CNBC INTERVIEW TRANSCRIPT: Warren Buffett on Moody's & Credit Ratings Agencies
This is a transcript of Warren Buffett's live interview on CNBC before appearing before the Financial Crisis Inquiry Commission on Wednesday, June 2, 2010.
It is also available here for download as a PDF document.
CNBC's BECKY QUICK: We are standing by at the New School where we'll be hearing from the FCIC Commission in just a little bit. We're gonna be asking some questions. They are in progress right now, where they are talking to a lot of — of the people who are coming forth as witnesses. In the second session of witnesses, one of those will be Warren Buffett. And we are joined right now by Warren Buffett of Berkshire Hathaway. And Mr. Buffett, thank you for being with us.
WARREN BUFFETT: Pleasure.
BECKY: You are here today — not of your own free will —
BUFFETT: (LAUGH) That's right.
BECKY: — you were subpoenaed for this.
BECKY: Why did it take a subpoena to get you here?
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BUFFETT: Well, in the last 12 or 15 months, I've had eight different — either congressional committees or — commissions appointed by congressional committees — who have asked me to go to Washington, primarily to testify. And I've always offered to do anything they want by phone, and answer all their questions, and I just did it last week for Elizabeth Warren's commission, for example.
And they had a number of people on the phone, and I — I answered all their questions, and told them if they wanted more to come back. But I've got a job running Berkshire, and I — if I — if I go to one voluntarily, I'm gonna have ten others that say, "Why d — why can't you come and do it for us?"
BECKY: But having said that, you're not gonna be a hostile witness today —
BUFFETT: Oh, I'm not hostile. (LAUGH)
BECKY: You'll tell 'em what they're asking?
BUFFETT: I'll tell 'em — I'll tell 'em whatever I know. And I've already had a two hour interview — with their staff a week ago, they came out to Omaha. And — and we had a good session. They asked good questions, good follow on questions. And —
BECKY: The — the focus today is going to be on the role that the ratings agencies played in the financial downturn. What — what role do you think the fi — the — ratings agencies played?
BUFFETT: Well, I think they were wrong like everybody else. (LAUGH) They — obviously people pay attention to ratings, and they had a model in — in their — rating system, but basically — I — I — I've never seen the model, but it must have said that — that — house prices — residential house prices can't take a dive, and that they won't take a dive all over the country.
That they — to some extent, they probably thought they were not necessarily correlated with each other. And — and that was — that was a fallacious model, it was held by Freddie Mac, Fannie Mae, the U.S. Congress, the media, me, (LAUGH) investors, and— and home buyers all over. So it was— it was part of a bubble mentality, and that bubble mentality got incorporated into— into models used by not only rating agencies, but others.
BECKY: But when you have ratings agencies that go from an A or— a AA rating overnight to a D, I mean, that shows that there's a huge problem with the— the system that's been set up—
BUFFETT: There was a huge flaw in the model. That w— basically, the American public had a model that— where they didn't think house prices could— could crash. And— and a very, very, very big bubble, probably the biggest I've ever seen, popped. And when it popped— A's became D's and so on. That—
BECKY: But that makes it sound like you think it's a problem not with the rating agencies' models, but with— everyone's model that was looking at this. There— there are a lotta questions now about whether there's an inherent conflict of interest just with the ratings agencies' models themselves.
BUFFETT: No, I— I think everybody's mo— I mean, if you— if— who knew more about mortgages than Freddie Mac and Fannie Mae? I mean, they were guaranteeing 40 percent of all the mortgage in the United States. They had data on millions and millions and millions of mortgages, borrowers, mortgage brokers, everybody else.
And— in March 30th of 2007, in the report to Congress that was prepared by OFHEO who oversaw them, they said that the— that their quality was good. It— we— we participated in a huge bubble. That does— that doesn't necessarily excuse the rating agencies, but it— but it— but it—
BECKY: Yeah, does it let them off the hook?
BUFFETT: —but it— it— it— it means that they were not inca— they were incapable of thinking— at great variants with how almost everybody thought.
BECKY: But is there a better model for rating agencies overall? Right now, you have the companies that are— are being judged, paying the bill. And they get to shop around—
BUFFETT: Right, I'm paying a big bill at Berkshire.
BECKY: Well— and you get to shop around, and— and go to different—
BUFFETT: No, I don't get to— I— I don't get to shop around. That's the— I— I— Standard and Poor's and Moody's are— are the— are totally the benchmarks for Berkshire. I would love to shop around. (LAUGH) Believe me, I have no pricing— no— no negotiating power with either Standard and Poor's or Moody's.
And best as a specialist in the insurance field too. But believe me, if somebody came and offered me ratings of half the price of Standard and Poor's or Moody's, I would love to do it, but I can't do it. The— the market demands that I be rated by Standard and Poor's and Moody's.
BECKY: The market demands it because of the government— laws that are set up requiring—
BUFFETT: They— it— it demands it for— for a couple reasons. One is Moody's and Standard and Poor's were there first, they've been around forever. They got enshrined into various regulatory— regulations. I mean, I— as a life in— we have a life insurance company. It tells us— what we can do in terms of BBB or in terms of A and all of that sort of thing.
So state after state has regulations relating to insurance companies that ties in with the rating agencies. And the agencies are specified. And so I can't go to the XYZ rating agency and say, "Will you do this for half the price," and have it accepted by anybody.
BECKY: Do you think though that there's an inherent flaw, just back to the question. Is there a problem with the business model right now for the ratings agencies? Would it be better if there were other competitors who could get in?
BUFFETT: Well, there are other competitors, but— but they—
BUFFETT: —and— and— there are issues there. But— but let's just say you start a rating agency, you know, and— and you say— come around and say, "I'll do it for half the price." I love that, the only trouble is, it won't do me any good. (LAUGH)
BECKY: But is there a way to change the system? I think what the commission's going to be getting at today is what changes need to be— made to this—
BUFFETT: Well they could—
BECKY: —particular business model.
BUFFETT: They— they could say any one of ten rating agencies was acceptable. And the— the problem is— there's— there's a really nuanced point in this, because if you have ten rating agencies out there, and I can choose among them, I'm gonna choose for one of two reasons, maybe both, price and laxity. I mean, in a sense, the— having a monopoly or a duopoly arrangement, means that the rating agencies can be independent of the people.
They— they— it's— it's the same problem, you know, basically as with newspapers. If you have ten newspapers in a town, and they're getting their revenue from the local department stores and grocery stores and so on, they are likely to be less independent than if there's only one newspaper, because that newspaper can thumb their nose and the department (LAUGH) store still has to buy ads in the paper.
BECKY: Right, there are— are two proposals in congress that have gotten a lotta play. One is from senate— is from Congressman Barney Frank who takes a look at— this idea that— "Look, we're just not going to give them the government mandate for them to be required anymore, so that will therefore create a lotta competition in the marketplace." The other is from Senator Al Franken, who says, "We'll set up a government oversight board that tells you where you're going to go to get your ratings." Do either of those models make sense?
BUFFETT: Well, I'd have to see more details on it. I— I— I think that the market will continue to demand from the brand names. I mean, I— I wish it weren't the case. I mean, when the rating agency comes to rate Berkshire, they have me by the throat. You know, if they say that it's gonna cost me a million dollars, and I say, "You know, why can't you do this for $900,000?" The— the— I have— I have— no leverage whatsoever.
So— if there were ten agencies, and I could say, "I'd like the cheapest." People will say, "Well, you took the cheapest, but they— they gave you— you know, they didn't do the work," or something to the sort. So it's— it's— it's not an easy answer.
BECKY: So there's not necessarily a clear solution that cuts out any sort of conflict of interest along the line?
BUFFETT: No, our— our solution as a buyer securities is we don't use rating agencies. I mean, I— I don't think— and I don't— and I doubt if BIMCO does, for example, or BlackRock. I mean, our— our— our job is to rate credit ourselves. We do not outsource that to rating agencies. But the world does, and it has all these regulations built in. So the rating agencies sort of evolved into this natural duopoly. That's what made it a good investment but tough to—
BECKY: I was gonna say— (LAUGHTER) you don't use the ratings agencies, but you're the largest investor in Moody's—
BUFFETT: Yeah, it— it had— it— it had one of the world's great business models. If you look at the return on invested capital for Standard & Poor's or Moody's, it's practically infant. So they have the power to price. And if you wanna know one question to ask in terms of determining whether somebody's got a good business or not, just ask 'em whether they can raise prices tomorrow.
BECKY: You know, that's interesting, though you— when you first that talking, you said, "They had a great business model." Is that business model gone?
BUFFETT: It's not gone at the moment, but it's— it's— it's perhaps threatened in some way. And— and— and the— ten years ago, it looked like nothing would happen to it, and now there's the possibility of something happening to it. It's still a great business model. I mean, I have to get rated— we have a company called Berkshire Hathaway Assurance. We have to get a rating from Standard & Poor's and Moody's.
BECKY: You have been selling your stake— you're still the largest sell— shareholder, but you've been selling your stake. If you had your druthers, would you own no Moody stock at this point?
BUFFETT: No, if I— if— if that were the case, I would've sold it all. (LAUGH) It depends on the price, it depends on alternative investments. But it does not have the bullet proof situation that it had ten years ago.
BECKY: That's why you've been selling?
BUFFETT: Well, that— that is a reason. It's a big reason, but it's not the only reason. But it's what we can do with the money and what price we're getting for it.
BECKY: Is the political spotlight, the regulatory spotlight with the problems with the— with the ratings agencies another reason?
BUFFETT: That threatens the bulletproof franchise. (LAUGH) Yeah.
BECKY: I mean, as an— as an investor, you— you talk all the time about the companies that you're highly invested in. Do you know the CEO of— of Moody's well?
BUFFETT: I wouldn't know if I saw him, I— I met him once three or four years ago, but I'm not very good on names (LAUGH) and faces, so I will be sitting next to him today, and— and— you know, I hope they don't put somebody else in there, or I'll c— (LAUGH) I'll call him by the wrong name.
BECKY: The other— there are a lotta questions that come up, though. Are you proud of the work that Moody's has done—
BUFFETT: I— I—
BECKY: —as an investor?
BUFFETT: —I think— listen, if I'd seen this coming, I would've sold my Moody stock at 60 or 70 too. So I— I wasn't a lot smarter myself.
BECKY: Okay. There was an— a column that was written yesterday by Andrew Ross Sorkin of The New York Times and it's asked a question at the bottom, he proposed a lotta questions—
BECKY: —he'd be asking if he were on this commission today. One of this is that— you sold a lot of your— you sold a stake in Moody's a week after they received the Wells Notice. Did you know about that Wells Notice?
BUFFETT: No, I never— never heard of it till I read— read about it the other day. I— we started selling it a year ago, and we had 48 million shares, we sold about 18 million shares over the last year, and it's— it's been when the price is up to some degree. And once it was publicized that we'd sold stock, every now and then a dealer the would have a bid for 100,000 shares, or something, would come in. But— no, I had no notion that they had a Wells Notice.
BECKY: You said today on The Today Show that— you thought the real reason for the financial crisis was— housing and the housing bubble.
BUFFETT: It— it— it was the housing bubble. I mean, there are a lot of other things that entered in, but— but if we hadn't had the housing bubble— and everything that went with it when it popped, and— and you know, it was the largest asset class to the American public, and it's one of 66 or 67 percent of the American public had an investment in it, and they were leveraged in it. So, you know, if s— if 66 or 67 percent of the American public had stocks margined to the hilt, and something caused that bubble to pop, that would've been a big pop too. But this was— the was the biggest asset class, you know? (LAUGH)
BECKY: You know, there are a lotta people who are worried about what's happening in Europe right now. How big of an impact is that having on the economy? Because the last time we spoke with you, you thought the economy was really moving along at quite a clip.
BUFFETT: The economy's picking up steam. And particular March, April, and May, it's— it's— it's shown some acceleration. So what's happening in Europe has not had an effect here yet in— in terms of our businesses. It's— it's a dangerous situation, but— but— but so far our recovery is coming along. We're hiring every week.
BECKY: You're hiring every week at Berkshire—
BUFFETT: Every week, yeah.
BECKY: (General Electric CEO) Jeff Immelt though, said, when he looked at the European economy, it's tottering right now.
BECKY: Can that catch up? Is that— a wave that can kind of wash over us?
BUFFETT: Well, it's something I'll watch with great interest. (LAUGH) They have— they have— you know, they have a very severe problem over there. And— and most economies get through most severe problems. But— but they have one right now.
BECKY: Are you more optimistic or less optimistic than you were a month ago?
BUFFETT: I'm always optimistic about the country.
BECKY: But do you feel optimistic about the country, let's just talk about the economy. You feel better or you feel worse—
BUFFETT: Oh I feel— I feel optimistic about the U.S. economy, sure.
BECKY: But the global economy?
BUFFETT: Well, I feel optimistic about Asia. (LAUGHTER)
BECKY: You feel optimistic about—
BUFFETT: Antarctica I'm big on.
BECKY: (LAUGH) Okay. When the flash crash came up, and it disrupted the trading, and we saw this massive drop of over 1,000 points in the Dow, it raised a lotta people's concerns about how stable the markets are. Do you have any concerns?
BUFFETT: No, no it doesn't affect, you know, we're still out there selling what we sell, and the— the world wasn't gonna change. It c— it could've been a cyber attack. I didn't know what was going on there for 15 or 20 minutes. And— and— but it didn't make any difference. I mean, it doesn't make any difference on Saturday and Sunday when the markets are closed, right? (LAUGH)
BECKY: But do you th— do you have confidence that the markets function properly, or do you think there's more that needs to be done?
BUFFETT: We'll, they— they— prob— there's probably some mechanical aspect that I don't understand, that needs work on. But— but— but— no, that did not raise fundamental questions in my mind about either the economy or the market.
BECKY: Okay, and again, as you're getting ready to head in today to speak to this (Commission, is there anything you want to make) sure you impart to them?
BUFFETT: No, I'll— I'll be there to answer their questions. I don't have an opening statement.
BECKY: In terms of the meetings that they had with you beforehand, did they focus mostly on the ratings agencies or was it— a broad range of questions?
BUFFETT: No, I talked to them for two hours, and there wasn't more than ten minutes on rating agencies. So it was a surprise to me to find out that I was going to appear with six people from Moody's. They— they did not indicate that to me in any way, shape, or form.
BECKY: All right, well Warren, we wanna thank you very much for your time ahead of this, and we'll be watching the hearing today.
BUFFETT: Okay, thank you.
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