Warren Buffett defend Credit Rating Agency.

[Dennis Ng]

2 Jun 2010 - Is this the Warren Buffett we know? The one who is regarded as high in Integrity and Trust? Or has he given in to the "dark" side becos of his "vested interest" in Moodys'? I really don't know.

I personally will not give in to the dark side. My only guide to what I say is Conscience.

Cheers!

Dennis Ng, http://www.HousingLoanSG.com


2 Jun 2010 NEW YORK (AP) -- Billionaire investor Warren Buffett on Wednesday defended credit rating agencies that gave overly positive grades to mortgage-related investments before the housing bust. He said the agencies were among many who missed warnings signs of the crisis.

"They made the wrong call," Buffett acknowledged.

But he said he counted himself among those who failed to foresee the collapse of the housing bubble. Buffett called it the "greatest bubble" he had ever seen.

"The entire American public was caught up in a belief that housing prices could not fall dramatically," Buffett told a congressionally chartered panel investigating the financial crisis. Had he known how bad it would get, Buffett said he would have sold his company's stake in rating agency Moody's Corp.

Buffett's investment firm is Moody's largest shareholder. He testified before the Financial Crisis Inquiry Commission alongside Moody's CEO Raymond McDaniel. The FCIC is a bipartisan group created by Congress to examine a range of issues surrounding the financial crisis.

Rating agencies have been criticized for giving high ratings to complex investments backed by risky mortgages. When homeowners defaulted, the agencies downgraded billions of dollars of investments at once. That helped spark the financial crisis.

Lawmakers have accused the industry of having a conflict of interest because the agencies are paid by the banks whose investments they rate. Congress is considering new rules for the industry as part of the broader financial regulatory overhaul.

Rep. Barney Frank's, D-Mass., legislation would get rid of laws and regulations that require businesses to obtain credit ratings. His proposal would make many business transactions less reliant on rating agencies' involvement. In addition, it would force credit raters to register with the Securities and Exchange Commission and allow investors to sue them for assigning recklessly high ratings.

Sen. Al Franken, D-Minn., wants to let a new regulatory board choose the rating agencies that analyze each bank deal. His proposal was included in the Senate bill.

House and Senate negotiators still must reconcile differences between the two financial overhauls.

McDaniel told the panel that "Moody's is certainly not satisfied with the performance of these ratings" and is taking steps to improve its rating process.

Still, McDaniel said in written testimony that investors should use ratings as a tool, "not a buy, sell or hold recommendation."

Despite his company's stake in Moody's, Buffett said he doesn't rely on credit ratings when making investment decisions. He makes his own judgments on companies.

"What we hope for is mis-rated securities because that would give us a chance to make a profit if we disagree with the ratings agencies," Buffett told the panel.

The FCIC subpoenaed Buffett after he declined to testify voluntarily. Buffett looked relaxed during the hearing and jokingly thanked the panel for the order to appear.

But the Berkshire Hathaway CEO later took pointed questions from the commissioners about whether he personally should have done more to hold Moody's accountable as the company's largest shareholder.

"If we can't count on corporate shareholders, who can we count on?" FCIC chairman Phil Angelides asked Buffett.

Buffett replied that Berkshire invests in many companies and can't know everything that goes on inside them.

Asked if rating agencies' model pose risks today, Buffett voiced concern over their ability to grade the debt issued by state and municipal governments.

"I don't think Moody's or S&P or I can come up with anything terribly insightful about how state and municipal finances will be five years from now, he said.

Angelides noted during his opening remarks that Moody's profited greatly from rating mortgage-backed securities. Revenue soared from $600 million in 2000 to $2.2 billion in 2007, just as the housing bubble peaked.

But as the company profited, "the investors who relied on Moody's ratings didn't do very well," Angelides said.

Asked why Moody's ratings failed leading up to the housing crisis, the company's former managing director Eric Kolchinsky blamed a "factory mentality." Resource-strapped employees were pressured to rate as many deals as possible to grow the company's market share, he said.

Bankers, in turn, knew they could get their investments rated quickly, even without providing Moody's sufficient advance notice, Kolchinsky said.

"Bankers knew we couldn't say no to a deal," he said. "They took advantage of that."

Asked to respond, McDaniel said the company declined to rate hundreds, if not thousands of mortgage-backed securities during the housing bubble because of "credit concerns."

One transaction that has focused attention on rating agencies is a Goldman Sachs deal called Abacus, a complex mortgage-related investment that later plunged in value. Both Moody's and Standard & Poor's gave the Abacus deal a AAA rating, the safest rating they offer.

The government has filed civil fraud charges against Goldman, alleging it failed to tell investors that one of its clients, hedge fund Paulson & Co., was betting against the securities.

Standard & Poor's has not escaped scrutiny. The FCIC focused on Moody's for Wednesday's hearing because commissioners believe the company provides a useful perspective on the broader credit rating industry, FCIC spokesman Tucker Warren said.

"It's not always necessary for us to look at every institution within an industry to get the insight we need," Warren said.

Standard & Poor's provided documents to FCIC staff. Some of that information could end up the FCIC's final report due Dec. 15, Warren said.

It is not the first time the FCIC has singled out a company as a "case study" of the broader industry. An April hearing focused on the role of Citigroup Inc. in spreading toxic mortgage debt through the financial system.

AP Business Writer Daniel Wagner contributed to this report from Washington.

[Dennis Ng]

Looks like I'm not the only one who is disappointed with the "behaviour" of Warren Buffett.....guess he "gave in to the Dark Side of Profits and Vested Interests". In recent months, Warren Buffett first defended Goldman Sachs (which he has massive shareholding) and now Credit Rating agency Moody's (which he also has massive shareholding).

Cheers!

Dennis Ng

Weekend: The Fallible Mr. Buffett
By Ian Cooper | Saturday, June 5th, 2010

For years, we've become accustomed to hearing how no one could have seen the unfolding subprime crisis... not even, according to Warren Buffett, the credit rating agencies.

The very companies that paid millions to do efficient research could not foresee a problem of this magnitude?

What is Buffett thinking?

This is the guy that once stood up for the little guy, defending him from corporate madness.

And now he's defending credit rating agencies — some of the very companies that took us to the edge of financial ruin, all while holding stock?

Why is he now catering to the corporate elitists that helped foster the subprime meltdown?

Why is he defending Goldman Sachs and its CEO Lloyd Blankfein — accused on fraud charges from the SEC and undergoing an alleged Justice Department investigation of criminal wrongdoing surrounding the structuring of ridiculous derivative contracts?

And why is he fighting derivative legislation after calling derivatives "financial weapons of mass destruction," "unattractive," and comparing them to hell and to Hurricane Katrina?

(In a note to investors, he once wrote: We are delighted that we hold the derivatives contracts that we do. To date we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts.)

It wreaks of hypocrisy.

But what really sucks is his support of credit rating agencies, which shouldn't be blamed because they couldn't have seen the subprime crisis unfolding.

And we all know that's bull...

How could they not have seen this coming?

We did... because it was as clear as day.

As I reported back in 2007:

Subprime lenders could offer adjustable or teaser rates to those with bad credit. Loans like this made up 23% of the U.S. mortgage market in 2006 as compared to the 8% in 2001, according to Yahoo! News. And it’s a big problem, as one in five sub-prime mortgages are now ending in foreclosure, according to the Center for Responsible Lending as mentioned by Yahoo! News.

The Lending Market has not bottomed… nor has it priced in all negativity.

I’d love to sit here and jump on the bullish housing bandwagon that dominates Wall Street. Really, I would... But I’m not a fan of flushing my money down the toilet.

In reality, the housing market has not bottomed. Subprime lenders are doomed. You can continue to listen to the delusional madness pouring from the mouths of Street analysts and the mainstream press, or you can listen to the homebuilder CEOs and the subprime lenders that have gone belly up because of a weak housing market.

It’s your choice... but I’d go with the latter.

Even JP Morgan CEO James Dimon is bearish on the sector, saying, "Mortgages are the one area of sub-prime lending where we really see something taking place that looks like a recession… "

That’s just an inkling of the tumultuous future for subprime lending.

MortgageDaily.com believes the sub-prime sector has another year of tough times ahead, a notion supported by Countrywide Financial: "We’ve got another eight, nine, 10, 12 months of headwinds. You’re seeing 40 or 50 (sub-prime companies) a day throughout the country going down in one form or another. I expect that to continue throughout the year."

A recent Center for Responsible Housing report projects that "2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process."

Even MarketWatch.com reported: Signs of credit deterioration from the slowing U.S. housing market have already shown up in recent results of other banks as more borrowers fall behind. Foreclosures jumped 35% in December versus a year earlier, according to recent data from RealtyTrac. For the fifth straight month, more than 100,000 properties entered foreclosure because the owner couldn't keep up with their loan payments, the firm noted.

Better yet (at least for those on the short side), there’s still plenty of negativity that hasn’t been priced in. We’re looking for further downside for six companies with connections to subprime lenders. Some have already fallen $3 to $4 in a week. Others, like NEW, fell $14+ in two days.

But one thing’s for certain — the worst is not over for subprime lenders.

And Buffett and the credit rating agencies missed it.

Let's just hope that the fallible Mr. Buffett doesn't miss the Option ARM disaster of 2010-2012

[Stradlinz]

I've read about the Option ARM a couple of times. It's an adjustable rate mortgage whereby borrowers paid low interest for a period of time and then the interest will reset to a normal rate. The article claims that most of these mortgages will start resetting from 2nd half of 2010 onwards and peaking in 2011/2012 which will lead to double dip in housing sector. I can't find the article now, however not very sure of the magnitude of this problem. But since Fannie and Freddie are still backed by US Govt, I foresee lots of these borrowers will be able to negotiate the rates down as mandated by US Govt. This will be very interesting as I'm expecting political decisions to prevail over economic ones