Monday, May 31, 2010

Did Berkshire Get Insider Info On Its Disposal Of Shares In Moody's?

Saw the following news clip on the Edge Financial Daily: Berkshire confirms Buffett subpoenaed to testify

  • NEW YORK: Berkshire Hathaway Inc confirmed on Friday, May 28 that Warren Buffett will testify under subpoena before a US panel examining the causes of the 2008 financial crisis.

    Buffett, 79, rebuffed earlier requests by the Financial Crisis Inquiry Commission to submit to voluntary questioning, resulting in Tuesday's subpoena, Berkshire said.

    Carrie Kizer, an assistant to Buffett, confirmed the accuracy of a Fortune magazine article on Thursday that revealed the subpoena and Buffett's resistance to testifying.

    Buffett, Moody's Corp Chief Executive Raymond McDaniel, and five other current and former Moody's officials will testify on June 2, as the commission examines credit ratings and how investors use them.

    The Congressionally appointed commission is examining the causes of the worst financial crisis since the 1930s and is trying to find flaws that could be remedied through reforms. It is slated to issue a report by December 15.

    Moody's is the parent of credit rating agency Moody's Investors Service. Berkshire had a 13% stake in Moody's as of March 31, regulatory filings show.

    Buffett is the world's third-richest person, with most of his fortune coming from Berkshire. He has since 1965 run the Omaha, Nebraska-based conglomerate, which now has roughly 80 companies and tens of billions of dollars of investments.
This is the CNBC version: Buffett to Appear Before Financial Crisis Panel

On ZH:
Buffett Has "No Comment" On His Sale Of $30MM In MCO Shares Just After Moody's Wells Notice Receipt

  • As Zero Hedge first pointed out on Saturday, Moody's is in very big trouble - in its 10Q, in the very last paragraph of the very last page, the company indicated that on March 18, it had received a Wells Notice and a recommendation by the SEC to pursue a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. This was not lost on the market, which punished Moody's stock by 10% yesterday even as every other stock went vertical. When all is said and done the 10% could well become 100%, and as far as the market is concerned nobody would shed a tear: the conflicted rating agency model is long dead, and the independent third party vendors are the only ones that add any actual value at this point. However, far more interesting are the actions by Moody's CEO Raymond McDaniel and key shareholder and kindly grandfather, Warren Buffett, both of whom sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice receipt. The New York Times has reported that Buffett, who recently has not had a problem commenting on pretty much everything, and was vociferously defending not only arch monopolist Goldman Sachs at his annual ukulele outing in Borsheims, but Moody's as well, has had "no comment" on his sales. Perhaps it is time for someone to take Mr. Buffett to task, instead of just to his word: sure, it could be just a coincidence... or three - he sold over $30 million in MCO stock on March 19, March 24 and March 26. Or it might not. However, now that it has become far too clear that nobody in the finance business has a shred of integrity and honesty left, perhaps it is time an independent and impartial jury to decide if any impropriety based on material, non-public insider information, was committed.

Yes, many are not taking it too kindly that Buffett sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice, a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. Yes, Wells notice effectively put the end in Moody's!

Yup. In short, did Berkshire got insider information in its disposal of shares in Moody's?

Here's an older article on NyTimes: Buffett Is Unusually Silent on Rating Agencies

  • ...But on the subject of the conflict of interest built into the rating agencies’ business model, Mr. Buffett has been uncharacteristically silent — even though that conflict is especially glaring in his case because one of the companies that Moody’s rates is Berkshire. (Its Aaa rating, for the record, is the same as the one from Standard & Poor’s. Fitch downgraded Berkshire for the first time last week.)

    Mr. Buffett also seems to have said nothing about a problem that some contend is just as serious and endemic: because ratings are required in so many transactions, the agencies’ inaccurate ratings have no effect on their own bottom lines. And a company that is paid regardless of its performance is a company that will eventually underperform, says Frank Partnoy, a professor of law at the University of San Diego.

    “Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not,’ ” Mr. Partnoy, a former derivatives trader, told The Times. “If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”

    The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,” Mr. Partnoy says, “and they’re not too happy about it.”

    Mr. Buffett declined to be interviewed, The Times said. Of course, he has bigger problems on his mind than a company that makes up less than $2 billion of his $127 billion empire....
  • “Warren deserves credit for his candor in admitting mistakes,” Alice Schroeder, author of “The Snowball,” a biography of Mr. Buffett, told The Times. “But he chooses which mistakes to discuss. It also pays to listen for the ‘dog that didn’t bark.’ ”

    One of those nonbarking dogs, she says, is Moody’s.

    “He hasn’t discussed publicly what he might be doing to influence the management at this time of crisis,” she told The Times. “Last spring, he knew the rating agencies were deeply involved with the financial crisis. Since he didn’t sell Moody’s then, he should explain what he’s doing to influence the management.”....

What one should note is that Bershire had started selling Moody's a long time ago.

July 2009: here is a document on SEC showing Berkshire disposal of Moody's shares

That's some 8 million shares disposed back then.

Sept 2009: sec link here

Oct 2009: sec link here

Dec 2009: sec link here

I could go on an on... here's a newsclip on Businessweek: Buffett Sells Moody’s Stock for Sixth Time Since July

  • .. By Andrew Frye and Matthew Leising

    Dec. 23 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. cut its stake in Moody’s Corp. for the sixth time since July
    after the ratings company was hit by profit declines, lawsuits and criticism from regulators.

    Berkshire sold 87,992 shares on Dec. 18 for $26.77 apiece and remains Moody’s biggest shareholder, according to a regulatory filing yesterday. Omaha, Nebraska-based
    Berkshire’s stake is down about 34 percent from the 48 million shares it owned at the end of June.

    Buffett buys stocks that he says have lasting competitive advantages and superior management. His stake in the rating firm, whose founder John Moody created credit grades a century ago, dates from 2000 and had a value of more than $3.5 billion at its high in 2007. Moody’s has since dropped by more than half amid criticism that inflated credit ratings during the housing boom exacerbated the recession.

    “Moody’s reputation has certainly been tarnished,” said Meyer Shields, an analyst with Stifel Nicolaus & Co. who has a “hold” rating on Berkshire shares. “My sense is he just thinks there’s less value.”...

How? Do you think the criticism is a bit too harsh? Berkshire had started disposing Moody's since 2009 and Berkshire had 48 million shares in Moody's to begin with and probably one should understand the difficulty in disposing 48 million worth of shares.


Richard Cranium said...

Yes, it is also hard to sell stock for a security that is 95% institution-owned. But people do get influenced by screaming headlines.

This Tyler Durden fellow is an avowed bear, and is probably hocked up to his eyeballs in shorts and puts. He'd love to see the market crash to 666 again.