Wednesday, October 22, 2008

Hearing on Credit Rating Agencies (C-Span Video), Plus Chanos Called It on Moody's in 2007

On Capitol Hill today there was a hearing on credit rating agencies. This was the description from cspan.org, and I also provided a link to today's video.

"What role did the three largest credit rating agencies - Standard & Poor’s, Moody’s Corporation, and Fitch Ratings - play in the current financial markets turmoil? Former and current executives testified before the House Committee on Oversight and Government Reform."



It was interesting to hear what the past executives at the agencies had to say about the ratings process, and how it could be changed in the future to avoid another disaster. There were also emails exchanged between employees that criticized some ratings. Here's a funny email that was exchanged between S&P employees mentioned at the hearing, "It could be structured by cows and we would rate it." The conflicts of interest as well as the backward looking nature of the ratings made this a problematic business model from the start, atleast I think so. It's interesting that Berkshire Hathaway still owns 19.70% of Moody's. Here's a look at the 3 year chart, from stockcharts.com.


Moody's 3 Year Stock Chart (Source: stockcharts.com)


By the way, sometimes betting against Buffett works out!! Look at this Bloomberg article I found dated May 31, 2007. Chanos, Betting Against Buffett, Sells Moody's Short (Update2). James Chanos of Kynikos Associates Ltd was exactly right. Below the quoted text there's a Bloomberg video I found where he explains his view. Click the pic, couldn't embed.

"May 31 (Bloomberg) -- James Chanos, president of Kynikos Associates Ltd., is bearish on Moody's Corp., the bond rating company whose biggest shareholder is Warren Buffett. Kynikos sold Moody's stock short, betting it will fall, Chanos said today. He said Moody's may face lawsuits for keeping its ratings of loans to the riskiest home borrowers too high. ``That's a ticking time-bomb,'' Chanos, who oversees $4 billion at Kynikos, said in an interview in New York..."


Chanos Sees Risks Facing Moody's, Sells Shares Short (Source: Bloomberg.com)

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