Buffett's Soggy Logic on Guarantors' Ratings 9 comments
Tom Brown
About this author:
-
Font Size:
-
Print
- TweetThis
I believe I admire Warren Buffett more than most value mavens do, and believe he's the greatest investor of my lifetime. But his comments in the Wall Street Journal yesterday ($) to the effect that the financial guarantors (his competitors, by the way) can’t possibly be true AAAs, since their stocks have fallen so much, are both inconsistent with his core beliefs and a little self-serving. Here's why:
Point 1: An insurer’s credit rating should be based on the ratings agency’s judgment of its ability to pay claims. Period. The insurer’s stock price, which can be—and has been, often—bumped around by the whims and passions of the market, has nothing to do with it.
Point 2: Buffett’s entire career is based on the fact that supposedly rational, efficient markets aren’t always so rational, and that things can get terrifically out of whack from time to time. Just this past weekend, Charlie Munger crowed to the crowd about the money Berkshire has lately made from the recent zaniness in the auction preferred market. The market for the guarantors’ stocks is somehow immune?
Point 3: If Buffett really believes the market’s judgment on these things always trumps the agencies’, why in the world does Berkshire own 20% of Moody’s (MCO)?
Point 4: I have no quarrel with the principle of talking one’s book, but from Buffett, who isn’t shy about making himself out as a sort of moral paragon of`corporate America, trash-talking the competition is unseemly.
C'mon, Warren, say it ain't so!
Tom Brown is head of BankStocks.com.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 9 comments:
I don't find anything wrong with that but the investing public should realize he's a mere mortal driven by profit motives.
Deification is inappropriate.
Poin1) The rating should be based on the guarantor's ability to pay claims, not necessarily the rating agencies "judgment"; the judgment has been wrong, and the ratings trends provide some reason to believe that is definitively the case here. His comments recently have focused on the rate of interest an guarantor has to pay to raise money, suggesting that 14% may hint at substantially reduced "intrinsic" value. By definition, the substantially higher cost of debt and equity capital reduces future ROE materially, especially with so little new business being written. The margin of safety, which many believed existed (i.e underwriting to zero loss ratios) proved fallacious, hence the need to revisit initial assumptions even in the event he believed they were AAA's before (which he didn't)
2) Valuations can get out of whack. But its not just that. Confidence in a company's solvency (margin of safety) are integral to its buinsse model, and its claims paying ability is certainly now hampered by the substantial reserve additions, increased cost of capital, and reduced profitability.
3) Guarantors are a small fraction of the rating agencies revenues. The intrinsic value of MCO has probably diminished, but perhaps not sufficient to merit his disinvestment.
4) Its not really trash talking, its taking advantage of a market opportunity.
For the record, many insurance companies (including AIG under Greenberg) refused to write the insurance business for securitized products, precisely because of the lack of relevant historical loss data, inaction that now seems quite prescient.
Can anyone think of a stock that has declined by 95% in one year and maintained its AAA rating?