Did the Oracle just blink?

September 4, 2009

It may have only been about two percent of his holdings in the rating agency, but Warren Buffett’s decision to pare back his stake of Moody’s smacks of capitulation after a Manhattan judge ruled that just because they write opinions does not necessarily afford the much-maligned credit grading industry first-amendment protection.

Buffett‘s Berkshire Hathaway said in a filing it had sold 794,388 Moody’s shares on Sept. 1 and Sept. 2, chiseling its holding down to 39,219,312 shares. This isn’t the first time the Oracle of Omaha has seen fit to shave his share of the rating agency. Many will say these incremental measures are not a signal of a loss of faith in the business. But one could argue that the small sales serve less of a financial purpose than they signal slipping confidence. Even Buffett has said Moody’s damaged its brand by providing inaccurate ratings of SIVs, CDOs, CDSs and ETCs — the acronyms of mass financial destruction in the markets’ meltdown.

U.S. District Judge Shira Scheindlin in Manhattan said ratings on notes sold privately to a “select” group of investors were not “matters of public concern” deserving of traditionally broad protection under the First Amendment of the U.S. Constitution. Shares of both Moody’s and McGraw-Hill, which owns Standard and Poor’s, slid in response.

Buffett may yet sense a brighter day on the horizon once the lawsuits are settled. Bond market investors can’t really do without rating agencies, so any improvements to their ability to spot and give appropriately poor grades to cruddy paper could spark a quick turnaround in rating agencies’ fortunes.

3 comments so far | RSS Comments RSS

Good news, honest ratings would be a wonderful.

Posted by Mike Middleton | Report as abusive

There is little doubt that ratings agencies failed to provide investors with the level of independent oversight required. One only has to look back at the expansion and contraction of markets since the great depression to realize that valuation must be taken with a pinch of salt. Yet the problem is not easy to fix as markets deal in minutes, newspapers deal in daily news and politicians deal within fiscal years and electoral cycle. Who is thinking about long term values? Who would pay for it if they did? How would the decline of empires be costed into such a framework? Surely Buffet’s dumping of less than 2 per cent of his holdings was intended as a professional slight rather than a risk management strategy, We all need change, we all need more sustainable values and we all need ratings agencies that are not in bed with those making deals in the financial industry. Perhaps highly regulated not-for-profit agencies would fill the current void in independent valuation?


Perhaps Warren Buffett simply realized the conflict of interest for a rating organization to have its shares listed in the Stock Exchange…


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