Warren Buffett is dumb

Buffett's holding company Berkshire Hathaway is the largest shareholder in Moody's Investors Service, one of the ratings agencies. He and the head of Moody's testified at a hearing of the Financial Crisis Inquiry Commission.

He did say that Mr. McDaniel and Moody's were no better or worse at predicting the financial fiasco than virtually every other player on Wall Street.

"The entire American public was caught up in the belief that housing prices could not fall dramatically," Mr. Buffett said. Moody’s "made the wrong call," he said, but he counseled humility because "I was wrong on it, too." Before the catastrophe started, he called the housing bubble a "bubble-ette," he said, a term he now regrets: "It was a four-star bubble."
...
Perhaps not surprisingly, the former employees tended to be more critical than those still on the Moody's payroll. Mark Froeba, a onetime senior vice president, told the panel that the culture of Moody's was transformed after the company was spun off from Dun & Bradstreet in 2000.

Quickly, the quasi-academic atmosphere of Moody's vanished, he said. Analysts suddenly felt their first priority was to help the company maintain market share, not get the ratings right.

"Cooperative analysts got good reviews, promotions, higher pay, bigger bonuses, better grants of stock options and restricted stock," Mr. Froeba said in a prepared statement. Uncooperative analysts, he added, were often fired. 

...
The commission’s questioning of Mr. Buffett was not particularly harsh, though panel members were scornful, at times, of Moody's. Mr. Angelides said in his opening statement that 89 percent of the securities given a top triple-A rating by Moody's were later downgraded.

"The miss was huge," he said. "Ninety percent downgrade. Even the dumbest kid gets 10 percent on the exam."

Mr. McDaniel fell back on a defense that has been heard often from top executives at rating agencies: the drop in housing prices was without precedent and therefore all but impossible to predict.

"We believed our ratings were our best opinion at the time we assigned them," he said. "I'm deeply disappointed with the performance of ratings associated with the housing sector"

Mr. Buffett sounded his most sober note when asked by a panel member, Brooksley Born, the former chairwoman of the Commodity Futures Trading Commission, if the derivative market was "still a time bomb ticking away."

"I would say so," he said.