Buffett says Ratings Companies Still Have 'Phenomenal' Business Model

A friend of mine sent me two interesting links from the WSJ. The first one was dealt with in my previous post: Government backed 96.5% of all home loans in Q1. The second one is about Buffett bragging about the phenomenal business of the rating agencies. I'm not a subscriber to the WSJ, but googling around lead me to this other link on Nasdaq, which seems to republish the same news article.

OMAHA, Neb. -(Dow Jones)- In the past year, Berkshire Hathaway has been rapidly selling shares of Moody's Corp., the ratings outfit.

But Bershire still has a large stake in Moody's, which many say played a key role in the financial crisis by handing out high ratings to mortgage bonds that later collapsed.

Berkshire CEO Warren Buffett mounted a defense of the firms. He said he believes the ratings outfits, including Standard & Poor's, have "incredibly wonderful businesses" and that their "pricing power is significant."

The rating agencies have proven that not only governments creating a monopoly cannot help in bringing in useful ratings but they keep their prices artificially high by preventing competition in the market place ("pricing power is significant" — why do you think so??) and fair ratings cannot happen when the company needing a rating on his own debt or products is paying to get them.

The subprime and CDO cataclysmic collapses just prove the previous points.

So, let's put the record straight, consequently, Buffett is not a free market advocate, he's driven by greed and profits, nothing else.

• Buffett has shown several times in the past that he doesn't care about integrity
• Buffett only talks his book, nothing else.

David Einhorn has been showing far more integrity and honesty and makes a clear case about why their business model is broken, and why he is shorting the shares as well. Here are some quotes from a MarketWatch report (see MarketWatch for full text):

Einhorn said that many institutions with AAA ratings, including the U.S. government, turned that supposed benefit into a disaster by borrowing recklessly, according to a hedge-fund investor.

Most of the companies that have run into trouble during the financial crisis were or still are AAA rated, including American International Group (AIG), Fannie Mae, Freddie Mac, MBIA, Ambac and General Electric, Einhorn noted.

The leading purveyor of AAA ratings is Moody's, so Greenlight Capital is short that company's shares, the investor quoted Einhorn as saying.

Einhorn argued that Moody's is part of a government-created oligopoly that should be abolished. The smartest investors, including Warren Buffett, ignore credit ratings when making investment decisions, he said.