“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.
Warren Buffett Unusually Silent on Credit Rating Agencies
NYT, March 17, 2009