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Originally published June 2, 2010 at 10:10 PM | Page modified June 3, 2010 at 6:56 AM

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Panel skewers Buffett over Moody's problems

Billionaire investor Warren Buffett told a congressional panel Wednesday that if he didn't see the housing bust coming, he can't ...

McClatchy Newspapers

NEW YORK — Billionaire investor Warren Buffett on Wednesday told the Financial Crisis Inquiry Commission (FCIC) that concerned executives from Moody's didn't tip him off to problems with bonds that Moody's had rated highly, directly contradicting evidence presented privately to the panel.

Testifying before the panel mandated by Congress to find out why the financial world quaked in 2008, Buffett — the largest shareholder in Moody's — denied ever being warned.

"No," Buffett said, responding to a question from panel Chairman Phil Angelides about a McClatchy Newspapers report earlier this year that two senior Moody's officials had warned Buffett about complex bonds backed by junk U.S. mortgages. He also said he had no idea how Moody's rated bonds.

"I've never been in Moody's. I don't even know where they're located," Buffett said.

But a former Moody's executive stands by what he told McClatchy Newspapers earlier this year: that he'd given panel investigators documentary evidence about his contact with Buffett.

"I reached out to him, and I've got the e-mail sent to him, and the commission has it as well," the former senior executive said Wednesday. He requested anonymity to protect his current job, which isn't with Moody's.

McClatchy Newspapers independently verified the executive's information.

Whether Buffett was aware of problems at Moody's is important because as the firm's largest shareholder and a larger-than-life figure in the investment world, he was in a position to push for changes.

There's also the question of whether he had inside information unavailable to the public.

Buffett, through his company, Berkshire Hathaway, at one point owned more than 20 percent of Moody's. He's since pared his investment to about 13 percent.

Angelides got Buffett to admit that he wasn't aware whether Moody's investigated the quality of the mortgages that were pooled into the complex bonds that it gave investment-grade ratings.

Angelides scolded Buffett for his lack of curiosity about the workings of a company in which he was the largest shareholder, asking him: "If we can't count on corporate shareholders, then who can we count on?"

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Buffett, who declined to testify until he received a subpoena last week, said the ratings agencies weren't the only ones blindsided by the 2008 financial crisis. "Looking back, they should've recognized it," Buffett said, "but, like I said, I didn't recognize it, and nobody I know recognized it."

Known as "the oracle from Omaha," Buffett testified alongside Moody's Chief Executive Raymond McDaniel, who conceded his company made mistakes.

"The regret is genuine and deep with respect to our ratings in the housing sector," said McDaniel, who has run the company since 2005.

Buffett was asked over and over if McDaniel should have lost his job, given the poor performance of Moody's, which, like its main rival, Standard & Poor's, slapped Triple A grades on hundreds of billions of dollars in bonds that were all but worthless after the housing crash.

Buffett declined to criticize McDaniel, though he had nothing much positive to say on his behalf, other than that Moody's was no better or worse at predicting the financial fiasco than nearly everyone else on Wall Street.

Angelides sounded far more skeptical about Moody's record. In 2006, he noted in an opening statement, $869 billion worth of mortgage securities were Triple A rated by Moody's and a large percent of those securities were later downgraded.

"The miss was huge," Angelides said of Moody's performance. "Ninety percent downgrade. Even the dumbest kid gets 10 percent on the exam."

Critics say the ratings agencies failed because their business model is based on a conflict of interest: The agencies are paid by Wall Street, not investors, to rate securities products.

Banks can shop around for a firm that will assign their products the highest grades.

Former Moody's executives described a culture where agencies went lax in their ratings to win more customers.

"When I left Moody's, an analyst's worst fear was that he would do something that would allow him to be singled out for jeopardizing Moody's market share, for impairing Moody's revenue or for damaging Moody's relationships with its clients, and lose his job as a result," wrote Mark Froeba, former senior vice president of U.S. derivatives at the Moody's Investor Service, in a statement submitted ahead of his testimony.

The financial regulatory bill addresses some concerns about the ratings agencies. The Senate passed an amendment from Sen. Al Franken, D-Minn., that would create a new ratings board within the Securities and Exchange Commission that would assign ratings firms to securities, rather than letting banks pick and choose their graders.

Both the Senate and House versions of the bill would make it easier for investors to sue the agencies.

The commission is required to submit a report by Dec. 15.

Material from The New York Times and The Washington Post is included in this report.

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