StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Warren Buffett's Shameful Performance

02 Jun 2010
Posted by Edmund L. Andrews

Oh my God.  I never thought i would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon.  I've just finished watching the beloved Oracle of Omaha being grilled by the Financial Crisis Inquiry Commission about the catastrophic role of credit rating agencies, and it's pitiful to watch him plead ignorance on the most elemental questions about what Moody's and Standard & Poors did wrong or how they should be changed.

This is the same Warren Buffett who has been all but canonized as a saint for his adherence to long-term value investing, his folksy candor, his opposition to Wall Street gimmickry and not the least for his memorable description of financial derivatives as "weapons of mass financial destruction."

Where have you gone, Joe DiMaggio?   

To the bank, apparently.  Buffett's Berkshire Hathaway owns a hefty chunk of Moody's Investor Service -- somewhere around 13 percent -- and he only appeared today after being subpoened by the commission. 

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.

When Buffett was repeatedly asked what he would change about the structure of the ratings agencies to reduce the conflicts of interest caused when bond issuers pay the agencies for their ratings,  the great sage seemed nonplussed.   "It gets tricky,'' he said at one point.   "It's hard to come up with an alternative,'' he said later.

As it happens, the Senate included one alternative in the giant financial reform bill that passed last month: an amendment by Sen. Al Franken that would have the SEC set up a process for approving rating agencies and then handing out specific assignments to the agencies in something like a rotation system.   The agencies would suddenly have no incentive to lower their standards in pursuit of market share.      But Buffett offered no opinion on that or any other proposal.

Having basked for years in public adulation for his his investment brilliance (he picked up a big chunk of Goldman Sachs at bargain basement prices at the peak of the crisis), Buffett suddenly acted as if he hadn't the slightest idea about the goings on at Moody's even though Berkshire Hathaway had been one of its biggest shareholders.

"I'm not in a position to judge,'' he answered, when asked whether Moody's management or board had made major mistakes.  Not surprisingly, this was unsatisfying to Angelides as well as to several other commissioners, including Douglas Holtz-Eakin, a top f      ormer economic advisor to President George W. Bush and John McCain.

But when they pressed him on why Berkshire Hathaway hadn't been more alert to the mounting problems, or why he didn't have any ideas for fixing it, Buffett went blank.

"We own a lot of Procter & Gamble, but I don't know much about the inner workings of Procter & Gamble,''  he said.  Same thing with Johnson & Johnson, which is under fire from regulators for manufacturing problems with children's pain-relief medications and is under investigation for an alleged "phantom recall'' of Motrin.

Well shucks.  Who could ask for anything more?






Turned into?

"an evasive, disingenuous, bumbling buffoon."

Buffoon is incorrect--as you know, since you correctly wrong "disingenuous."

"Bumbling" is open to question; it's what happens when "folksy charm" meets possible perjury charges.

"Evasive" has always been true; note that the same canned answers are given in perpetuity, as if nothing has been done badly since the original acquisition of Berkshire Hathaway.

But disingenuous is the key: look at the actual holdings of BRK and you'll find a lot of financial intermediaries--the same firms whose uncontrolled activities have supported the stock for the past decade.

Anyone who really expected direct answers from Warren Buffett, investor to the Intermediary Industry, on the causes and effects of the financial crisis needs to re-evaluate what they believe those causes were.

Buffett and Munger RE comments from 2006

If I recall correctly, Berkshire vice-chairman Munger said at the Wesco Financial annual meeting in 2005 or 2006 that the smartest real estate investors he knew in Los Angeles were selling all but their best properties. The same year at Berkshire's annual meeting, Buffett said he had recently sold his home in Laguna Beach, and joked about the irrationally high price he got for it -- I believe he said it worked out to $30 million per acre.

That does not automatically imply they anticipated a crash -- these guys rarely forecast, and when they do, the forecasts are long-term and optimistic -- but clearly they thought coastal RE was overpriced at the time, and made no secret of it.

He didn't know about the

He didn't know about the housing bubble or that it could bust? I knew about the housing bubble just looking around at comments from purchasers of houses: buy now or be priced out forever! They aren't making anymore land! etc. And the disconnect between rents and ownership costs. I stood in a housing development north of sacramento with an upper level executive at a major regional homebuilder in August of 2006 and told him the housing bubble was peaking right this month and he said yes, it was. I could sense there were no more fools to get off the bench.

I am not an investor and did not know how to bet on the decline but I did save myself quite a bit of money by waiting with my growing family in a small rental property until this year to buy. We saved a lot of money.

What do you expect?

You don't think the guy didn't got to be a billionaire by telling the truth, do ya?


I thought he was spot-on: There was a bubble. Won't be the last one.

Don't be too tough on Warren

I think you are being a little bit tough on Warren. Some mitigating considerations...

[] Moody's is defending a torrent of lawsuits relating to all this coming from every possible direction. Buffett as an owner has both a personal interest and a fiduciary duty to defend the lawsuits. How candid do you expect him to be?

Imagine you had 20 lawsuits to defend, coming from every direction, and thus very reasonably and upon your lawyer's advice declined to make any public comment about them -- yet were subpoened to do so against your will by (possibly showboating?) politicians/regulators. How candid would you be when asked about all your mistakes contributing to the plaintiffs' losses?

Probably not very -- which would make you a "shameful, evasive, disingenuous, bumbling buffoon." ?

[] 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.

And he was exactly correct. Eric Falkenstein has nicely documented how those after-the-fact claims to have predicted a "bust" are not so -- starting with Shilling.

There's a big, big jump from "prices are high and rising too fast" to "thus there must be a dramatic bust". When making that jump, how does one disregard all the intermediate cases: prices may have shifted higher for good reasons, may plateau for a long time until relationships readjust, may drift down, some may fall sharply while others vary ... ? How does one know that only a bust is possible? Or is more likely than the other possibilities?

Shilling for one didn't. During the boom he entertained all the possibilities, and never predicted a bust.

Count up all the experts who expected the bust. The Fed? The European Central Bank? The Russian Central bank? Fannie? Freddie? Who??

Hey, there was an opportunity to make *huge* money on such a bust. If it was so easy to know the bust was coming, there ought to have been a slew of investors cleaning up from it. Who did? Warren Buffett? (oops) Soros? Bear Stearns? Name a bunch, please. (Magnetar, yes. Had you heard of it before this year? Did Dean Baker invest in it? Did Phil Angelides?)

Looks to me like Buffett was exactly correct on this one. "Most people didn't recognize it".

[] The corruption and/or incompetence of the rating agencies has been documented so extensively...

Let's remember that the rating agencies are a government-created and regulated cartel, protected from competition, and so very beholden to their regulator. (In the late 1990s there were only three authorized rating agencies. Since then about another have dozen have been added, but mostly just for specialized niche purposes.)

The agencies are selected, and their practices (including having their fees paid by securities issuers, with the obvious conflict of interest) governed by the SEC. This is the same SEC that during the same time period investigated Bernie Madoff five times, giving him a clean bill of health each time, as its investigators dropped off resumes asking about job opportunities.

"Corruption and/or incompetence", eh? How'd that happen under all this supervision?

Perhaps a more candid Buffett would have ripped into this, the quality and effects of the regulation, and of blocking of competition so as to distort the behavior leading to profit, etc? Well, probably not, since as an investor he surely likes being protected from competition -- and how would it play to rip the regulators who are your bosses and protectors in a hearing held by regulators?

an amendment by Sen. Al Franken that would have the SEC set up a process for approving rating agencies and then handing out specific assignments to the agencies in something like a rotation system...

Wow. As its reward for doing such a great job regulating the rating agencies during this entire episode -- preventing all that "corruption and incompetence" -- it gets its power over them expanded into micro-management! That Al Franken always was a funny guy.

[] Now, an interesting and non-trivial point is that riskiness of bonds such as those at issue here actually is evaluated by the market in which they are heavily traded, not by the rating agencies. It's no trick to find bonds with market interest rates far different, one way or the other, than their "rating agency" gradings imply -- with the rating agencies rushing from behind to play catch-up. (Say, recently, "Greece".)

These mortgage bonds were mass traded as AAA by extremely sophisticated players, and approved as such by regulators such as OFHEO -- these weren't mom and pop taking the rating agency's word on it before investing in a muni bond.

The most important practical effect of the rating grade from an agency in such cases is *not* to evaluate the risk of the bond for anybody, but to qualify it legally to be held in portfolios under their terms and indentures -- and very importantly, to qualify for very favorable bank capital rules.

In light of this, Falkenstein has posed an interesting question: What if Moody's had correctly rated mortgage bonds in 2006?. That's what everyone is bashing them for not doing. But suppose Moody's, with perfectly accurate foresight, in light of booming housing prices had knocked down the bonds from top rating to BB -- while the markets were still trading them en masse as AAA?

The result would have been a train wreck, with Moody's at the bottom. It would have been a crippling shot to the financial markets (masses of bank capital, shot!) -- and to the housing industry, and to all the new home buyers whom politicians and regulators so favor.

How long would it have been before the hearings started?

"How can you strike a blow at the entire economy, and the American dream of home ownership, like this?" "We think half of these bonds will default." "Why?? All the world's investors judge them as AAA!" "The world is wrong, we know better, a big crash is coming." "How do you know?? Fannie, Freddie, OFHEO, the Fed, Buffett, Soros, nobody agrees with you. Nobelist Joe Stiglitz says the risk to the GREs is 'zero'. Even Robert Shilling doesn't predict a bust!" "Well, The Economist had a cover saying it potentially could happen, maybe. And we read Dean Baker". "You knock bonds down from AAA to BB due to offhand reading? To shake the economy and destroy the housing market? Create the very ruin you warn about? Even if home prices are too high, how do you know they won't plateau or glide down slowly with no such defaults?" "Well, we don't know, obviously, how could we? But we feel we should torpedo the financial markets and housing industry today to be on the safe side, just in case." "Get your owner Warren Buffett in here to answer for this, now!..."

Absolutely right.

I agree with you Jim. Warren is protecting his investment, same as anybody would do.
To try and hang this fiasco around his neck is unbelievably short-sighted and really just plain stupid. Warren made no money on the way down because he doesn't bet that way. Anybody who understands his style of investing would know that it is plausible that he wouldn't know exactly what was going on at Moody's day to day because all he read's are the numbers, he doesn't get involved in 'running' the business. When he doesn't like the business anymore he votes with his dollars, hence, his off-loading of Moody's shares over the past months. Warren has more integrity and honesty in his baby toe than most Wall Streeters have in their entire bodies and he has demoonstrated this fact over the years many times. He should be allowed a few mistakes because his mistakes don't devastate lives like this housing crash has.

I second Jim Glass

As someone who did see the housing bubble, and did predict a big crash in housing prices long before it happened, I spent 2006-2008 looking for more knowledgeable people to either convince me I was wrong or help me figure out what to do if I was right. There were very, very few people in that time frame who predicted what was coming.

Franken's solution does not get rid of the problem of regulatory capture; the employees of the rating agencies will still have the incentive to favor the banks in hopes of future employment, for example. You may think it is easy to come up with a better approach for rating agencies, but any changes Congress makes will have unintended consequences. I favor Franken's plan, btw, but I have very little confidence that it will make things better.

Berkshire is one of the biggest shareholders of many, many companies. Expecting Buffet to understand the inner workings of each of those companies is ridiculous. His job as an investor is to find undervalued companies and buy them; he's done a pretty good job at that.

Finally, it takes amazing chutzpah for Edmund Andrews of all people to criticize someone for not having seen the housing bubble coming.


I second Matt J and by extension I third Jim Glass. Chutzpah indeed. Warren Buffett is not always right, but to call him a buffoon in this context is way out of line.

MattJ, Andrews criticizes

MattJ, Andrews criticizes Moody's and others for not recognizing that the bubble MIGHT pop. Nobody is saying that Moody's should have predicted the date of the top, the depth of the fall or any other such thing. Rather, as the issuer of insurance, Moody's JOB was to rate risk, and there were plenty of people identifying the specific risks that threaten to collapse the bubble at some future date. Indeed, that was Angelides' purpose in holding up the copy of the Economist article.

Put another way, if 99 out of 100 people didn't see the bubble coming, Moody's job was still to rate the securities as if there was a 1 in 100 chance of a collapse. It is quite clear they failed to perform that job. We have all kinds of explanations of WHY they failed to perform that job, but Buffett is simply wrong to suggest that Moody's adequately performed their job.

There's a difference between

There's a difference between expecting an event to happen and knowing how to profit from it; there's a difference between expecting an event to happen and knowing how an intricate financial system which you have no knowledge of could be affected.

I knew prices were going to drop, didn't buy, saved money buying several years later.

A friend of mine shorted homebuilder stocks and made a lot of money.

I do know people who bought in the peak bubble years and they did not consult me - how would they have known the research and thinking about it that I did? If they had asked, I would have said, "wait".

The rating agencies are

The rating agencies are almost a monopoly, Buffett shouldn't be criticized for his investment. I don't fault him for "talking his book" like others, I wouldn't expect otherwise.

The incentives at the rating agencies aren't properly aligned.

Get Real About Congressional Self-abuse

Your column is satire, right? How else can you -- with a straight face -- suggest Phil Angelides was doing anything other than preening for the TV cameras. Congressional involvement is a horrible joke. Angelides intended zero good other than trying to showcase his ability to read the attack plan. Buffet was very clear on who was responsible for the TARP expenditures--and it wasn't Moody's. His refusal to be the tool of a sap politician, as well as his steadfast refusal to engage hindsight judgment, was in character. He could have had Moody's CEO's head, but why ever would he have used a congressional committee, when he holds the board seats. He -- not you and the snivelers -- lost money on Moody's. Buffet resisted being the democrats' pawn for bad legislation. Bravo for Buffet.

Ed Andrews' Buffett column

Andrews' column is just more "piling on", which has become rather trendy with all the Buffett critics these days. A Buffett observer throughout the past 30 years, I found his testimony to be just fine yesterday. I suspect his reluctance to appear before the commissioners was based (correctly) on his expectation of the grandstanding that was sure to result. Al Franken's solution? Good golly, Al... go back to SNL where you belong as soon as the TV cameras' red lights went on. In my view, given the passing of Walter Cronkite and Norman Vincent Peale, Buffett deserves to be viewed as "the most trusted man in America."
andy zane

Jim Glass is right on the money

I fully support Jim Glass' rebuttal of this disrespectful article on Warren Buffett.

In all that I have read, no other blog poster besides me has lamented the expropriation of Buffett's valuable time against his will. I guess it is hard for most people to feel sympathy for such a wealthy guy, but I do. The most common attempted justification I have heard as to why it was perfectly valid to force Buffett to testify is because he is Moody's largest shareholder (13% down from 20% a year ago since has has sold off many shares in recent months). To me, that reasoning is very weak. He's a shareholder. That is all. He is not a director, he is not involved in the running of the business, does not know the president, doesn't even know where the head office is and doesn't even respect the work they do enough to outsource his risk assessment to them! (i.e. Warren does his OWN risk assessments) In other words, just because he is a shareholder does not make him responsible one iota for the work that Moody's does. Whether they do good work or bad work is not really accountable to him. He's a shareholder for at least one perfectly valid reason: because it is/was a sound investment of the capital under his care. It is not a crime nor is it disingenuous to own shares in a company whose products you don't use or whose products you are forced to use by government mandate, especially if you are the custodian of other people's money... people who are trusting you to turn a profit for them.

Are you serious

It is always easy to pick apart a man after the fact. I've met, eaten lunch and spent time with Warren. This man is honest and has the uptmost integrity.

If Mr. Buffett is guilty of

If Mr. Buffett is guilty of being involved in the crash by virtue of his shareholding in Moody's, then so is every American shareholder of every American financial institution, ratings agency, investment bank and Wall Street house.

I find it funny how critics of Warren Buffett somehow seem to appear en masse at just the right time, that is when on the extremely rare occasion such as this, a crack can be found in a few words uttered under forced conditions. For all the critics, I would like to see their reputations after 50 years in their business.

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