The news reporting this morning on Warren Buffett’s testimony doesn’t exactly move me. But the blogs sure are fun.
Edmund L. Andrews of Capital Gains and Games hammers the Oracle of Omaha for turning into “an evasive, disingenuous, bumbling buffoon” in his credit-ratings testimony yesterday. The “buffoon” bit may be a bit harsh, but the rest of it sure isn’t. Not after that performance and his book-talking of the last few months.
The corruption and/or incompetence of the rating agencies has been documented so extensively — and reinforced again today by two Moody’s whistleblowers — that it needs almost no repeating. Moody’s, S&P and Fitch all made fortunes by handing out AAA ratings on about $2 trillion worth of securities backed by junk mortgages and worse. On a typical pool packed — no money-down mortgages to borrowers with bad credit histories who were allowed to lie about their incomes — the rating agencies merrily gave AAA ratings to tranches accounting for 85 to 90 percent of investors’ money. They did the same thing for “mezzanine CDO’s,” which were made up of the toxic waste tranches from all those pools. And they also gave AAA’s for billions worth of “synthetic” subprime CDO’s, that were sometimes designed by investors like John Paulsen who wanted to bet on their failure.
Yet when asked by Phil Angelides, the commission chairman, what the agencies did wrong, Buffett passed the buck as shamelessly as every other Wall Street powerhouse player: “I think they made the same mistake that virtually everybody else made,” Buffett told in the first in a long series of evasions. That “mistake,” of course, was in faling to recognize that the housing bubble might turn to a bust. When Angelides held up a copy of the Economist from 2005, which featured a cover story on housing called “After the Fall,” Buffett stuck to his story. When Angelides mentioned some of the economists who had warned for years about a housing bust Robert Shilling, Nouriel Roubini and Dean Baker, among others — Buffett still shrugged his shoulders.
“Looking back on it, they didn’t recognize it, I didn’t recognize it, most people didn’t recognize it,” he said more than once.
That last quote from Buffett is flat untrue. If you didn’t see the housing bubble, you weren’t paying attention or you were in willful denial. Both are bad traits in an investor. Plenty of people, very much including the press, made convincing arguments that there was a bubble years and years before it popped in 2006. Argument isn’t even the right word. The bubble was just an obvious fact.
Felix Salmon of Reuters calls the testimony a “PR disaster” and “arguably the single worst day of Buffett’s life.”
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.
Buffett has been the face of Good Capitalism—you know, the friendly, straight-shooting, all-America, west-of-Wall Street kind—for decades now. Funny how even this crisis has changed that, at least among those paying attention.
I’m glad Planet Money’s Jacob Goldstein zeroes in on Buffett’s two faces on derivatives:
Warren Buffett — the wise, grandfatherly investor — has described derivatives as “financial weapons of mass destruction.”
Warren Buffett — the billionaire financier — today had this to say about those weapons:
“I use them to make money. If I think they’re mispriced, I buy them.”
Both sides of Buffett were on display today.
He was testifying before the Financial Crisis Inquiry Commission, which was looking into the role the ratings agencies played in the crisis.
Matt Phillips of the Journal gets an insight in during the paper’s live-blogging of Buffett’s testimony:
Buffett seems to aim a dart at McDaniel, who just made reference to the “modest” nature of the fees for ratings. “I haven’t found ’em yet,” Buffett says. “The modest fees he was referring too.” This interchange underscores the strange position Buffett is in with regards to Moody’s, he’s a huge shareholder. But he also has to pay Moody’s for his ratings, and he clearly feels annoyed about it. At the same time, he’s crowed about the “pricing power” that Moody’s has, which is also what he seems to be complaining about. Strange.
Strange is one word for it. Hypocritical is another. If there’s one thing that everyone—and I mean that all-but-literally—agrees on, it’s the central—indeed, essential—role of the ratings agencies in causing the crash. Almost everyone agrees that their business model is fundamentally corrupt, too.
And so the spectacle of the hero of American capitalism defending the indefensible is beyond disappointing. Add Buffett to the long list of fallen institutions you can’t trust anymore. It’s yet another reason for the press to back away from its Buffett worship.
— Further Reading:
Warren Buffett, Talking His Book on Goldman. Warren Buffett can tout an investment like any other CEO. And the press can airbrush it as long as it’s Buffett doing the talking.
Deal Near on Derivatives: Berkshire Presses Lawmakers to Roll Back Proposed Curbs, Avoiding Potential Hit.
The Business Press and the Cult of Personality: A misplaced emphasis on celebrity over substance got us into this mess.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.