Warren Buffett was summoned yesterday to testify on the role of credit ratings agencies in front of the Financial Crisis Inquiry Commission. How did he do?
Commission vice chairman thanks Buffett for coming, Buffett replies: "Thanks for the restraining order."
On the housing bubble:
"In 2006, I was not sitting there thinking the housing bubble would get as large as it did and that it would burst. If I did, I would have sold my stock."
"In this particular case I would say they made a mistake that virtually everybody in the country made. The entire American public eventually was caught up in a belief that housing prices could not fall dramatically. Very very few people could appreciate the bubble."
On issuer paid model for ratings agencies:
"I'm not arguing that this is the perfect model, I'm just saying I don't see an alternative."
Should consumers pay:
"I don't know who's going to pay. I wouldn't pay."
On the rights and wrongs in regulation:
"No one has any business running any large financial institution unless they regard themselves as the chief risk officer. There has to be a large downside for the CEO, and significant for the board, if government help is required."
On leverage:
"Leverage is what gets people in trouble. When people stretch and they get rewards for it, I think they're inclined to stretch more. The easiest way to jack up the return on equity is to leverage. Addressing it wisely is very tough but I think it's the most important thing in the regulatory world."
On speaking out more on big issues:
"Perhaps I could have done more."
Why did we miss the signals?
"Rising prices and discredited cassandras from the past blunt sensitivities and judgement even of people who are very smart.
"Rising prices are a narcotic that affect the reasoning power, up and down the line. Of people even who had the experience."
"It is not easy to avoid."
Why didn't Buffett predict the housing market crash?
"It was the grandaddy of all bubbles. The internet bubble went further than I thought it would."
"I never understood why tulips were worth what they were in the Netherlands."
"Yeah, I know, I blew it."
"I didn't think it would pop like it did. When homebuilders started Berkshire Hathaway to buy them out, I should have figured out what I didn't figure out."
On why he sold Freddy Mac/Fannie Mae:
(Cited concerns they bought securities that had nothing to do with housing) "I figured if you see one cockroach, there's probably a lot more in the kitchen."
On derivatives?
"Derivatives can cause system-wide damage. It is something that should be addressed."
"I use them to make money."
On compensation:
"I was at Salomon, 20-odd years ago, and I know putting in a new compensation system on Wall Street is tough."
On ratings agencies not changing models quick enough:
"It looks like they tweaked their model when they should have gone at it with a meat axe."
On Goldman Sachs:
"When Goldman Sachs was willing to take money on terms I found satisfactory, I came to the conclusion that unless the American financial system totally fell apart, it was going to be a sound investment. If the Federal Reserve had not acted, everyone would have been toast."
"I felt our $5bn would not be in any danger at all, the terms were attractive and there were a lot of other things that were attractive."
