Sunday, June 6, 2010

Moodys Corp: Warren Buffett Defends the Indefensible




I am a big fan of Warren Buffett and his investing prowess - I run a blog called Everything Warren Buffett - and long-term approach to the stockmarket that he has built up over generations but recent comments and actions from the man have left me wondering whether my admiration for him has been rather blinded by his image as a folksy, no nonsense kind of guy who wont put up with, and dispense, to put it bluntly, bullshit.

Much of that has changed for me over his comments on the Moody's ratings fiasco.

With that in mind I just have to join the chorus of commentators who have roundly criticized Warren Buffett over his recent testimony to the Financial Crisis Inquiry Commission (FCIC) over the defense of rating Agency Moodys Corp [MCO.NYSE], a company in which the once great man is the largest shareholder in.

While Moodys isn't completely to blame for the 2008 financial meltdown (the lenders, borrowers politicians - principally Bill Clinton's administration - mortgage back securities businesses and a whole host of other characters in this drama share the ignominy) and what has happened subsequently, it did rate subprime mortgages as good loans and a prize moron could figure out even before the September meltdown these loans were always in danger of defaulting, it was just a matter of when not if.

Warren Buffett's defense of Moody's part, is ,well, indefensible. Buffett, known for his principled stance on matters of business, investing and commentary on such things has ruined his reputation by not coming out and roundly criticizing Moodys, which he would have been expected to do given his past history on such matters of business ethics and the like. Moodys business practices have effectively endorsed short term risky derivatives and short term gain over a long-term outlook for business, something that Mr Buffett has been yelling from the rooftops for the last 60 years.

In Buffett's testimony to the FCIC he gave a lame excuse for Moody's part in the 2008 crash:

On Wednesday, though, Mr. Buffett testified that he did not know all that much about the credit rating market, even though the holding company he controls, Berkshire Hathaway, is the largest shareholder in Moody’s Investors Service, one of the three companies that dominate the business.
“I’ve never been to Moody’s,” he said at a hearing of the Financial Crisis Inquiry Commission, which is investigating the causes of the global crisis that led to the government bailout of big banks. “I don’t even know where they’re located. I just know that their business model is extraordinary.” New York Times
Feigning ignorance of a company that Buffett has such a large stake in just doesn't stack up. We know he doesn't have "intimate" knowledge of every minutia of the way businesses he has shareholdings in do business, he has a vast portfolio and little time to spread around, but he is however aware of the basic way all his businesses run. His solid reputation as an investor has been built on knowing the businesses he invests in. it is part of his investment mantra that comes out of his mouth to any investor or business interviewer who will listen or ask questions of him.
The past would have seen Buffett own up and take responsibility for mistakes that he has made and he has owned up to plenty. The inconsistency of his approach over the Moody's fiasco has dented a reputation that he has built up over a very long time .
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently". Warren Buffett
Personally, I will find it difficult now to take what Warren Buffet says seriously. He has time to redeem himself but he is 80 years old this year and probably doesn't have another 20 years.
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