Buffett and the Ratings Agency Political Dragnet (BRK-A, MCO)

Warren Buffett may not be immune to the world of political inquiries and those looking for more “What really happened?” answers out there.  CNBC and others reported last night that the head of Berkshire Hathaway Inc. (NYSE: BRK-A) has been subpoenaed to testify next week in front of the Financial Crisis Inquiry Commission at a hearing on the role that the credit ratings agencies played in the financial crisis.  Our take is not on the report, but on the implications this could have for Buffett.  As the largest shareholder in Moody’s Corp. (NYSE: MCO) and as having defended ratings agencies despite their obvious flaws, this may bring more light upon what really happens in the sausage making process back at the sausage processing plant.

Buffett is more of an insurer of debt issuance rather than a rater of debt issuance, despite the Moody’s stake.  Buffett had reportedly turned down several ‘invitations’ to speak and this one is no longer an invite.  This seems to be a hunt for ‘insight’ rather than a hunt for blood.  The problem here is that if this goes on, then the politicos are drafting experts for compulsory service for free.

The big deal about bringing in outsiders and/or industry insiders by subpoena is that it can set an awful precedent.  What prevents other politicians or officials from now issuing a subpoena for Warren Buffett’s opinion (or even loose industry involvement in) when they are “trying to get to the bottom of something” in the new normal?   Could you imagine if this commission started summoning Jamie Dimon to opine on troubled competing financial institutions about their health and/or remedies of how to fix them?  What if they brought in Lloyd Blankfein each time some firm takes a huge trading loss about trading versus risk management?  Neither case is likely.  Still, it is the precedent which can be set.

Where this can become even more interesting is that you also never know where the politicos will go with whatever it is that they are looking for.  To avoid any pointed direction, Buffett may even want to note that those same ratings agencies downgraded Berkshire Hathaway.  His large stake of Moody’s did not exactly keep Moody’s from taking away that Triple-A status of Berkshire Hathaway.

While Berkshire Hathaway has lightened up on his stake in Moody’s, he did try to get more into the insuring side of the debt issuance game when the spreads were incredibly wide when no one else could underwrite new business.

Our take: It will probably only be more and more obvious that Buffett should have dumped that Moody’s stake long ago when it was clear that the ‘pay for ratings’ model was about to come under fire after the ratings agencies mis-rated all those mortgage derivatives.

This will be at least one wasted day where Mr. Buffett won’t be able to do any work for shareholders.  At least unless he can state clearly and simply how those on the committee might not even understand the questions they want to ask.

JON C. OGG