Warren Buffett to CNBC: Market Demands 'Brand Name' Credit Rating Agencies

Warren Buffett tells CNBC that the market will continue to demand ratings from "brand name" credit rating agencies, even if government rules were loosened to encourage more competition among firms.

Warren Buffett speaks to CNBC's Becky Quick on June 2, 2010.
Warren Buffett speaks to CNBC's Becky Quick on June 2, 2010.

In a live interview before testifying under subpoena before the Financial Crisis Inquiry Commission today, Buffett told Becky Quick that he would "love" to shop around for lower prices on ratings for debt issued by Berkshire and its subsidiaries.

But, he says, Moody's and Standard and Poor's were "there first" and their debt ratings are also given special status by state and federal regulations.

"Rating agencies sort of evolved into this national duopoly" with strong pricing power for credit ratings. But he notes that while "it's still a great business model," Moody's "does not have the bulletproof situation they had 10 years ago." That's a reason, he says, Berkshire has sold some of its stake.

Berkshire Hathaway is Moody's largest shareholder, although Buffett's company has been reducing those holdings in recent months.

While he'd rather pay much less for ratings, he points out that having only one or two established firms can be an advantage for the system because it gives the agencies more independence from buyers who might use the competition to get favorable ratings.

Asked about the favorable ratings issued to questionable debt before the financial crisis, Buffett told us the rating agencies "were wrong like everyone else" due to a widespread "bubble mentality" that believed housing prices couldn't crash.

Asked about the U.S. economy, Buffett repeated his recent statements that the "economy's picking up steam" and "showing some acceleration."

Europe, however, is facing a "dangerous situation" and a "very severe problem." But he says Europe's problems are not affecting the U.S. economy.

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