Four Star Bubble
Research for Online Investors

by John Dalt

6/2/10

Warren Buffett appeared before the Financial Crisis Inquiry Commission (FCIC) along with Moody’s (MCO) CEO Raymond McDaniel.  Berkshire Hathaway (BRK) is MCO’s largest shareholder.  Before the hearing in a CNBC interview, Mr. Buffet was asked how well he knew Mr. McDaniel.  Warren said he had met him once and knew his name, but wouldn’t recognize him.  “I have a terrible memory.  I hope they don’t put someone different next to me, and I call him by the wrong name.”  That is pretty amazing candor from MCO’s largest shareholder.

Fox Business News asked Buffett if he would be a hostile witness since the committee had to subpoena him to appear.  He answered, ‘No, but I have a company to run and would rather be in Omaha.’  Buffett explained he gets a lot of invitations and required a subpoena to appear.

In the hearing, Buffett defended the ratings agencies as participants in the “greatest bubble” he had ever seen.  He also referred to the housing bubble as a “four-star bubble” and “the granddaddy of all bubbles.”  He explained almost everyone missed it, including himself.  Buffett said he would have sold his stake in MCO if he had known how bad it would get.  “The entire American public was caught up in a belief that housing prices could not fall dramatically.”

McDaniel expressed disappointment that ratings his company gave various mortgage backed securities and derivatives turned out to be inaccurate.  As the credit crisis worsened, homeowners fell behind on their mortgages and the rating agencies had to downgrade the investments.  This made the credit crisis worse as the downgraded investments lost value.

Buffett was fun to watch answering questions and offering opinions.  When asked why he sold his stake in Fannie Mae, he told the committee that Fannie Mae was investing in securities outside their scope and taking on riskier loans at the behest of congress.  Our sources today included USA Today, Reuters, CNBC and FOX Business News (editor watched).

France has proposed an “economic government” for the eurozone.  European Council President Herman Van Rompuy has endorsed the idea.  Germany is resisting this as it would mean giving up individual government's ability to set budgets.  Germany is not the offender, but politically giving up sovereign rights to a third party is very difficult.

We can only imagine a central planning group telling each country how much they can budget and what their tax rate must be.  The ideas that bureaucrats come up with are only limited by the time they have available to dream.

French President Nicolas Sarkozy wants regular meetings of euro zone leaders to act as an economic government for those countries using the euro.

Van Rompuy is pushing for negotiations to reform euro zone budget rules and economic governance.  He would like to have a deal to announce at the EU summit scheduled for June 17th.

We would caution our subscribers from being sucked in by this latest attempt to paper over the economic problems in the euro zone.  The problems may fade from our front pages but like the Terminator, “They'll be back!”

Sent in by paid up subscriber D.E.
The American system of democracy will prevail until that moment when politicians discover that they can bribe the electorate with their own money---Alexis de Tocqueville

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Home Page

Back to Top