The FT’s live coverage of the Financial Crisis Inquiry Commission’s hearing on the credibility of credit ratings agencies has ended. But read on – a play-by-play of one of the most metaphor-enriched hearings on record is below. Testifying on “credit ratings and the financial crisis” were Warren Buffett, the billionaire investor, and Raymond McDaniel, chairman of Moody’s Corp. All times are eastern standard time.
As it happened coverage below.
2:05 pm: It’s over. After a discussion about rating state and municipal securities (Buffett wit #68 “If the federal government will step in to protect the security, I’d rate it triple A, if not, I don’t know what it should be rated.”) the meeting wraps up. The third hearing will begin at 2:30. No live blog for the next session, alas, but you can watch it here.
2:02 pm: It’s past 2pm. Mr Angelides moves to wrap up the meeting, but one member manages to get in a request that Moody’s provide information on its ratings of non housing asset backed securities, in an attempt to determine if it was a systematic failure at Moody’s or if Moody’s gets a free pass, because “no one” predicted such a severe housing market collapse.
1:58 pm: That derivatives time bomb (part 3). “Is the derivatives market still a time bomb, ticking away?” asks Ms Born.
“Yes,” responds Mr Buffett.
1:56 pm: Buffett on gambling. “Gambling instincts are very strong…[people] do mathematically unintelligent activities. States prey on it with their lotteries.”
1:55 pm: Ms Born says she is concerned with the explosion of purely speculative futures transactions. Mr Buffett says there’s a difference between speculating and gambling, and he’s concerned that there’s a lot of gambling going on in derivatives trading.
1:51 pm: Buffett’s view on ‘enormous’ derivatives dealers. “I think they’re dangerous. I don’t think I could manage it. It’s hard for me to imagine a system…that could manage that,” Mr Buffett said, adding that it would be extremely difficult to regulate.
1:47 pm: That time bomb comment (again). Brooksley Born, begins her questioning, quoting Buffett to Buffett. No bombshells. Mr Buffett stands by his comments.
1:46 pm: Making your report card public. Mr Daniel is asked to submit his self-evaluations to the FCIC. Also he’s asked to get back to the committee with a definitive answer as to whether different fees were charged for differently-rated tranches.
1:42 pm: Buffett wit (part too-high-to-count): “You’re always going to be fighting the human tendency to leverage more than you should” and it needs to be balanced on the regulatory side, he said.
1:39 pm: Mr Buffett’s own due diligence. “Did you read the SEC report, at least the public one,” on Moody’s actions during the crisis? “No,” Mr Buffett responds.
1:34 pm: Shareholder responsibility (pt 2) and cockroaches. Mr Angelides is back to a question, that wasn’t answered at the beginning of the hearing, about whether large shareholders and boards have a threshold reponsibility to make sure businesses are run properly? Mr Buffett says that shareholders can not be held responsible for mistakes – even large ones – if they’re not systemic. Mssrs Buffett and Angelides spar about whether Moody’s failure was systemic. “What if you see a cockroach?” Mr Angelides says, a reference to Mr Buffett’s earlier comment that if you see a cockroach in the kitchen, you can be sure there are others there. Mr Buffett did not appear to think there had been evidence of cockroaches at Moody’s.
1:31 pm: Seems like due diligence to me. Mr Buffett says that his personal experience dealing with Moody’s is that they do sufficient due diligence. Every year they spend 3 hours speaking with Berkshire Hathaway management and he answers questions to Moody’s that he wouldn’t answer for his own shareholders.
1:24 pm: If you didn’t know, couldn’t you wait? Douglas Holtz-Eakin begins his questioning. Mr McDaniel emphasises that he dramatically underestimated the severity of the downturn. “Couldn’t you wait until you found out more from your MBS guys before you rated, or was their short term pressure to rate?” asks Mr Holtz-Eakin. Mr McDaniel says that information was shared as it came along.
1:21 pm: Fed helps Buffett. Mr Buffett said that he invested in Goldman, after negotiating better terms, because it would be a good investment – but only because he thought the Fed would intervene in markets. “When Goldman Sachs was willing to take money on terms I found satisfactory…I came to the conclusion that unless the American financial system totally fell apart, it was going to be a good investment. If the Federal Reserve had not acted, everyone would have been toast,” Mr Buffett said.
1:19 pm: Looking for a better world. Asked if he thinks it would be a better world if everyone did their own due diligence rather than relying on ratings agencies, Mr Buffett replies that Berkshire Hathaway makes its money on misrated securities, but that some groups wouldn’t be able to realistically do their own due diligence.
1:15 pm: Heather Murren begins her questioning. She asks if there would be any changes to Moody’s business if there weren’t requirements for securities to be rated. He says he doesn’t know exactly how that would affect his business there would be, but he supports changes to statutory requirements that require securities to be rated.
1:10 pm: No blame at all? Mr Georgiou asks Mr Buffett – who has been defending the ratings agency – if he faults Moody’s for failing to overhaul its model for rating CDOs once housing prices started falling. “It looks like they tweaked their model when they should have gone at it with a meat axe,” Mr Buffett replies. “Especially if they’re on narcotics,” another member chimes in.
1:07pm: Modest fees. Mr McDaniel says the fees for some of the securities they rate are modest. Mr Buffett jokes that he hasn’t found them yet.
1:05pm: Not aware. Under questioning as to why the fee scale seemed to encourage employees to give securities higher ratings, Mr McDaniel said the analysts were not aware of the fee structure.
1:01pm: Responding again to a question about the difference between Berkshire Hathaway and AIG, Mr Buffett says that, if everything goes wrong, they’d be able to pay. AIG wasn’t.
12:59pm: “Hi Mom!” Byron Georgiou begins his question period. His first question is directed to Mr Buffett, because, he says, his mom, who is watching, would be upset if he didn’t acknowledge Mr Buffett’s seniority. “Hi Mom!” replies Mr Buffett.
12:55pm: Mr Buffett (alias AIG). Mr Buffett is asked if he’s doing the same thing as AIG when he deals in CDS. No, Mr Buffett replies. “We sell auto insurance and AIG sold auto insurance, but we weren’t doing the same thing.”
12:52pm: The role of Fannie and Freddie. “They were mandated by Congress [to live up to housing affordability goals] and they also served Wall Street,” said Mr Buffett, adding that it wasn’t an easy position to be in.
12:49pm: It’s special. “We’ve had housing price bubbles before…and other asset bubbles, but this one is special,” said Mr Wallison. What made it special and how did Mr Buffett manage to miss it? Mr Buffett is not giving a clear answer. “It was the granddaddy of all bubbles,” he said and then goes on to describe general bubble psychology. “I blew it,” he said. When homebuilders started asking him to buy them out, he said, “I should have figured out what I didn’t figure out.”
12:48pm: Blaming housing prices (part 2). Asked what caused the crisis, Mr McDaniel responds, the deterioration of the housing prices and the tightening of credit.
12:46pm: Keep the lines of communication open. The communication between a security’s issuer and its rater is important, Mr McDaniel says.
12:45pm: Peter Wallison begins his questioning. Did Mr McDaniel learn anything from the first panel (which contained internal critics of Moody’s) that he hadn’t known before? Mr McDaniel replies that they had hired lawyers and the claims were found not to be credible.
12:42pm: Don’t we regulate narcotics? “You don’t want your police trading in crack. You want them to step back,” said Mr Angelides, asking whether credit ratings agencies and regulators should have prevented the crash. Mr Buffett replies that it’s hard to do.
12:41pm: The wit of Mr Buffett: “Rising prices were a narcotic.”
12:33pm: The music may have been going, but Mr McDaniel says they sat some of the dances out. “We did not rate hundreds, possibly thousands of mortgage backed securities, particularly the junior tranches. We’ve sat out entire sectors where we have a market concern. The ratings quality is paramount.” They didn’t always get it right, Mr McDaniel said, but when they were more conservative than issuers would have liked, they wouldn’t rate the security.
12:29pm: I can’t see the chart properly, but it apparently shows an internal document from October 2006 showed that a crash in housing prices was likely in many markets. Mr Graham asks how the information was incorporated in Moody’s ratings. Mr McDaniel says he doesn’t know how it was incorporated. He’s asked to find out and he says he will.
12:28pm: “Stop the clock!” A chart is put in place as Robert Graham begins his questioning.
12:26pm: “I have no right to ask you this, but…you really need to speak out more than you have about fundamentals,” Mr Thomas instructs Mr Buffett. “There aren’t really many people that command” the same respect. Mr Buffett says he agrees that he should speak more about what’s going on in Congress.
12:24pm: What’s Congress missing? Asked what Congress should be looking at that it isn’t, Mr Buffett says there needs to be a huge (financial) downside for the leadership of companies that need government help.
12:23pm: Mr Buffett agrees to answer written questions provided to him by the commission.
12:20pm: “If its and buts were candy and nuts, we’d all have a Merry Christmas,” said Mr Thomas. He’s serving on the commission, he says, because the commission’s job is to explain the crisis, not to figure out what to do going forward, which, he says, makes it a pure public service activity.
12:18pm: “Thanks for coming, despite the restraining order,” said Bill Thomas, commission vice chairman. “Thanks for the restraining order,” Mr Buffett replies. Mr Thomas urges him to hang it on his wall.
12:14pm: Due diligence. Asked if Moody’s should have done proper due diligence – tried to find out about liar loans, for instance – Mr McDaniel said the group relied on the information provided. “We thought we were getting it right at the time.”
12:13pm: Dunce cap. Mr Angelides on the massive failure of MBS ratings, the 90 per cent of which were downgraded. “Even the dumbest kid in the class gets 10 per cent right on an exam.”
12:11pm: More transparency. Mr McDaniel says ratings agencies need to manage any conflicts of interest and be transparent. Mr Angelides says that, of course, that’s the goal, but can conflicts be internally managed?
12:09pm: No change part 2. Asked if there should be a different model for ratings agencies (now they’re paid by the issuer) Mr Buffett responds: “I’m not arguing that this is the perfect model, I’m just saying I don’t see an alternative.”
12:06pm: No change. Mr Buffett says that no change in Moody’s management or board is necessary, because everyone would have made the same call.
12:04pm: Shareholder activism? Mr Angelides asks Mr Buffett what role shareholders should have played in Moody’s decisions. Mr Buffett replies that had he believed the housing market was going to crash, he would have sold his stock.
12:03pm: “The Cassandras were there. But who was going to listen to them?” said Mr Buffett, who says he regrets calling it a “bubblette”. “It was a four star bubble.”
12:00pm: The nature of bubbles. “That’s the nature of bubbles, they cause a sort of mass delusion,” said Mr Buffett. No one saw it. Mr Angelides corrects him: Nouriel Roubini, Robert Shiller and (my former boss) Dean Baker, saw it. “There were many red and yellow flashing lights” indicating there was a bubble, he said. Now he’s reading a poem making that point.
11:57am: Do you deserve your job? Mr Angelides asks Mr McDaniel, “don’t we need to have a system where success and failure are accounted for in a capitalist system?” “It’s a fair question,” he responds. If the board wants him to go, he’ll go.
11:56am: Blame housing prices. Mr McDaniel says he’s deeply disappointed with the performance of ratings associated with the housing sector. He says “the regret is significant and deep.” But, of course, the securities failed because housing prices fell.
11:53am: Pointing the finger. Phil Angelides, the commission chairman, says there has been a lot of finger pointing, but no one is taking responsibility for the financial crisis. He lists the problems with Moody’s ratings in subprime securities, of which there is no dearth. His question, directed at Mr McDaniel: who should be held accountable?
11:52am: Very short opening statement. Mr Angelides says he’ll ask the first question.
11:50am: It’s seen as inevitable now, but…Mr McDaniel says Moody’s did not predict the speed with housing prices would fall, nor the financial problems that it sparked. At the time, he said, there were different views about the state of the housing market, and the collapse didn’t appear to be inevitable.
11:48am: Mr Buffett, who had no written testimony, says he will not make an opening statement either.
11:48am: Warren Buffett and Raymond McDaniel are sworn in.
11:45am: Photographers snap photos of Warren Buffett as he enters (okay, not exactly earth shattering, but the webcast volume hasn’t been turned on yet.)
