Too Big To Fault

An article by The Wall Street Journal last week reported the exchange between members of the Congressional Financial Crisis Inquiry Commission and star witness Warren Buffett ("Buffett Defends Moody's Managers").  The topic was the credit rating agencies.  Buffett defended the entities as having been hoodwinked by a tremendous real estate bubble.  The stock market guru was quoted as saying "I think they made a mistake that virtually everybody in the country made."  On the conflicts raised by the issuer pays model (whereby the agencies profit from repeat use by vendors), Buffett said, "It's very difficult to think of an alternative where the user pays.  I'm not going to pay."

How tragic that even in the wake of calamity we are forced to listen to such conflicted defenses and hollow threats.  The article stated that Berkshire Hathaway had a "stake" in Moody's" in the recent past and inferred that Buffett still owns Moody's shares (which are currently sensitive to news about proposed credit rating agency regulation).  While no one doubts Buffett's expertise, experience and insights, at this point can he play any other role but apologist?

The real lesson from the testimony may thus lie in Congress' unseemly need to rely on the chief market players for judgment.  A Commission co-chairman pushed Buffett to issue stronger comments ("This may be your real legacy"), cuing a potential condemnation that might lead to meaningful reform.  But harsher words were not to be uttered by the famed CEO.  And the Commission, with only 6 months left until its report is due, does not appear ready yet to condemn on its own.

For the investing public, it's hard to avoid concluding that Gramm-Leach-Bliley and deregulation created structures that could not be controlled; for Congress, the ugly, inevitable truth may be that it is equally impossible for it to independently assess those same leviathan organisms, despite their undisputed failures.

---JSC, 6/7/10