Warren Buffet Wrong About Moody’s

Warren Buffet testified before Congress that Moody’s rating agency should not be blamed for its enormous role in the financial collapse that occurred following the blow up in the real estate market and the subsequent implosion of collateral mortgage options, or CMOs. These securities eventually became the so-called toxic securities that continue to weigh down the balance sheets of many financial companies.

Buffet is not dumb nor is he being led to say certain things by Berkshire Hathaway’s large stock holding in Moody’s. Rather, Buffet is saying that Moody’s and the other rating agencies including Standard and Poors and Fitch can’t be held responsible since what they missed is the same thing that everyone else missed. In other words, they weren’t any worse than anyone else.

The problem with this line of thought is that the whole point of Moody’s business is that it knows MORE THAN EVERYONE ELSE. Otherwise, what is the point of paying them to rate securities. If Moody’s role in the securities industry is nothing more than the corroboration of information that others have already figured out, then what is the point of what they do exactly?

Don’t forget that numerous investment concerns including pension plans, government investment operations, and numerous trusts and endowments are prohibited by law or by internal rules from investing in securities unless they get a high enough rating from at least one of the three major rating agencies. In other words, the multi-billion dollar investments run by top notch professionals around the country must bow to the ratings issued by Moody’s and others precisely because those agencies hold themselves out to be experts who fully and completely analyze the investments they rate and then rank them based upon their potential risk.

Frankly, I cannot understand why there has not been a major class action lawsuit filed against all three ratings agencies for their complicity in the shell game that mortgage investments have been revealed to be. Not once did these so-called experts smell a rat in one of the numerous packages of mortgages that they supposedly diligently looked into. Not once did they question the pool of mortgages used or the structure of the security. Not once did any mathematical model predict even the slightest of blips for these investments. The vast majority of these now toxic investments were given the highest Triple-A rating by Moody’s. If these firms had been doing anything other than rubber stamping what Wall Street put in front of them, there would have been at least a few blips along the way.

Just statistically speaking, any remotely valid mathematical model would have eventually kicked out the small amount of risk necessary to rate an investment Double-A, but that didn’t happen here. The ratings firms were either incompetent, or they were in on it the whole time. Either way, they shoulder a large amount of blame for creating and fueling the bubble, as well as tricking a lot of big investors into investing in it.

If I had my druthers, all three firms would be severally fined, sanctioned, and strictly regulated until such time as the world could feel that the faith place in these agencies was in any way justified.

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