Warren Buffett Testifies About Moody's, Einhorn Says Shut Down Ratings Agencies (MCO)

If you haven't seen Warren Buffett testify on the role of credit rating agencies during the sub-prime mortgage crash, check it out. He also gave his thoughts on the financial crisis.  If you remember, Buffett's Berkshire Hathaway owned 20% of Moody's at the same time they set up a municipal bond insurance entity when AMBAC and MBIA (who were supposed to boost bond ratings by providing insurance) were insolvent.  David Einhorn (Greenlight Capital) on Bloomberg said they should just look at market spreads (credit default swaps, yield spreads). I agree!

The backward looking nature of these credit ratings agencies allowed John Paulson and other forward looking thinkers to short subprime CDOs (Abacus CDO 2007) with reference obligations rated one notch above junk before the downgrade occurred. The business model doesn't work when there's volatility and credits get taken advantage of easily.



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