NEW YORK (
) -- Don't look for enlightenment on the rating agencies when
Chairman and CEO
faces the Financial Crisis Inquiry Commission Wednesday as part of its inquiry into the role the credit ratings agencies played in the financial crisis.
unit Standard & Poor's have taken their share of lumps since the market nearly imploded in 2008. The triple-A ratings they gave to pools of junky mortgage securities went a long way toward inflating the housing bubble at the center of the crisis.
The ratings agencies were the lapdogs of banks like
. Those banks helped put together the mortgage securities whose issuers paid fees to the ratings agencies for every bond they rated. Assigning a lower rating to a bond meant potentially giving up future revenues as underwriters steered business to the agencies most likely to give them the highest rating.
Ratings agency analysts, many of whom aspired to boost their compensation by going to work at the banks whose crappy securities they were rating, gave banks all kinds of opportunities to test their securities with the agencies before being assigned an official rating. Institutional investors, including fiduciaries of nonprofits, insurance companies and governments, as well as regulators, regularly relied on the credit ratings, though they should have known better.
The whole system, in other words, was rotten, and shareholders of Moody's and Standard & Poor's benefited for years as the securitization machine kept cranking out more and more bonds that needed to be rated. The fact that Buffett, who so many see as a great exception to the foolishness that gripped financial practitioners during the last decade, was Moody's biggest shareholder was noted, but widely ignored by the press, elected officials and anyone else with a bully pulpit.
Even as it became clear that ratings agencies might actually be held accountable for their actions, as they weren't in so many past cases, and Buffett started unloading his shares in Moody's, he was never held to account.
Now the Financial Crisis Inquiry Commission looks to be forcing Buffett to explain himself. After he turned down two requests to appear before the Commission, it forced him to do so by issuing a subpoena, Berkshire shareholder, Buffett buddy and
writer Carol Loomis reported last week.
Loomis noted in her report that three members of the Commission held a private interview with Buffett the day after their May 25 subpoena, and two brought books for him to autograph. So much for holding Buffett to account.
Everybody loves Buffett. He may have done a better job of escaping criticism over the part he played in the financial crisis than anyone, which is one reason my colleague Lauren LaCapra got such a big response to her provocative story "
Warren Buffett is a Hypocrite
Lauren focused her criticism on derivatives, which Buffett famously called "financial weapons of mass destruction," despite the fact that Berkshire has a $63 billion derivatives book, according to Barclays Capital, and wants to be exempted from new proposed capital rules on derivatives.
But the same hypocrisy applies to Buffett's Moody's investment. He benefited from the institutionalized nonsense that allowed Moody's to be part of a duopoly for years, and now is trying to slip out the back door without having to explain himself.
Some consolation comes from the fact that Moody's shares have lost half their value in the past five years. Still, it looks like Moody's will have an opportunity to reinvent itself, and while it seems unlikely the shares will return to their pre-crisis highs, they will likely prove buoyant enough to allow Buffett to make his escape.
Written by Dan Freed in New York
More on Warren Buffett:
live blog of Buffett's appearance later today: