Buffett's Soggy Logic on Guarantors' Ratings

Includes: MCO, SPGI
by: Tom Brown

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 (NYSE: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.