Warren Buffett, the CEO of Berkshire Hathaway (BRKA; BRKB), has taken a fair amount of heat in the media and in the blogosphere over the past week. The backstory is that he was compelled to testify before the Financial Crisis Inquiry Commission (FCIC) which is a government commission with a mandate to examine the causes of financial panic.
Warren Buffett testified before the commission along with Raymond McDaniel, the CEO of Moody’s (MCO). Other than the fact that Berkshire owns a 13% stake in Moody’s, I’m not sure why Buffett was forced to appear with the Moody’s CEO, but he was.
Moody’s and the credit rating fiasco
I think it was unfortunate for Buffett to be paired with a guy trying to defend the ratings agency fiasco because, in my view, rating agencies such as Moody’s and Standard & Poor’s bear a lot of blame for enabling the craziness that went on in the mortgage-backed securities business and on Wall Street. Grilling the company’s CEO seems fine to me. Having to appear alongside the Moody’s CEO may have led people to think Buffett was defending the company’s action, even though he was not. How do I know that Buffett did not defend Moody’s?
I actually listened to Buffett’s testimony
As I could not find a transcript of his testimony, I paid the price of actually listening to the testimony from start to finish. It was long. How long you say? Too long. If you want to listen also, here is the link.
As I was listening, my two sons wandered in from time to time to ask what the purpose of this video was and they occasionally offered funny remarks about a particular panel member who was being — no doubt unintentionally — amusing.
FCIC Chairman and former California State Treasurer, Phi Angelides got in a few good quips, but overall the tone was calm and rather boring. I had to laugh when I read some approving accounts of Phil Angelides’ comments, given the role he played over the past decade or so in California’s dismal economic condition.
For those who do not know of him, Phil Angelides is hardly a paragon of financial acumen. He was the Treasurer of the State of California during the years (January 1999 to January 2007) when most of the disastrous decisions were made that plague California today. He was also on the boards of California’s woefully underfunded state pension plan during the time period when it embarked on an ill-fated and unfunded increase in pension payouts. California is broke today and Phil Angelides bears at least some responsibility for that.
The Buffett bashers
The Buffett bashers (see here and here and here) seem to have heard different testimony than I did. Or rather, I think they expected him to transform himself miraculously into some sort of social champion, bashing Wall Street right and left. Apparently, they did not know that he is a guy with strong Wall Street connections. D’uh. He is a big investor in Wall Street firms and has been a power player in investment circles for decades.
Here are three examples of the scorn and derision unloaded on the venerable investor. From the generally-sensible Felix Salmon:
Buffett is that rarest of institutional shareholders: someone who actually owns and runs lots of large companies of his own. As such, he can and should act much more like an owner than most shareholders. But he doesn't, and he has no visible desire to fix the problems at Moody's or at the ratings agencies more generally. He just says he wishes he'd sold his Moody's stock earlier, passing on those losses to some other sucker. I don't think he's ever going to be able to live this one down.
Note the loaded phrase, ’should act much more like an owner.’ Salmon is entitled to his opinion on what Buffett should or should not do, but that doesn’t mean Buffett has to agree with him.
From Capital Gains and Games blog, comes former New York Timesman, Edmund Andrews, who thunders:
Oh my God. I never thought i would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon. I’ve just finished watching the beloved Oracle of Omaha being grilled by the Financial Crisis Inquiry Commission about the catastrophic role of credit rating agencies, and it’s pitiful to watch him plead ignorance on the most elemental questions about what Moody’s and Standard & Poors did wrong or how they should be changed…
I find this kind of language — Buffett has turned into an evasive, disingenuous, bumbling buffoon — to be really offensive.
As if that was not bad enough, Fox Business News personality, Liz Claman, asked this:
You being the largest shareholder in Moody's would that make you knowingly or not complicit in the unwinding of the financial system?
Good grief.
Buffett bashed for being himself
I found Buffett’s testimony to be utterly in keeping with his reputation. He spoke as a knowledgeable shareholder in Moody’s, but not someone who pretended to understand the ins and outs of the credit ratings system. I did not hear him defending Moody’s, but rather stating the obvious fact that the firm missed the real estate bubble along with most everyone else. He was clearly not happy with the results, either for his investment or for the country. He did not buy shares in Moody’s because of the quality of the ratings they give, but rather because he felt they were cash machines that had been granted a duopoly by governments. His point-of-view is simply that of a large shareholder — a ‘hands off’ shareholder I might add.
In my view, Buffett is being condemned in crude terms, not for something he did, but rather for something he did not do, which is to try and reform ratings agencies thereby ’saving’ the financial system. However, Buffett is no social crusader, nor has he ever acted like one. Certainly, he has announced that the bulk of his billions will go to charity when he dies and that’s laudable indeed. Maybe that act convinced some folks that he was a social reformer, I don’t know. He’s no saint, nor a social activist, but he is hardly a buffoon.
Apparently, Felix Salmon and Edmund Andrews and Liz Claman had false expectations that Warren Buffett would charge forth and bash ratings agencies. Obviously, he disappointed them and their strident responses reflect their collective disappointment. Boo hoo.
Saints seldom make billions
I would not have thought it was necessary to remind anyone that billionaire saints are rare indeed. Making as much money as he has made — for himself and for his shareholders — is not easy, nor is it simple. Warren Buffett has mastered a very complex system of making investments, managing taxes, working the system in Washington and New York and sticking to his lucrative knitting. He works the system and talks his book (promotes his point of view) whenever he can. That’s why he has been so successful.
But, when it comes to companies whose stock is owned by Berkshire, I see Buffett as an investor, pure and simple. If he thinks a company is screwing up, I suspect his first inclination would simply be to sell the position, not try to reform that business. He’s a portfolio manager and, I think it behooves us to acknowledge, one of the best portfolio managers of the past 50 years.
Quite frankly, as an investor in Berkshire, I don’t want him spending his days opining on ways to improve Moody’s or other rating agencies. Rather, I’d like him to figure out great investments that will make Berkshire lots of money. His job, in my view, is not to try and make the world safe for unwary investors, but rather to make money for his investors, of which I am one.
Kurt Brouwer owns shares in Berkshire Hathaway (BRKB)
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“I did not hear him defending Moody's, but rather stating the obvious fact that the firm missed the real estate bubble along with most everyone else.”
Missed? If he was talking about me and everyone else, you’re right. But the rating agency has a job to do. its to examine the product, and rate it. Bottom line, it doesn’t take a rocket scientist to realize the immense amount of money the agencies were making might have “influenced” their opinion. This was their job, its not supposed to be something they might miss like everyone else. Basically, the entire “argument” here that they got swept up is that they can’t perform the function they are paid to do. And more importantly, you should not trust their ratings. Does no one get this, they are saying we get paid to rate things, you pay us to see the ratings, and you should not trust us, because we can get “swept up” with everyone else. So I may as well ask my neighbor what they think of the CDO I’m buying.
Do you know there is something in investment called Risk. Rating agency can only express their opinion. They are not insurance company. They are paid by the companies that issued the debt. What do you expect from them. It is up to the investor to assess the risk based on the rating. The ultimate responsibility lies with the investor. It seems the this point got lost completely in the stupid scapegoat searching process.
Dan & Homer — I agree with the points each of you made. A rating does not necessarily tell us how much risk there is in a given security. And, there is no question in my mind that Moody’s bears a great deal of responsibility for misrating so many securities by so much. I have no problem with someone bashing Moody’s. They deserve the criticism. I do think its’ incorrect to bash Buffett for something that Moody’s did.
Blame Buffett for our problems?…laughter. Pay Attention to the man who knows what is coming next…not suspects or ignores, but KNOWS, and acts on it. His Burlington Northern purchase will be the crown jewel of a career and life that is most amazing.
Amen, brother! He’s merely a shareholder. Anyone who would change the world with their investments will invest in ’socially responsible’ portfolios. You didn’t mention whether the Buffett Bashers noted that Buffett was on Moody’s board, so I would assume he was not. Not that much influence, I would venture.
As far as Moody’s goes, I would further guess that they’re working off what’s available to everyone, and sometimes, the correct information isn’t there. How was Enron rated before they went under? Not to mention the fact that in this day of credit default swaps, no one really knows who’s holding what and what anybody is really worth. So good investing still boils down to doing your homework.
At least Buffett does his. And yes, I’m a shareholder too.
This must be one of the worst articles I read this week. Biast INVESTOR opinion hence not journalism….
I can’t even address the comment Moodys was just taking a guess like the rest of us and its up to the investor to decide. Everyone once again seems to think what probably amounts to criminal behavior should be excused or at least ignored. Shameful where we are right now. And I agree Buffett does know where this is heading, and therefore think about his testimony and how truthful it was. I do have to say I’m not sure why he was there.but I think he could have been more forthcoming without hurting his reputation.
CNBC special House of Cards put spotlight on ratings agency employees who stated that they knew many subprime and CDOs that received AAA were junk, but the technical guidelines used to evaluate debt ‘force’ rating as AAA. Because all of the investment world wanted to believe there was no end to the gravy train of housing values increasing 8% yr/yr, these investments were gobbled up by individuals/institutions/goverments. Most of whom bought off on an ROIs sales pitch without a genuine understanding of the risk/underlying business. Likely to avoid missing out. Historically, housing values have increased 1% more than the household purchasing power (avg annual pay increase) since the advent of modern mortgage - 1950(s). Did WB once state that CDO(s), and CDS(s) were “weapons of mass destruction” long before the house of cards collapsed? According to the CNBC speical, an investor in Texas saw this for what it was, bet against it and won big - billions. Purportedly he confirmed the underlying thinking behind the irrational exuberance prior to placing his bet and warned one of the big investment banks of his expectation. His thanks was a quick escort out the door with a “god help us all if your right” salutation. Did WB not liquidate a third of his holdings in Moodys? Is it possible he’s lending his street cred to this process so as to bolster Moody’s innocence/validity long enough to avoid a fire sale liquidation on the stock once the ratings process changes and the cash cows dry up? I’m not saying WB is guilty or responsible to anyone for anything associated with the collapse. I find it hard to believe that the oracle of omaha has been or was fooled by anything that has transpired I simply find it hard to believe that with all the analysis his teams do, the potential meltdown was dismissed as an asset “bubblet”.
Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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