Pay no attention to Moody’s Berkshire downgrade

By Felix Salmon
April 9, 2009

Let’s say that Berkshire Hathaway carried a double-A credit rating from both S&P and Fitch, but retained its triple-A from Moody’s. Would anybody pay attention to the Moody’s rating? Of course not: Berkshire owns more than 20% of Moody’s, it’s a huge and loyal shareholder, and any Moody’s rating of Berkshire is fraught with conflict.

So my gut feeling is that faced with any ratings action by Moody’s on Berkshire, the best thing to do is to ignore it, even the downgrade is eminently sensible, and even both inevitable and a good thing.

One of the biggest weaknesses in financial markets is the way in which investors happily downplay the biggest of conflicts, so long as those conflicts are disclosed. If a bank is a huge lender to a company, then that bank’s research on the company in question should not be taken particularly seriously. And what applies to debt investments applies tenfold for major equity investments. Ignoring the elephant in the room only becomes more egregious when the presence of the elephant is disclosed in some pro-forma footnote.


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The Moody’s tactic of being last into the playground also pays dividends.

For example, S&P and Fitch must now feel pretty stupid about handing out Peru an investment grade rating, while Moody’s sit pretty below the line and say “aaaah, boys, you shudda waited a while”.

Posted by otto | Report as abusive

Just imagine a securities world free of credit rating agencies. What a better world it would be.

Posted by Duncan | Report as abusive

I seriously doubt the quality of these agencies as to what were they doing giving good credit ratings to companies having big exposures to sub-prime markets … it all seems so wrong.

Duncan, all you would have is an even more opaque securities market: the job of the rating agencies is to ptovide independent, third-party opinions on credit. Sometimes they do it well, sometimes as in the sub-prime mortgage and derivative debt example not so well but with them gone you would lose the one remaining way of overcoming informational assymetries. The challenge is not to eliminate rating agencies but to reduce their error rate.

Felix is only half-right. We should not downplay conflicts, true, but we also should not presume that someone who has a conflict in theory necessarily has one in practice. In this example, for instance, is there any evidence whatsoever that Moody’s analysts were influenced by Berkshire? Do we have the minutes of their committees to back up that claim?

“One of the biggest weaknesses in financial markets is the way in which investors happily downplay the biggest of conflicts” — considering that you’re being paid money to churn out opinions that we can all get for free at any bar or bus stop, you are surely under at least some obligation to adduce evidence to support such claims as this?

Posted by Ian Kemmish | Report as abusive