BL: Berkshire's Moody's Stake No Conflict, Buffett Says (Update3)
By Erik Holm and Betty Liu
May 3 (Bloomberg) -- Billionaire investor Warren Buffett said Berkshire Hathaway Inc.'s ownership of almost 20 percent of ratings firm Moody's Corp. poses no conflict with his company's municipal bond insurance business.
``It would be wrong if we tried to pressure Moody's but that's never happened,'' Buffett said today in an interview with Bloomberg Television in Omaha, Nebraska, where his Berkshire is based. ``I have no contact with the management of Moody's. I can't recall ever calling them in my life.''
Berkshire's relationship with Moody's drew scrutiny this week from Connecticut Attorney General Richard Blumenthal after Moody's gave four-month-old bond insurer Berkshire Hathaway Assurance Corp. its top rating. A favorable Moody's rating for Berkshire or a lower rating for a competitor could give Buffett's firm an advantage. The arrangement was a ``clear and direct conflict of interest,'' Blumenthal said.
Berkshire is ``a passive investor that has never contacted us regarding our ratings,'' said Tony Mirenda, a spokesman for Moody's, in an interview this week. ``We have a longstanding policy of not discussing our ratings with shareholders and non- employee members of the board of directors.''
Buffett and his insurance lieutenant, Ajit Jain, started the bond insurance company to compete with existing guarantors struggling to maintain their ratings. Standard & Poor's, a unit of McGraw-Hill Cos., also gave its highest grade to the Berkshire unit, which offers municipal bondholders protection from default by state and local governments.
Top Grades
``If Berkshire isn't triple A, I'm not sure which company would be,'' Buffett said. ``We are one of the ten or so largest companies in the United States. It would be kind of silly if they didn't rate us,'' he said of Moody's.
Berkshire hasn't received a subpoena from Blumenthal, he said.
The new bond insurance unit had about $400 million in first- quarter sales, probably more than any competitor in the same time period, Buffett said today during a question-and-answer session at Berkshire Hathaway's annual shareholder meeting.
``That was from a standing start,'' he said, crediting Jain for doing a ``remarkable job.''
The company has been involved in 278 transactions, Buffett said. Insurance for some securities backed by Berkshire, including bonds for the Arizona Sports and Tourism Authority and a Tennessee building authority, were rated only by Moody's through yesterday, according to Bloomberg data. Berkshire has held about 48 million shares of New York-based Moody's since at least 2002, Bloomberg data show.
MBIA, Ambac
Some state officials have questioned the need for the bond insurance that Berkshire has begun to sell. They've criticized Berkshire competitors MBIA Inc. and Ambac Financial Group Inc. for charging too much, and said Moody's and its competitors exaggerated the risk that government borrowers will be unable to meet their obligations. Buffett, who often scolds corporate America for putting profits ahead of ethics, hasn't been spared from the criticism.
``It's only natural that you comport yourself in a way that pleases your owners,'' Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, said of Berkshire's stake in Moody's. ``The perception, at the very least, is problematic. Are they going to rate municipal bonds fairly, or do it in a way that helps maximize income from Berkshire's bond insurance operation?''
State Regulators
Buffett, the chief executive officer of Berkshire, created the bond guarantor in December at the urging of insurance regulators, who were seeking to help governments find new places to buy the coverage when losses on mortgage-related securities jeopardized the AAA ratings at MBIA and Ambac.
In criticizing the bond insurers and rating companies, elected officials point to a study by Moody's that found only 41 defaults in 37 years.
Lockyer is leading more than a dozen state and local governments that say bond ratings exaggerate the risk of default, forcing them to buy the coverage.
``The aura that Berkshire enjoys, specifically through Warren Buffett, does make a lot of people look the other way toward any conflict of interest,'' said James Cox, a professor of corporate and securities law at Duke University. ``Maybe they shouldn't, but the whole financial industry has been characterized by conflicts of interest and it's still managed to bumble along.''
Moody's and Fitch Ratings have said they may offer municipal issuers ratings that can be directly compared with corporate debt. Such a move would lower demand for Berkshire's new insurer, Jain said in prepared testimony for a U.S. congressional hearing in March.
``It's just not part of Berkshire' modus operandi to exert undue influence,'' said Charles Hamilton, an insurance analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. ``The way they invest, the way they do business, it's just not how they do things to try to be shady.''
To contact the reporters on this story: Erik Holm in Omaha, Nebraska at eholm2@bloomberg.net; Betty Liu in Omaha, Nebraska at bliu17@bloomberg.net.
Last Updated: May 3, 2008 17:23 EDT
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