Warren Buffett has one of the bigger claims to having predicted the credit crisis, describing credit derivatives as "financial weapons of mass destruction" as long ago as 2002, but when he testifies before the commission investigating the crisis this morning he will not be playing his familiar role of avuncular investment oracle.
Rather, he will sit next to the chief executive of Moody's, the credit-rating agency of which Mr Buffett's Berkshire Hathaway owns 13 per cent, to be grilled on the failures of that company and its peers in the run-up to the crisis.
The Financial Crisis Inquiry Commission (FCIC) is investigating the misunderstandings and possible conflicts of interest that led rating agencies to declare that billions of dollars of mortgage derivatives created by Wall Street were as close to risk-free as US government debt – before a wave of mortgage defaults and collapsing house prices proved they were not just risky but, in many cases, worthless.
Moody's, together with its biggest rival, Standard & Poor's, vastly increased profits in the run-up to the crisis as they were paid by the banks to rate their newly minted mortgage derivatives, and Mr Buffett was an enthusiastic supporter of the companies' business model until recently. Now, as the agencies face curbs on their activity and new competition mandated by the forthcoming financial reform legislation in Congress, Berkshire Hathaway has trimmed its holding from 20 per cent at its peak.
Mr Buffett resisted giving evidence after a series of back-and-forth communications with the commission, telling friends he had no unique insights that would make it a valuable exercise. In the end, he had to be subpoenaed by the commission's lawyers, and will appear at a special New York hearing to examine the "credibility of credit ratings, the investment decisions made based on those ratings, and the financial crisis".
The billionaire investor will appear alongside Raymond McDaniel, Moody's chief executive. The proceeding panel will hear from former executives of the specific division rating mortgage securities, including Eric Kolchinsky, an executive hailed by Congress as a whistleblower because in 2007 he told bosses he thought ratings on mortgage derivatives were artificially inflated.
Last month, Mr Buffett took a wide range of questions on the crisis and its aftermath from Berkshire Hathaway shareholders at the company's annual meeting, where he launched a defence of the activities of Goldman Sachs' in the creation and trading of mortgage derivatives. Berkshire has an investment in Goldman through preference shares purchased at the height of the panic in 2008.
He also set out his view on how the rating agencies came to mis-rate so many securities, blaming not conflicts of interest but group-think. "It is very hard to think contrary to the crowd," he said. "They couldn't see a world where residential housing countrywide would collapse. They succumbed to the same mania that prevailed throughout the investment world."
Modelled on the bipartisan 9/11 Commission, the FCIC has been asked to report on 22 factors in the onset of the crisis, from fraud and due diligence failings to monetary policy and regulation. Recommendations are due on the President's desk by 15 December.
Previous hearings have taken testimony from the heads of Wall Street banks at the heart of the credit crisis, including Goldman Sachs, Citigroup and Bear Stearns.Reuse content