Charlie Gasparino Takes Negative View on Warren Buffett’s Ratings Agency Testimony

Charlie Gasparino rips Warren Buffett for his stance on the ratings agencies and their role in creating the financial crisis. Here’s the money quote:

He believes that [rating credit is] a sleazy business and it makes a lot of money so he’s gonna own it. Well, that takes Warren Buffett down three notches in my book.

Take a look. Video embedded below.

Where I agree with Buffett is where he sees bad times ahead for municipalities and states and their bonds, something I have noted in the past (as have Jim Chanos, Fred Sheehan, Meredith Whitney and Rick Bookstaber in posts on CW):

“If the federal government will step in to help them, they’re “Triple A,” he said. “If the federal government won’t step in to help them, who knows what they are? If you are looking now at something where you could look back later on and say, these ratings were crazy, that would be the area.”

This will be a drag on recovery. However, I don’t agree that municipals are Triple A because of the implicit or explicit backstop of the Federal Government any more than I believed the same about Fannie and Freddie. If states and municipalities cannot stand on their own, they are not Triple A.  And their CDS spreads reflect this fact. This is exactly the problem with the credit crisis and the bailouts.  The ratings agencies are a big part of this problem. Claiming that an organization is triple A when it needs to be propped up by another level of government doesn’t make sense to me. I find it surprising that Buffett would make such a claim.

Update: to be clear of where I take issue with Buffet, let me add some more comments.  What Buffett is suggesting is that the Federal Government take select states and/or municipalities under its wing and socialize their losses. That is what he implies when he says "If the federal government won’t step in to help them, who knows what they are?" Given the context of the discussion i.e. Buffett having stated earlier that the government needed to bail out financial institutions in the same manner, it is pretty clear he is suggesting it may need to do the same here again with local government.

I am uncomfortable with this. Sure, if government backstops states or municipalities, they can get a AAA. I could receive a triple-A as well. What I have a problem with is giving an explicit or even implicit backstop to an organization which on its own is not triple A in the first place. This is exactly the problem we faced with Fannie and Freddie and we see what is occurring there – massive losses for taxpayers.

And the ratings agencies have facilitated this dilemma by giving ratings to governments that are not at all reflective of the longer-term un-backstopped fiscal position they face.  In my view, this is exactly what the sovereign debt crisis is about – it is about taxpayers and sovereign bondholders balking at the risk transfer from private agents to the sovereign in a way that weakens the sovereign. We see that in Europe and even between European states within the Eurozone. I do not want to see it here with states or municipalities.


Buffett warns municipal debt next ratings minefield – National Post


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.