Warren Buffett Shows (Again) That He Plays Both Sides of the Street

(MoneyWatch)  Warren Buffett toed the line yesterday between revealing he knew too much about credit rating agency Moody's (MCO) and admitting he knew too little.

"I've never been to Moody's," he said at a hearing of the Financial Crisis Inquiry Commission, which is investigating the causes of the global crisis that led to the government bailout of big banks. "I don't even know where they're located. I just know that their business model is extraordinary."

It's a bind, alright. If Buffett suggests he had any inkling that Moody's -- whose largest shareholder is his Berkshire Hathaway (BRK) -- conspired with Wall Street to rig ratings on mortgage securities, he implicates himself in the biggest scam since, well, the credit rating agencies blowing a kiss to the shell-game formerly known as Enron. But acknowledging that he was clueless about Moody's would pierce his armor-plated rep as perhaps the shrewdest investor on the planet, a label worth billions in Berkshire's market value.

So which is it? To answer that it's helpful to examine the "extraordinary" business model Buffett cites from the perspective of former top Moody's exec Mark Froeba, who also addressed the Financial Crisis panel. He described in detail how the ratings firm changed first its corporate culture, then its business, in ways that proved disastrous:

When I joined Moody's in late 1997, an analyst's worst fear was that he would contribute to the assignment of a rating that was wrong, damage Moody's reputation for getting the answer right and lose his job as a result.

When I left Moody's [in 2007], an analyst's worst fear was that he would do something that would allow him to be singled out for jeopardizing Moody's market share, for impairing Moody's revenue or for damaging Moody's relationships with its clients and lose his job as a result.

Interestingly, Froeba says this transformation started in 2000, which is the same year Berkshire took a $500 million stake in Moody's. That suggests Buffett should've known something was afoot at the company during the period Froeba describes.

And indeed, Moody's executives say they contacted Buffett after the subprime bubble burst in 2007 to express concerns about the agency's ratings, although he denies it. Keep in mind that the rot eating away at Moody's wasn't invisible to the naked eye, let alone to the company's biggest shareholder. Then-president Brian Clarkson was reportedly squeezing -- or firing -- analysts to produce high ratings in order to keep ratings customers happy.

Given Buffett's peerless record as an investor, it defies credulity to imagine that he didn't have at least a sense that Moody's was entering dangerous, and unethical, terrain. As Buffett has long exhorted, it's an investor's job to know these things. That's what he said recently in defending Goldman Sachs (GS) in the Abacus affair, suggesting that investors who got burned by the CDO should've done their homework.

Notes Edmund Andrews regarding Buffett's evasions yesterday:

Having basked for years in public adulation for his his investment brilliance, Buffett suddenly acted as if he hadn't the slightest idea about the goings on at Moody's even though Berkshire Hathaway had been one of its biggest shareholders.

You can't have it both ways. Buffett blasts derivatives as "weapons of mass destruction," yet Berkshire uses them enthusiastically to boost profits. He calls for Wall Street reform, yet invests in companies like Moody's and, years ago, Salomon Brothers that exploit the system he purports to disdain. He poses as an innocent bystander, but acts as the consummate insider.

This is perfectly in character for Buffett. Perhaps more than anyone, he embodies the conflicts of interest that snake not only through Wall Street, but across the entire financial system. The least, and the most, he can do is admit it.

Image from Wikimedia Commons Related:

• The Alchemist: Can Warren Buffett Transform Goldman?
• Financial Reform: Why Do the Credit Rating Agencies Still Live?
• Bad Credit: How S&P, Moody's and Fitch Helped Cause the Housing Bubble
• Congress Too Soft on Credit Rating Agencies