BLOGNAME: LOUDER THAN WORDS

An informal, stream-of-consciousness reflection on business ideas, events and issues in modern business, modern life and with some specifics to the web-software industry by Paul Tomori, Internet Entrepreneur

Thank You For Coming Here Today Mr. Buffett Notwithstanding the Subpoena By Paul Tomori Thursday, June 03, 2010 at 10:17:03 (EDT) Yesterday, Mr. Buffett appeared before the FCIC, a commission set up by the government to try to figure out what caused the financial meltdown. I watched with rapt attention. As a 79-year-old man, actuarial studies would suggest he has only a few thousand days left in his life. And despite that, some people think that Buffett owes it to society to respond to such commissions. I wholeheartedly disagree. Like anyone else, Mr. Buffett should be the owner of his time. I don't care if he wanted to stay home yesterday to watch Star Trek reruns. His time is his time and people should respect that. The day before yesterday, I wrote that I thought their heavy-handed tactic of forcing Buffett to appear was an offense on his civil liberties. I also suggested that the event would be farcical. Often I am wrong about things, but with what transpired yesterday, I was handsomely validated. Case in point: Repeatedly, the commission members literally "thanked" Mr. Buffett for appearing, then qualified their gratitude by stating (verbatim) "notwithstanding the subpoena" (i.e. that FORCED you to be here). It was utterly strange to hear them say that. What a joke. To their thanks, Mr. Buffett merely nodded with a slightly bewildered look as if to say "ok, I am here, let's get on with this, I have a job to get back to". They even had the gall to invite Mr. Buffett to make an opening statement. He politely declined and I laughed out loud when he shook his head (all the other attendees made long, rambling opening statements - he was alone in his silence). It seems that the commission (and everyone else in the world) was wondering how the security ratings agencies (a duopoly of Standard & Poors and Moodys) got everything so wrong. Why did they rate toxic mortgage-backed securities as investment-grade (A) ratings, when most of them should have been assessed as B or C grade. (Most should have been classified as junk bonds)? Mr. Buffett's response: "they just got it wrong... and so did the banks... and so did the American people... and so did I". Hmmm... hindsight is 20-20 people! It's always easy to look back and state with arrogance and self-righteousness that things should have been different. It's all part of the big blame-game going on in Washington now. They need a sacrificial lamb to appease the angry masses. By bringing Mr. Buffett to the hearings, there is a subtle implication that HE somehow is accountable. Of course, that is ludicrous. And it's probably one of the reasons he resisted going (until he was forced). What's ironic is that if the ratings agencies actually had downgraded the questionable securities BEFORE the collapse, that act alone might have precipitated the exact same (or worse) collapse. You see, many institutional investors are internally mandated to only hold "investment-grade" bonds and notes. So, if suddenly, their holdings were pronounced to be non-investment-grade, there would have been a pretty big sell-off. In fact, such a sell-off might have triggered "a run on the bank" as the expression goes. When you're dealing with a house of cards, which is what the mortgage-backed securities business is seen to be in retrospect, what difference does it make if the cards are brought down by a loose footing or a sudden gust of sanity? The real problem is that no one at the time was willing to call the investments what they were: a house of cards. When asked why Mr. Buffett owns such a large chunk of Moodys (he's the biggest shareholder), he simply stated that it was a sound investment (after all investing is what he does). He was careful to clarify that he doesn't necessarily believe the services are of great value, but for him that doesn't matter. Many of his companies are REQUIRED to be rated, and there are only 2 respected ratings agencies, so as he puts it, he has "no bargaining power". Moodys can charge whatever they want for their services pretty much... and business owners HAVE to pay. Mr. Buffett likes that kind of a business... as an owner. No wonder he bought shares. Being a large shareholder is a good way to offset the expense of having to hire Moodys in the first place. In other words, he has to pay Moodys a LOT of money for ongoing ratings for his companies, so by owning a big chunk of the company, he is essentially taking money out of one of his pockets and putting it in another. No wonder they call him the Oracle of Omaha. His insights are profound in their simplicity. When asked if he uses the Moodys ratings system himself when he is assessing a prospective share purchase for his own portfolio, he said (paraphrasing) "no, we do our own assessments of securities before we buy them." What a concept! Do your own due diligence? Imagine if we all did that. Anyway, kudos to him for remaining calm and congenial. He is a master PR puppeteer and did both pre and post interviews so that he could get some control of the message of the day. You know, he could have sent a bunch of lawyers against the commission to assert his rights not to have to attend, but instead, he did a cost-benefit analysis and figured it best to go and get it over with... You could see he just seemed to resign himself to remain pretty tight-lipped and then get back to what he really wants to do... run his business. Return To Blog Index