Buffett's Turn to Face Some Heat

In a recent post ("More Obama Supporters Concerned by the President's Recent Actions") we noted that Warren Buffett and Jim Cramer had made essentially the same criticism of Obama's recent handling of the economy: in an economic emergency, the president's primary focus ought to be dealing with that emergency, not trying to enact other policy priorities. Last week, Jim Cramer and his network, CNBC, became the targets of liberal comedian Jon Stewart. Stewart's criticisms of Cramer, some of which had merit, related mainly to Cramer's actions last year and earlier (e.g., Cramer's comments regarding Bear Stearns prior to that firm's collapse). Why bring that up now? As I speculated elsewhere recently (for example, in a comment on Dr. Mark Perry's Carpe Diem blog), Cramer seemed to be targeted because of his recent criticisms of President Obama -- particularly since he made an easier target than some other Obama supporters who recently criticized the President, e.g., Warren Buffett.

Yesterday, apparently, was Buffett's turn. An article in the business section of Wednesday's New York Times ("Buffett Is Unusually Silent on Rating Agencies") criticized Buffett for not using his influence (since he owns 20% of the company via Berkshire Hathaway) to get Moody's to clean up the way it assigns credit ratings. Now, this is a legitimate criticism of Buffett; in fact, it's one I've made myself¹. But the timing of it seems a little odd, if you don't take into account Buffett's recent criticism of Obama. After all, Berkshire Hathaway has been a major holder of Moody's for years, and the role Moody's and the rest of the ratings oligopoly played in the credit crisis has been common knowledge since at least 2007. Can it be a coincidence that Buffett is getting criticized for this now, a week after he expressed concerns about Obama's handling of the economy on CNBC?

The illustration of Buffett above was credited to Minh Uong, and accompanied the New York Times article.

¹For example, on June 12th last year, on GuruFocus I wrote,

Before we begin the ritualistic praise of Buffett here, let's remember that a company in which he was the largest shareholder through BRK, Moody's, facilitated these excesses by slapping triple-A ratings on so many of those CDOs. When you own ~19% of a company, you have a lot of access to what's going on there, if you want it. It's too bad that Buffett didn't exercise more oversight of Moody's during the credit boom.

The Credit Crisis a Year Later

Articles with similar titles are sprouting up in the financial media now, so I thought it would be worth posting a link to John Mauldin's excellent essay on this from last August, "The Panic of 2007". Mauldin's essay includes helpful charts such as the one above and offers a lucid explanation of CDOs comprised of mortgage backed securities.

One suggestion Mauldin had back then for ameliorating the crisis was for Warren Buffett to take over Moody's, which he owns about 20% of through Berkshire Hathaway (as he took over Salomon Brothers years ago), to restore faith in the rating agencies. Of course, that didn't come to pass (instead, Buffett later created a muni bond insurer, Berkshire Hathaway Assurance, to profit from the crisis in which Moody's and the other rating agencies played a supporting role) but I wonder if it would have helped anyway. At Salomon Brothers, the problems were regulatory violations (of Treasury auction rules) that Buffett wasn't aware of (and of course wouldn't have condoned) at the time they were committed; at Moody's the problem was the way it did business, awarding triple-A credit ratings to so many questionable mortgage backed CDOs. As an insider, one would think that Buffett would have been aware of this practice at the time, so he might not have had the same credibility coming in to clean the stables at Moody's that he had coming into Salomon.