BECKY: — you were subpoenaed for this. BUFFETT: Yeah. BECKY: Why did it take a subpoena to get you here? BUFFETT: Well, in the last 12 or 15 months, I've had eight different — either congressional committees or — commissions appointed by congressional committees — who have asked me to go to Washington, primarily to testify. And I've always offered to do anything they want by phone, and answer all their questions, and I just did it last week for Elizabeth Warren's commission, for example. And they had a number of people on the phone, and I — I answered all their questions, and told them if they wanted more to come back. But I've got a job running Berkshire, and I — if I — if I go to one voluntarily, I'm gonna have ten others that say, "Why d — why can't you come and do it for us?" BECKY: But having said that, you're not gonna be a hostile witness today — BUFFETT: Oh, I'm not hostile. (LAUGH) BECKY: You'll tell 'em what they're asking? BUFFETT: I'll tell 'em — I'll tell 'em whatever I know. And I've already had a two hour interview — with their staff a week ago, they came out to Omaha. And — and we had a good session. They asked good questions, good follow on questions. And —
BECKY: The — the focus today is going to be on the role that the ratings agencies played in the financial downturn. What — what role do you think the fi — the — ratings agencies played? BUFFETT: Well, I think they were wrong like everybody else. (LAUGH) They — obviously people pay attention to ratings, and they had a model in — in their — rating system, but basically — I — I — I've never seen the model, but it must have said that — that — house prices — residential house prices can't take a dive, and that they won't take a dive all over the country. That they — to some extent, they probably thought they were not necessarily correlated with each other. And — and that was — that was a fallacious model, it was held by Freddie Mac, Fannie Mae, the U.S. Congress, the media, me, (LAUGH) investors, and— and home buyers all over. So it was— it was part of a bubble mentality, and that bubble mentality got incorporated into— into models used by not only rating agencies, but others. BECKY: But when you have ratings agencies that go from an A or— a AA rating overnight to a D, I mean, that shows that there's a huge problem with the— the system that's been set up— BUFFETT: There was a huge flaw in the model. That w— basically, the American public had a model that— where they didn't think house prices could— could crash. And— and a very, very, very big bubble, probably the biggest I've ever seen, popped. And when it popped— A's became D's and so on. That— BECKY: But that makes it sound like you think it's a problem not with the rating agencies' models, but with— everyone's model that was looking at this. There— there are a lotta questions now about whether there's an inherent conflict of interest just with the ratings agencies' models themselves. BUFFETT: No, I— I think everybody's mo— I mean, if you— if— who knew more about mortgages than Freddie Mac and Fannie Mae? I mean, they were guaranteeing 40 percent of all the mortgage in the United States. They had data on millions and millions and millions of mortgages, borrowers, mortgage brokers, everybody else. And— in March 30th of 2007, in the report to Congress that was prepared by OFHEO who oversaw them, they said that the— that their quality was good. It— we— we participated in a huge bubble. That does— that doesn't necessarily excuse the rating agencies, but it— but it— but it— BECKY: Yeah, does it let them off the hook? BUFFETT: —but it— it— it— it means that they were not inca— they were incapable of thinking— at great variants with how almost everybody thought. BECKY: But is there a better model for rating agencies overall? Right now, you have the companies that are— are being judged, paying the bill. And they get to shop around— BUFFETT: Right, I'm paying a big bill at Berkshire. BECKY: Well— and you get to shop around, and— and go to different—
BUFFETT: No, I don't get to— I— I don't get to shop around. That's the— I— I— Standard and Poor's and Moody's are— are the— are totally the benchmarks for Berkshire. I would love to shop around. (LAUGH) Believe me, I have no pricing— no— no negotiating power with either Standard and Poor's or Moody's. And best as a specialist in the insurance field too. But believe me, if somebody came and offered me ratings of half the price of Standard and Poor's or Moody's, I would love to do it, but I can't do it. The— the market demands that I be rated by Standard and Poor's and Moody's. BECKY: The market demands it because of the government— laws that are set up requiring— BUFFETT: They— it— it demands it for— for a couple reasons. One is Moody's and Standard and Poor's were there first, they've been around forever. They got enshrined into various regulatory— regulations. I mean, I— as a life in— we have a life insurance company. It tells us— what we can do in terms of BBB or in terms of A and all of that sort of thing. So state after state has regulations relating to insurance companies that ties in with the rating agencies. And the agencies are specified. And so I can't go to the XYZ rating agency and say, "Will you do this for half the price," and have it accepted by anybody. BECKY: Do you think though that there's an inherent flaw, just back to the question. Is there a problem with the business model right now for the ratings agencies? Would it be better if there were other competitors who could get in? BUFFETT: Well, there are other competitors, but— but they— BECKY: Again? BUFFETT: —and— and— there are issues there. But— but let's just say you start a rating agency, you know, and— and you say— come around and say, "I'll do it for half the price." I love that, the only trouble is, it won't do me any good. (LAUGH) BECKY: But is there a way to change the system? I think what the commission's going to be getting at today is what changes need to be— made to this— BUFFETT: Well they could— BECKY: —particular business model. BUFFETT: They— they could say any one of ten rating agencies was acceptable. And the— the problem is— there's— there's a really nuanced point in this, because if you have ten rating agencies out there, and I can choose among them, I'm gonna choose for one of two reasons, maybe both, price and laxity. I mean, in a sense, the— having a monopoly or a duopoly arrangement, means that the rating agencies can be independent of the people. They— they— it's— it's the same problem, you know, basically as with newspapers. If you have ten newspapers in a town, and they're getting their revenue from the local department stores and grocery stores and so on, they are likely to be less independent than if there's only one newspaper, because that newspaper can thumb their nose and the department (LAUGH) store still has to buy ads in the paper.
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