they're the major responsibility, but I think they participated in it just like everybody else that had this notion in their mind that house prices couldn't go down.
CLAMAN: You being the largest shareholder of Moody's, would that make you knowingly or not complicit in helping to unwind the financial system?
BUFFETT: No, I don't think so. I'll give my opinion about any societal matter and -- you know, I don't think smoking is good for you, but I own the cigarette bonds.
CLAMAN: The dirt inside is that they're going to quickly move at some point from the Moody's investment to your $5 billion Goldman Sachs investment. Are you going to answer questions about Goldman Sachs?
BUFFETT: I'd -- I'd love to. I'd love to.
CLAMAN: And you will say you don't regret that at all in any way, shape or form?
BUFFETT: Oh, no. No.
CLAMAN: Do you regret owning Moody's?
BUFFETT: No. I regret not selling it a couple of years ago. But if I'd seen this coming -- they didn't see it coming, I didn't see it coming, you know, the media didn't see it coming, Congress didn't see it coming. Basically the American public got this notion in their mind that house prices couldn't fall.
CLAMAN: There's a whistleblower named Eric Kolchinsky who will be testifying there, and the whistleblower is going to say that he was pressured to give better ratings so that Moody's could maintain market share. Did you ever know anything about that?
BUFFETT: No, never heard of it.
CLAMAN: Does it surprise you?
BUFFETT: But I would -- well, I would doubt it because, in effect, I need Moody's and Standard & Poor's. They don't have to do anything for me to get market share, they own me, basically. So actually, they are in the position of basically a newspaper in a one-newspaper town. They don't have to kowtow to anybody. If there's ten newspapers in town, you do have to kowtow to people.
CLAMAN: Weill the rating agencies, because of what happened and the loss of credibility, refuse at some point or cease to exist?
BUFFETT: Oh, no. I think there will be rating agencies of one sort or another. But as I've said many times, we don't use them ourselves. I mean, we are forced to be rated, but in terms of evaluating credits, we don't use them.
I better -- I've got some other people waiting to have a conversation.
CLAMAN: I know, I know. I know you've got to go, but one last question. The ratings agencies, of course, have misrated Greek debt, Spanish debt, now they're downgrading it. I know it's a broad question, but is the world broke?
BUFFETT: No, the world is not broke. No, no. The world is going to do fine over time.
CLAMAN: You're not worried.
BUFFETT: I'm not worried.
CLAMAN: Warren Buffett, thank you very much.
BUFFETT: Thank you. Thank you.
CLAMAN: He has to testify, obviously, coming up in just a few minutes. So we're going to get out of the chair, he's got a long list of journalists. But, Dagen, let me send it back to you.
MCDOWELL: Liz Claman, thank you so much, with Warren Buffett. Terrific.
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