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Berkshire Weekend: Buffett, Munger on Credit Ratings

|Includes: Berkshire Hathaway, Inc. Cl A (BRK.A), BRK.B

Liz Claman of Fox Business Channel quotes or paraphrases the Berkshire chairman and vice chairman:

Question: Given the role of ratings agencies in the economic crisis - why do you retain such a large holding in Moody’s? And why didn’t you use your stake to do something to prevent conflicts of interest and these flawed models?

Buffett: Five years ago - virtually everybody in the country had this model in their mind - formal or otherwise that house prices couldn’t fall. They were wrong. Bankers were wrong. Borrowers were wrong. Lenders were wrong. People who lent money said it didn’t matter if borrowers lied on applications. There was almost a total belief throughout the country that house prices certainly wouldn’t fall significantly and would probably keep rising. And the ratings agencies built that into their system. I don’t think it was the payment system that created the problem. I just think they didn’t understand what could happen in a bubble where people leveraged up enormously. They made a major mistake analyzing instruments - but a great many people made that mistake. If they took a different view of residential mortgages -t hey would have been answering to Congressional committees who’d be asking - why are you being so unamerican? Congress presided over 2 largest mortgage companies -and they’re in conservatorship [Fannie Mae & Freddie Mac].

I don’t think I’ve ever made a call to Moody’s. We don’t tell Burlington Northern what safety procedures to put in or AmEx who they should lend to. When we own stock - we are not there to try and change people. If you buy stock in a company - better not count on fact that you’ll change their course of action.

In terms of selling the stock - the ratings agency business is still good -but subject to attack. It’s a biz with very few people in it - it affects large segment of the economy. I think there will be ratings agencies in the future and doesn’t require capital. ..It has fundamentals of a pretty good business.

Charlie and I don’t pay attention to ratings.  We don’t think Moody’s or S&P should be telling us the rating of a company.

Munger: I think the ratings agencies eagerly sought stupid assumptions that enabled them to do clever mathematics. It’s an example of being too smart for your own good.

Buffett: I think it was stupidity and the fact that everyone else was doing it. The one reason you can’t give at Berkshire is because “everybody else is doing it.” But it happens in security markets all the time. It’s difficult to tell a big organization you shouldn’t do something that big competitors are doing and making money.