Pay no attention to Moody’s Berkshire downgrade

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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