moines. thank you for being with us. >> we are going to spend a couple of minutes here where we help understand what the secretary had to say. and i want to start with you, mike, because you tried to press a few times on regional differences and commodity differences. what do you know that the secretary wasn't willing to say about that? >> i put the bait out there but he wouldn't bite. the fact of the matter is that every farm bill is a regional fight, and to say it's a fight is not to say that it's wrong, just that conflict is the nature of the business. certainly western daries in california where many of my papers are, the daries are very large, thousand, 2,000 head scaparetted to wisconsin. very different demands, very different inputs in costs. and it's very complicated to get them to be aligned. it's very difficult to necessarily align, say, southern cotton growers with western cotton growers. the interests of specialty crop growers in california often

have nothing to do with wheat growers in the midwest. the differences between the processors and producers can be fairly great. so what the secretary was dancing around was the fact that there are inherent fights and they are never resolved to everyone's satisfaction. and the notion that at the end and the notion that at the end there will be this coom buyia momenttis a beautiful thought but it's just not going to happen. >> that overlay in this particular year with $13 trillion debt burden for the trillion debt burden for the country which is getting increasingly politicized as the election gets near. the farm bill seems to be in this nexus between home state concerns, jobs, the economy, and concern over the debt. so how does this all play out? >> well, it plays out the way mike has outlined in terms of different regions fighting for their priorities.

the two chairmen of the agriculture committees in the house and the senate are concerned about what's going to happen to the baseline for the farm bill, because they generally, when things get tight in the budget, you know, the cuts come out of agriculture. agriculture chairman peterson, agriculture chairman peterson, that's one of the reasons he started his hearing so early, is to find out what the priorities are and to also try to get a sense of what it is that people can live without. so it's going to be tight and it's going to be tough. and it is going to have a brood range effect on people. >> if i could add two points in reference to that. the secretary repately referred to they're listening to and working with the chairman. while the chairman of the agriculture committees are typically captured the industry, mr. peterson from minnesota is a very effective

chairman. his interests are much more aligned with the farmers than with the white house policy. the chairman of the senate agriculture committee from arkansas is running for reelection in a tough year for her, and there's a possibility that she will not be back to chair the committee in time for the scompleegs of the 2012 farm bill. so the players are still in flux by keeping in mind that the secretary of agriculture may not be in fact will not be the ppime leader in the rewriting of the bill. >> which is making the point that's early for his involvement of but thanks to both of you for your questionses this week. >> my pleasure.

and the c.e.o. of moody's investor service. later, we'll hear from other officials from moody's. this focuses on credit agencies which assess the financial products. many of those gave high ratings to financial products consisting of subprime home mortgages which declined dramattcally in value. the financial crisis inyirey

commission is a bipartisan group created by an act of congress. >> we will now come back into session. we'll begin on the credibility of the credit ratings, the decisions made and the financial crisis. this second session is credit ratings and the financial crisis. we are joined today at the witness table by mr. warren buffet, the chairman and c.e.o. and mr. raymond mcdaniel the chairman and c.e.o. of moody's corporation. thank you for being here. i'd like to start by doing what is customary for all witnesses in all proceedings. i'd like to ask you fwotesdz stand and be sworn.

please raise your right hand. do you solemnly swear under penalty of perjury that the testimony you are about to provide will be the truth, e whole truth, and nothing but the truth, to the best of your knowledge? >> i do. >> we will begin by offering both of you the opportunity to make an opening statement of no more than five minutes. >> i have no statement. >> good. that will cut five minutes. we will take your opening statement and go right to questions. >> thank you. good morning. my name is ray mcdaniel. i am the chairman and ceo of moody's corporation. moody's appreciates the

importanwork this commission is undertaking and on behalf of my colleagues, i welcome the opportunity to contribute our views for the role of crit rating agencies. over the past seven years, we have witnessed the events that many of us would have thought highly unlikely. the turmoil in the housing maet that began in the subpme residential mortgage sector began eighth global liquidity crisi the impact has created a great hardship for many americans. american families have lost jobs, homes, and college and retirement savings as a result of this financial crisis. moody's is well aware that the crisis o confidence in the market has impacted the confidence in credit ratings industry. at notice, our reputation is our single most important asset. for 100 years, moody's employees have brought inside to bring in trlions of dollars of that and hundreds of thousands o obligations across a broad range of sectors and regions. weave a strong reputation

among capital market participants worldwide. moody's is certainly not satisfied with the performance of the credit ratings for the u.s. mortgage-backed securities and debt obligations over the past seven years. it has been deeply disappointed. starting in 2003, we observed a trend of loosening of mortgage underwriting standards and escalating house prices. we reatedly highlighted these trends in our research and incorporated them into our analysis of the securities. by 2006, we were requiring an unprecedented level of credit protection. if neither we norother participants anticipated the rapidity of edit tightening that exacerbated the situation. even our enhancecrit protection requirements were not sufficient to ensure tting stability. wi the benefit of hindsight, many oervers have suggested that the events that came to pass were inevitable and easily

predictable. as they were occurring, various outcomes were considered possible. market experts in the public and private sector had differing views about the ultimate performance of the u.s. housing sector and the potential effect on the rest of the economy. these questions persist today. the economic downturn exposed serious vulnerabilities across the infrastructure of the global financial system. members of my management team and i solicit ideas and perspectives from both inside and outside the company. we have sought to better understand what caused t performance of our ridings in the sector and have sought to improve the creditate -- crit risk. we've undertaken numous initiatives to improve the credibility of o ratings and strengthen their quality, transparency, and independence. these actions are extensive and have occred in six principal areas. we have strengthened the analytical integrity of our ratings, enhanced consistency across groups, improved the transparency of ridings in the

writing process, increased resources in key areas, bolstered measures to avoid conflicts of interest, and we continue to pursue industry and maet wide initiatives. in each area, we have made good progress. i still believe more can and should be done. we whoheartedly support racist -- legislative efforts that will reinforce high-quality rating staff and enhance accountability for without intrudingnto writing opinion content. women tend high standards of our breeding practices and transparency and our actions and meics. thank you. i am happy to respond to any questions. >> thank you. we will begin with the questioning. i will start and the vice chair and members who led this research and investigation effortnto credit rating agenci. let me start by saying the two issues of like to property

gentlemen are the following -- first of all, business and management practices. corporate responsibility, management accountability. second issue is the model for credit rating agencies in the financial market. let me start with you today, mr. mcdaniel. let me asyou very directly. the reason i want to say that these issues are importa is in trying to assess how we had this run-up to the financial crisis, we have found over the course of months that there is very -- there is very little self examination. but mr. with you. under your leadership, there were very significa failures at moody's. the product that your company offered proved to be highly

detective. not just by small measures but by a large amount. 83% of your aaa rated securities were downgraded. in 2007, 89% of those which were investment-grade ratings were downaded to junk. massive downgrades start in july of 2007 when housing prices have declined just 4% from the peak. some have said that the very enterprise was fraudulent if not -- if not in a legal sense but in a practical sse because the product is not closely approximate at they represented to be. if we flipped a coin, it would have been five times more accurate in terms of the result. your shareholders lost 73% of e value in the stock from peak to today. the ratings enabled the issuance of trillions of dollars of mortgage securities which we now know were rife with significant

problems from fraud to misrepresentation and may have well fueled the housing bubble. investors relied on the ratings suffered enormous losses intercompany's reputation, something i know that mr. ffett has held important, is certainly under a significant criticism. my question for you is really who should be held aountable? we have a system of capitalism are there are regulatory mechanisms. we have owners, boards, and management owho should b accountable if not you? >> the performance of the housing sector, and as a result the ratings, that are associated with housing assets clrly have exhibited in variable performance in recent years. there was decades of strong performance leading uto the current crisis. we believed that our ratings

were our best opinion at the time that we assigned them. as we obtained new information and were able to update our judgments based on the new information and transgendered we were seeing in the housing market, -- and trends we were seeing in the housing market, we adjusted our ratings. i am deeply disappointed with the perfmance of ratings associated with the using sector. that is injurious to the reputation of the firm and to the long-term value of the firm. the regret is genuine and deep with respe to our ratings in housing sector. >> the april this further. -- let me probe this further. i know it is hard to keep t peaks and valleys.

but me just say there is almost a common-sense test. your firm rated 42,000 tronches of rmbs aaa in a context where there are four corporatio in the country and the context you were writing about0% of the curities as aaa in terms of the corporate debt world where we have more transparency a understand the corporate data. only 1.4% side of that was rated aaa. you lead an enterprise for which you were compensated handsomely, $39 million, over this period. if american capitalism is about risk and reward, reporting says, should there have been a management change at moody's? do we need a culture in which success and failure are essentially accounted for? >> as i remarked a moment ago,

we'd certainly believed that our ratings wereropriatehen they were assigned. i recognize that those ratings have not performed well in the housing-related sector. as a result, we did me management changes >> but not at the top. no board or ceo changes. >> if you are asking with respect to me,hich i can see you are, it is a fair question. if we reach a point where either our shareholders or our board of directors or i do not believe i am in the best position to lead the firm through this period and into the future, then i will not be in my job. >> ok. mr. buffett, any observations on the responses by mr. mcdaniel? >> i have been more draconian in

my view ofhe ceo's responsibility. in terms of financial institutions that have failed and have required assistance by the government, i think when society has to step in to save institutions for societal asons, the ceo should basically the way of broke. there should be a real downside. incentives are an important aspect in behavior. in the end, i do not know who except for maybe john paulson would have been coming up with different kinds of ratings? it was the greatest bubblehead ever seen. -- bubble that i have ever seen. the enre american public was

caught up in a belief that housing prices could not fall dramatically. eddie mac believed it. fannie mae to the debt. congress believe that. the media believe that. i believe that. very few people could appreciate the bubble. that is the nature of bubbles. the bece massive dilution. i am much more inclined to come down hard on the ceo's of institutions that cost the united states government to come in and necessarily bolster them. >> l me prove that a little. i just want to sit for the record, i do think around the country there were peopl who thought the bubble was unsustainable. there were a number of experts. robert schiller, the real rub been a, a dean baker.

-- nouriel roubini. this was something we had never seen hhstorically. moving beyond that for a minute, the rating agencies did play a fundamental role in accelerating the securitization and therefore me would argue that the origination of products intended to be highly efficient. we are talking about low teaser rates,-and a transition. there was a warning in 2004 from the fbi that mortgage fraud became so epidemic tt if unchecked, it would result in a crisis as big as the s and l crisis. there were many flashing lights along the way. there is a country song by don mclean wheree says when the gates are all down and t signatures are flashing and the whistles are screaming and you

stay on the tracks of boarding the fax, you cannot blame the wreck on the train. was the rolef the rating agencies to be referees in a game that got out of control? you told our staff that if they had not done the ratings come up they would have been hunted at by congress. do we not expect referees to make the call even if they get booed? >> they made the wrong call. they've basically believed, as most of t public did, you cann have this as possible without overwhelming believe, it did not mean anything in 2006 to listen to henry paulson. look at me. i was wrong on it too. i recognized something dramatic was going on. i actually called a bubblette. that was wrong. it was a four-star bubble. the rating agencies missed it.

you can look to the march 30, 2007 report by congress wch had 200 people overseeing freddie mae and -- in may and freddie mac. they gave them a green light. >> f i take a different view -- i take a dferent view. they raised a number of issues. you said the ratings business was a wonderful business. q said that because it is a t wobbly, little capital is required. it turned out to be a good model for a short time. not necessarily. you are the largest shareholder. i realized by all accounts you cannot -- you were not particularly active or aggressive. you h a very infrequent contact.

i want to probe the responsibility of shareholders. this was a company where 50.5% of the shares are held by five large orders. you had this tremendous spike in revenue coming from structure products. we have heard today and in the course of our interviews a lot of concerns about the change of culture and the pssure for profit, sacrificing ratings, what are the approiate roles of shareholders and boards of directors and monitoring companies? what responsibility to look in to the problems arising and did the board and shareholders do what they should have done in this respect? >> in 2006, i was not sitting there thinking that the housing bubble was going to get as large

as it did or as it was and it was going to burst. if i h, i would have sold my stock. >> given the dramatic consequences that have happened, and i do think there have been reputationf damages. you said it takes 20 yrs to build a reputation, five minutes to ruin it. if you think about that, something aboutoing things differently. the question is, in the end, the rating were wrong. there are reputatn no issues. there has been a massive loss of shareholder value. should there be a new board? should there be new management? i would say that in this particular case, they made a mistake that everybody in the country made. march 30 of 2007, it was reported the overall asset quality is strong. all they owned was mortgages and

that was march of 2007. >> i will just say, arguing with you about what the markets were saying, this was not a big secret. this was "the economist." there were a lot of rnings. even movies -- moody's.com you are saying this does not warrant looking at the culture of the company? it's certainly not put it is not necessary. >> this was 2005 let me move on. we interviewed a member the moo's board who indicated the board was not particularly involved and didot discuss significant issues but the ratings process. there was a recent press accounts about the disengaged

naturef the board but it's as the two sior executives approached with significant problems at the company. >> no. >> no? >> no. >> ok. not accurate. it seems to me that it was the worst of many worlds. the model by its nature creates pressure to produce credit ratis that serve the beneficiary and of those. it was said that whose bread i e to, whose song i sing. -- whose bread i eat, whose song i sing. you have the duopoly with enormous pricing power. you have a whole set of legal protections, including first amended protections. it seems to me like a pretty toxic brew of corporate non

responsibility. do you think radical surgery is necessary? for example, mr. buffett, should be out of the issue of pay model? should we adopthe franken ovisns in the senate bill which would say that when secting rating agencies,hey should be selected by the sec? what kind of radical surgery, had it been performed early enough, would have helped in the sense that the spreading agencies would not have enabled this flood of toxic mortgage securities? >> as the chairman, i hate issue are pay. we pay a lot of money and we have no negotiating power. >> i deeply resent the model myself. >> it makes for a wonderful economic model but as a practical or model, i have no negotiating power. i need a rating. it is required in many cases.

if they say that it is $1 billion and i say it could be 900,000, there is no guy on the street. that is the nature of that. if you go to something other than user pay, it get carried tricky. if i will buy a $10,000 municipal-bo, she will hear the ratings someplace published. >> united bs is a nonprofit model. you do not have the profit pressure. consumer reports doeit. is this a broken model? if they wanted to rate bonds and people would accept them, i suppose it could happen. it would require a faithe large -- to require a large expenditure to rate a of these bonds. >> what about selection of

raiders by people other than issue worse? >> and defect, -- in effect, i am told which raider's eye and to use. >> what about that as a change? >> i do not know the answer to that. the wisdom of somebody picking out raiders, will that be perfect? -- picking out raters. will that be perfect? >> the largest rating agencies operate under an issuer pays del. i think it is important for us to acknowledge and recognize that any busins model in which the feet payer has interest in the outcome is a model that has potential conflicts of interest and those conflicts st be managed

properly. >> can they be? fannie mae and freddie mac, these four institutions that d this bush poll. -- thi push-pull. can it really be overcome? its like transparency. everybody loves it. they also say we can handle our conflicts. it does not appear to have been based on this leaders period. >> e poor performance of ratings from the 2006-2007 period and residential mortgage- backed securities and other related securities, hsing related securities, it is not -- has not been replicated elsewhere in the business. to the extent that there is a

concer that there cannot be superior ratings quality and even in the midst of a severe economic downturn, i think it is a misunderstanding. as i said, because the parties that are wng to pay fees for ratings, whether they be issuers or investors or government, have an interest in the outcome of those ratings, i do not see how to avoid potential conflicts of interest. we also have an important public good that is pduced which is the ratings are made available to the general public for free. there is no selective disclosure of the ratings. large institutions to not have an advantage ove smaller institutions or individuals in terms of the access tratings. i think that is an important public benefit. >> this goes to management. this structural products vision was a cash cow. this is a classic case of its

growing like a weed so it is a weed. there are questions about what staff had to do to increase revenues so much. pn became 52% of your revenue. the mess was huge. 90% downgrade. even the dumbest thing in t class gets 10% on eir exam. it seems the resources were not apply to understanding these products. . . >> it does not seem to me that you built in the capity to structure your new industry

that brought in renue, but does not seem to be from a manageme perspective. and we spent countless hours trying to understand the modeling. if you loo at the modeling, data was put in that was incomplete and inadequate. there were a lot of human judgments. is that not a significant management failureo not have built innthe capacity? might youave missed this last had you been on top of this? >> i think that we certainly believe that we were on top of this. we believe the information made available was adequate. there were other parties in the marketplace that have other roles and responsibilities in respect to evaluation of properties and review of

mortgage applications. we are analyst. we can send that information. we believe our role is to look at the information and the data and process that as part of our analytical process, not to replicate or duplicate roles that others inhe market -- >> which they did not do. >> it would appear that they did not. >> they did not. . buffett, any observations on whether this was a pure modeling mistake or if it was a lack of diligence, you are a b advocate to due diligen. you have an entity that is a do ligence provider in a sense. you can ask a third party, but if you're gng to outsource

diligence you would be doing due diligence. should the rating agencies have done due diligence rather than just looking at the revenues? >> looking back, they should have recognized it. like i said, i did not recognize it. as i understand it, they had something in the model that they would not be a correlation to of the country of the same experience. its true in the past -- this was a nation-wide bube. the diversification among states did not make that much difference. it happened every place. >> 91-93 we had a decline in drops. there is the big -- old-line that one bad apple can spoil the bunch.

half of the apples may have been rotten. all right, i have asked you 24 right now. let's move on to the vice chairman. thank you very much. >> thank you mr. chairman. mr. buffett, not withstanding the subpoena, i want to thank you for coming. >> i want to thank you for the subpoena. [laughter] >> i wanted you to have a framed copy for your wall. i think it was good cover because you can tell others that you do not want to go to that you have the power to use it. i do not have anything for you to sign. when i was younger, he went monday night football began, don meredith and howard cosell where the team. don meredith he would launch in but game game"if it's an

it's where candy and nuts, we would all have a merry christmas." i am not interested in going after the epps and buts. -- ifs and buts. i am a very strong supporter and have tried to maintain the argument that behavior has consequences. you can't do it when your ability to track down someone's with something as an incentive or as a negate can influence that behavior. i am very concerned about the amounts of money that were generated in a structure that provided the short-term opportunities and no long-term downside and, apparently, no thanks to avert having done it. there is to a degree an argument

that this is basically somebody 's idea of unfettered capitalism to a very great extent. you have made comments in that regard. how concerned are you that we are able to get this genie back in the bottle to the point that if behavior has consequences that -- i do not see anybody able to put tt structu back%+ in place. how do you feel? >> it requires a whole new level of thinking. i think you are absolutely right. when you run a huge financial institution whose stability or instability can affect the entire society, i think there should be a tremendous downside. i think that if someone's personal equation for a financial institution that they

run the place that they walk away with $100 million instead of $500 million, and that is a crazstructure. i think boris of directors should not sign on for such a structure. i think the boards themselves should bear a heavy penalty if the institution has to go to the federal government. it would not be as draconian as with the ceo, but i would focus th attention that the mistakes could cause big problems to society. >> thank you. >> i thought i got out of e business. i did not think i was going to be back on this side of the desk asking questions of witnesses again. iaid yes to this because of the way this commission has been structured. it is basically my belief that it is pure public service. i thought it was wise of the

ngress to structure us, not to look for answers to this ifs and in terms looking for to what we should do, but our job is to explain the financial crisis can do it as accurately as we are able with the resources that we have. one of the reasons i was pleased to have you in process of us -- i would hope the answers you would give mto your questions is not the ones that virtually everyone else has given because it does not unlike the behavior and the consequences. the answer is somebody else. given your reputation --

cretaceous are only as good as or baldacci -- -- the reputations are only as good as your balance sheet -- you have a good reputation. in your estimation, i do not want to drag us to this business if -- this business of ifs and buts, you are not going to be able to solve the fundamental pblems as we examine them with a single bill that has gone through two committees that have the same jurisdiction. you are just not going to hit it. what i would like you to do, and i would like both of you to answer questions in writing

because we do not have the end time. would you be willing to do that? >> i had a vergood session with your staff. i think they dia good job of asking good questions and good follow-up questions. i wou hope some of t material would be and that record. >> we are revwing it to make sure it is. what do you think the house and the senate has gotten mostly right in the legislation that is moving through congress? where are their obvious mrs.? i do not think we need to deal with subtleties now. it may be in the follow-up written questions. >> i have not read the 1500 page bill. >> no one has. that is a denial that is ok. >> i have two thoughts. one is the question of incentives. i think it is very important.

i think no one has any business runnin a financial institution for the ship. if they are not able to accept thatption, i think someone else should. there should be a huge downside for the c e zero and a significant downside for the board. the second thing is excessive leverage. it is very hard to define leverage because some institutions will stand for wine and their assets are all treasury bills it is not easy to define, but the size of the pop of the bubble was accentuated because of the leverage that exist in the system. those would be two points that i would try to address intelligently. >> thank you.

>>one question on the kind of incentives, upside and downside. you talk aut financial institutions. the very structure of credit rating agencies, it does seem in the end that there a lots of upsides and very little downside. i think there is a fine distinction between financial institutions that received federal money and, i mightdd, credit rating agencies that got us there. wasn't this system is tilted in terms of lots of upside and downside? >> i think most of corporate america is tilted back way. >> i know you are a owner but come on. >> we have seen significant downside. ere is no question. the mistakes that were made at moody's and standard and poor's had affected their stocks.

>> i have no right to ask u this, but just as the rating encies proced what ever a triple a was and then investment banks and others were able to take the leftovers, restructured them, and turn theinto more triple a's rated by an agency, you need to speak out more than you have about fundamentals. there are not very many people who can command the respect -- and i know you were busy ou there in front of a number of different cnnels, but you have to do more about this. this may be your real legacy. >> i have spoken out on some things. i do not disagrewith you.

perhaps no one spoke out enough in the past year during the bubble. my partner speaks very loudly. i agree with you. >> once congress acts, the ability, as you well know, to act again to move into aas that they were not able to will be virtually impossible. he only tried to clean up the area you knew then to burst. this is not neay as comprehensiie as it needs to be. it may need to move to torte. i am going to turn my time over to others you may want t quiz you. capitalism has changed in your lifetime. my concern is that it gets better which means

responsibility, a moral obligation -- behavior has consequences. thank you. >> thank you very much, mr. thomas. we will now move to senator graham. >> thank you very muc, mr. buffett and mr. mcdaniel said, per your insightful comments. mr. mcdaniel, you said that inc. the research into its rating process. e chart that is about to be -- ced to g >> can we place it where it was before? >> be real time keeps ticking.

>> newborn. >> this chart indicates -- move on. >> this chart indicates securities that were rated by moody's. the blue and the red or the cdo's. the first of the yellow boxess in october 2006. it was something south of $1 biion issued. when a new pea research service issued a report -- moody's research service issued a report saying that the u.s. housing market downturn is in full swing due to single-family housing production, house

prices are falling at an increesing -- in a increasing number of areas. the word crash is used to describe the situaon in areas of the country that represented about half of the outstanding mortgages. how was that information inc. and to the ratings process is of the new peace? >> the analysts and ratings -- moody's. the analyst and a ratings -- it was included in the ratings communications and analysis. they do use multiple sources of information, including

moodyseconomy.com. >> recogzing, the question is al in october 2006, was this incorporated into the ratings ocess? >> i do not how it -- i do not know how it was used in the rating committees. >> the concern is, immediately after that dire prediction was theed, the c number,eo's -- to $40 ceo's went billion a month in less tn 90 days. it does not seem that the announceme of severe problems correlated with the actions that were taken. >> i believe the rating committees would include any information they believed relevant in their deliberations. >> could you, as a follow-up,

give usome more specific information as to what did happen in terms of incorporating this research into e rang process in october of 2006? >> yes. >> can i simplified that? this came fr moody's.com. could you do a chronology of what management did specifically? it is pretty dramatic. they usedhe words that the market a would crash. could you give us a specific time line of to did what went on the top level on down? >> i will do that. i should add thaat this time, even with the analysis that moodys.com was producing, their pectations were for more moderate in rms of what was the one to happen in the housing market than what actually

happened. i just want to make sure that there is no misunderstanding o the degree of downturn they were expecting at that time. >> one of my concerns, which is not peculiar to financial industry for rating agencies, but seems to be endemic across our culture is the avoidance of warning signs until the situation degerates into a catastrophe, whether it is the failure to see the consequences of new technologies and deep wateretroleum extractions, but t changing safety and response capabilities or some of the signs that have led to the financial collse. the first panel, made up of people who had experience at of why, gave examples

these warning signals were not acteupon. those included t desireo increase market share, the lack of ability to walk away from a deal, the lack of a human- resources keep paceith the rapid increase in the number of cdo's that were ing evaluated, the lack of an attendant research capabilities, the fac that the banks were misleading the agencies and manipulating the process. those wereome of the items that were listed. do you concur with that list? are there oth items you would add to the list? >>here are some things i would concur with and others i would not. to highlight two i think are important, first of all, we

agree that having a robust, independt researc function is important. we've had made changes in both the iividuals and independence of the credit policy option over the last three years. >> excuse me, can i ask -- one other sue was the fact that the committees during the ratings seemed to be devoid of people either from the real- estate industryr from the banking indusy. therefore, they had little personal capacity to evaluate what was happening in those areas. had you taken some steps to broaden the pool on the rating committees? >> that, again, in the category

of lessons learned, greater cross-disciplinary expertise is important. we have made important strides in accomplishing that. i think we have made very good progress. >> could you give us some animation on that subject -- information on that subject? what was the status of those rating committees during the period of 2005 forward? >> with respect to being able to walk away from the deal, i simply disagree with that. we did not rate hundreds, probably thousands, residential mortgage-backed security charges -- tranches.

they were not such that the issuers and west to have those opinions and we did not rate those. we set out entire market sectors for credit reasons where we had credit concerns. that is because the ratings quality is paramount. we do not always get it right. predicting the future is an uncertain process, but i think that there has been a misunderstanding of our willingness to stay out of markets where our credit opinions or its mo conservative or we have credit ncerns. >> what about thi issue of mislding or manipulative activities by banks? >> certainly, if we are where --

if we are aware of misleading or manipulative information, we would not pursue within institution that is providing that. >> if the testimony tha we have ishat the banks would not have disclosed information which was requted and the analyst did not feel that they could push back against the banks to make that eight requirements of their issuing the rating. >> our methodologies are, i believe, clear in terms of the information we need to rrte an estimate. i believe that we pursd that informatton consistent with our methodologies. there may be additional information that may be interesting to review which may or may not have an influence on our thinking onredit, but we certainly would look to have all of the information consistent

with our met a lot -- methodological approach. >> mr. buffett, this is a broader question, but you have an excellent reputation for being the smasher for your firm. you feel that that is a principal responsibility of the ceo. why do you feel that as a society we have missed so many signals acrs a range of areas? >> rising prices and a discreted sensitivities and judgments of people that are very smart -- you get in much more trouble with a goo premise than a bad premise. when you have a sound premise,

initially that makes a lot of sense. after a while, t rising prices of all internet stocks allow people to make llions of dollars over things that are nonsensical. 66 or 67% of the people will want to be in one. it you believe that hou prices are going to go up next year, you wi stretch to buy one thi year. after a while, rising prices became their own rationale. people thought that by one house was a good ia -- by ree houses was a good idea. people who lent money said it does not matter if someone is lying about their income because of the house goes up in price we will get our money back anyway. it affects the reasoning pow up and down the line. aac newton participated in the south sea bubble, got out,

and got claimed. he was regarded as generally been pretty bright. we had farmland in the midwest. it was a worse recession for us that the housing recession. there ar going to be more people, the rising prices prevented their own destruction. >> it is a narcotics, but do we not expect that regulators, credit rating agencies not partake of the narcotic? is that t their role? >> it is not easy to avoid. >> you do not was yo police trading in crack. -- you do not want your police trading in crack. >> with the power of this podium, we had a great interne boom after that.

>> that was the nature our question of who was responsible. soone must be. >> i want to ask a different question of mr. mcdaniel. during this period of the last five years, how frequently did representatives of various regulators from financial records -- institution regulators to the sec, visit new to talk about's your methodologies and inform themselves to what yo're doing? they are the ones youave imposed regulations requiring the use of your rating rvices. how close supervision are monitoring of activities did they maintained? >> pursuant to the credit rating

agency reform act of006 which became effective in september of 2007, there has been multiple inspections and reviews of our rating processes and practices by the securities and exchange commission. prior to that. , the overght was less intensive because there was not a regulatory framework. >> prio to that legislation, are you saying that they did not think that they have some responsibility to having mandatedre given strong incentives to use the rating agencies products as part of the management of regulated

activities that -- activities. >> i cannot speak for the commission, but i believe the regulatory oversight portunities were more limited prior to legislation passing, said they were not -- so they were not as extensive in their oversight of moody's are the industry. >> thank you very much, senator graham. >> thank you mr. chairman. thank you both for coming here. le me start with you mr. mcdaniel said. you were he this morning for the elier panel. >> i heard most of the earlier

panel. not all oit. >> i was wondering if you heard anything about your company that was a surprise to you or that you did not know. >> the issues that were raised byome of the individuals that were more critical of the company i have heard before and, in fact, we ha investigated those iues previsly, including use of and an external law fm. we found the concerns that were raised to be without merit. >> there was this question i thought enhanced what you referred to when you talked about enhanced analytical integrity. i think you were getting at the point that there were pressures perhaps, on the talent that you had -- the analytical talent -- to produce ratings.

is that what you meant by enhanced analytical integrity? what did you do to prevent that from happening? >> in the context of my prepared remarks with regard to enhanced analytical integrity, i was referring to some of the actions we have taken since 2007 to separate our credit policy function from the line of business ratings analyst to have more cross disciplinary participation in the process, and to create fther separation of any person who is involved in cmercial activities for the terms. >> let's talk specifically about this one issue. our analyst now permitted to top two issuers -- talk to issuers? >> yes, analyst do speak to

issuers. >> you're not concerned that there are pressures brought to them by people who are more ambitious and forceful? you do not see that as a problem in? >> i am -- you do not see that as a problem? >> i think i is important and should continue. the analyst may have questions about nancial information or management strategies. i do think that thos communications for purposes of creating predictive credit ratings or useful. >> is there a manager who oversees the analysts and can be available for discussion of these issues? >> there are managers to oversee our analysts, yes.

they would be available. >> let me ask you want final question. what i your view of what caused the financial crisis? >> in terms of direct cses, certainly the weakening of the housing market, the softening of that market, and importantly, the very rapid tighteng of credit for mortgage borrowers who needed to refinance. that greatly exacerbated the issue. the sudden tightening of credit produced theindf large and rapid problem that we saw. >> it is principally a problem of people not being able to finance -- refinance debt sts

failures? >> that was an important contributor. it acted as a catalyst. >> mr. buffe, we have had housing bubbles before. we have had other kinds of asset mobile's before, most recently oil price asset bubble. this one was quite special. i want to press you a little bit on this because i would like to get your sense of why this one was special. why did it get so large? why did someone with your astute knowledge about the economy and not see that this was an extraordarily different bubble from one we have had before? >> i wish i could give you a good answer to that. it was really the granddaddy of all bubbles and it affected in

an asset class of 22 treen. it hit every -- 22 trillion. it hit everybody. the figures show that it happened. when it gathers momentum -- the internet bubble went further than i thoughtt would. we had the farm bubble in nebraska where things went crazy for a while. when your next-door neighbor is maki money and very easy by buying a second house with a very small down payment, after a while it's sort of gets to you and yofigure that you should be doing it too. there have been a history of bubbles. i never understood like tulips we worth so much.

>> you have had many years to watch our economy. to economists in general, sharply rising prices are a gnal that something is particularly good -- is peculiar in the economy. esol the prices rising, but you did not think -- you salt beef prices are risin but you did not think it was something that could -- butyou saw the prices rising, but you did not think it was something that could go wron >> a significant percentage of the publicly traded homebuilder's let it be known at they would like to sell out to berkshire hathaway. lookin back, i should have figureout what i did not figure out. >> were they asking more than once? >> it is interesting, i never

heard from them for many decades and all of a sudden some of them showed up on my doorstep. >> you were once an owner of freddie mac. you are familiar with alfred may -- fannie mae and freddie mac operates. do you see their activities as having any role in the growth of this bubble? >> i think they were doing what they were instructed by congress to do to a great degree. they took on weaker forms of mogages in greater amount -- amounts. that has been covered in the reports. they also bought the required 20% down payment, but then they would buy mortgage iurance from other entities. i look at the profiles of some of those loans. frequently, a significant

percentage of the time, more than 80 percent of the borrower wasoing to mortgage payment that is not sustainable. they were still, in effect, helping people to participate in something that wouldd to big trouble. >> what did you sell your freddie mac -- why did you sell your freddie mac stock? >> i sold it for a lot of reasons. at one point, it became aarent that they were getting more and more tranched by trying to report increases every quarter. they became quite interesd in having that happen. they also bough some bonds that had nothing to do with housing at all. they were using the government's credit to enlarge the size of this hedge-fund type information

-- porol. i figure it d.c. one cockroach, therere probably a lot more in the kitchen. >> if you eat -- did you tolu fannie and freddie enough to find out if they had -- follow danny and freddie enough to find out if they had requirements? >> there were predicated on using the tax credits and bald. of course, they have no income now. thus bece very dubious assets. >> were you aware that they were buying the type of mortgages that they were buying? >> they were mandated in many other activities by congress, no question about that. therwere also tried to serve on wall street. that issa tough balancing act. >> , do i have that >> four-o'clock 55.

-- 4 minutes and 55 seconds. >> it has recently come to light that you participated actively in that market. >> i said that derivatives -- i think that used improperly as they are certain to be because of what they provide people who trade in them, i think that the pose system-wide problems. >> what do use them for? >> i u them to make money. if i think they are misprized, i'd buy them. >> -- miss priced, i'd buy them -- mispriced, i buy them.

>> you do not hedge that? >> i do not lay them f. we sl insurance. >> this is much like what aig did. >> i do not think it is much like it. we sell credit insurance. >> ie no further questions. thank you, very much. >> can i bring up one. ? it gets back to another point. it you go back to the late 20's, we had a bubble in stocks that was caused by extreme margins and people who did not know what they were doing. they had commission hearings after that and they decided that this was a societal problem. congress gave the federal serve the authority to regulate margins. the federal reserve still has

that authority, as i understand it, 70 years later. we put in derivatives and swaps, at that point you can borrow 100 percent. i brought this up a half dozen times. i say, what in the world are we doing when you can get a return swap? it is something that should be addressed. >> ybe i misread this, i thought your problem with some of the legislation that is going through had to do th the bag that you did not want to put up the collateral. >> in terms of contracts that were negotiated several years ago, there was one price for collateralized contracts and another part uollateralized.

thousands of companies negotiated under that basis. if we are required to substitutt an uncollateralized contract and make it a collateralized contract, before we send that money to wall street, we should get paid for the differenc between those two types of contracts. just like changing the price or changing the maturity, there is a significant difference in price. hundreds of end-ers would be required to send money to wall streetirms, contrary to the contract they originally negotiated and contrary to the differential. >> you do not have an objection to doing it the future? >> notn the least. i object to sling one type of contract. >> thank you very much for joining us.

i would like to start with mr. buffett largely because my mother is watching and she would be very disappointed if i did not acknowledge your seniority. >> h hi mom. >> you charge enough to cover the rest of your undertaking. >> we only take on risk we can handle ourselves. we only have about 250 coracts are so total. if everything goes wrong, we can easily handle it. that was not the case with aig. >> indeed, it was not. let me address a general question about how we might restructure the incentives in the market system to try and avoid these kind of crisis in the future. he said, mr. buffett, you light moody's because it had a pricing power. you testified a little earlier

today that in many ways the incentives -- incentives for rating agencies have become worse during the credit crisis. the new controlput in place by regulators are too weak to significantly alters dynamic. then, there is a quote that you also have in your testimony that you gave privately to our team, market systems -- taking a small percentage resul in a huge amount of money per capita in terms of the people who are working in at and they ar not inclined to get it up. whenever i hear the terms of modernization and animation, i reached for my wallet. it is easily what they mean by revenue producing. we have seen a number of things going on in the marketplace. you have also said that everybody should have a lot to lose in this marketplace.

in and the securitizatn process, we have learned that everybody involved has nothing to lose. the mortgage brokers to originate the mortgage get paid a percentage of the mortgage they originate without regard to the consequences if it succeeds or fails. the bankers tout the deals together or getting a percentage. theawyers to write the perspective, the auditors to audit e books, and the credit rating agencies to wre the3 cash at the conclusion of the sale of these secuties. onthought that some people have suggested is that rather than pay all of these market participants in cash, that you might increase the likihoodf diligence being properly done if you paid them in the securities

themselves. if you are getting 10 basis points of the dollar's, and give the -- you know that you will live with that security for a long time. you can't bonus the people that did the job wh the same security. if they succeed, they get 7% interest for 10 years. what do you think about that idea? >> i liked it. or, put it in a deferred account. i think the most can be achieved byetting at the big institutio. i was at solomon almost 20 years ago trying to put in a new compensation system. it can be very difficult.

i do not retract any of those earlier remarks. i agree with them. >> it was said that it w a great idea, but they are not core to like it. it seems to me -- iant to go back to what happened at moody's to some extent. 100 years ago, john moody started trading railroad bonds, which you know a lot about. they are relatively simpl instruments. now they are raiding complex instruments. maybe i should turn to mr. mcdaniel is on this question. some of the -- some of them are skewed in favor of your property rating. in your pricing, i ve learned from our investigation, our nds

on residential mortgage-backed securities, you charged basis points on this and that were rated senior and 3.50 basis pots for the tranches that were rated subordated. it sms you should put less in the supported tranches. it is similar to a difficulty that we discovered in the mortgage-brokerag situation where mortgage brokers were sotimes compensated atwe the percentage rate for generating a mortgage that had a higher interest rates payable to the lender than a traditional mortgage which tn incentivize themwice as much to direct borrowers into sub-prime mortgages and -- to otherwise

may have qualified for traditional mortgages. mr. mcdaniel, do you think that is a problem? why did you actually structured the fees payable to new peace in that way that gave you more if you rated -- moody's in that way that gave you more if you rated them higher. >> first of all, they were not aware of the severance in pricing in thei deliberations or analytical work or rating committee work. secondly, although i have not had a opportunity to do a comprehensive che, i did go back to look at rnbs applications in 2006 and 2007. the basis point fees were identical. >> our people say that the change in 2007 that led to 3.5%.

that is a reduction in pricing wer. 3.5 basis points startin in 2007. >> i was able tlook at 2006 and it was idental in 2006, as well. i did not have a chance to do a comprehensive check. >> maybe you could do a comprehensive check and report back to us. you have nine basis points for reading a cdo which is twice as much as she got 4 rating and rmbs. it is unclear toe how that could be. does that incentivi you to do mhtdo's because you more than $1 million in fees. is it ally that much harder to rate a cdo than it is too great and mbs? >> i can only respond in respect

to the overall approh. yet there an opportunity to charge fees and that the market will bear, i think we would do that. we have fees that range from very, very modest -- particularly in the municipal bond sector -- tuttis that are more substanal for large corporations -- to duties that are more substantial for large corporations -- to fees that are more substantial for large corporations. >> lookg back to this chart that commissioner graham brought in front of you, it strikes me that when you look at ts in the face of contradictory information, the actual number of deals and rated in both cdo's

and ridential mortgage-backed securities goes up dramatically. even after you have had four or five major downgrades, you are still raking a whole bunch of deals that come forward. i will sort of give you a past to some extent on nobody knew that the market would go down as was basically -- i do notody%- remember what your term was, mr. buffett -- everybody was the leading in this mobile once you get contradictory information, do you not have a obligation to go forward? it seems to me that there are so fewransactions in the marketplace, you're trying to get these deals done so you could mop up the last bitf the gravy before they took the plates away. thes deals are not out there

anymore. there are not nine basis points cdo'scod's amore -- anymore. do you have a thought on that? >> as long as securities are being offered to the marketplace, i think we have an obligation to shrike toffer our best opinion on the securities -- i think we have an obligation to offer our best opinion on the securities. what is coming to market, i ink we should offer an opinion on we obviously want this opinions to be predicted. we want his opinions to incorporate all information that we think is relevant. i think we should offer the opinion. >> they wereot any more predictive, were they? in fact, they led to downgrades just significantly as they did prior to that. is that not correct?

>> if yes, mr. angelides. -- yes, mr. angides. >> there are two greeks on this committee. mr. buffett, do you fault the management of a new lease -- moody's, or at least that? how is it that they went forward and continued to rate the securities, is essentially, no differently than they had been doing in the face of the bubble? >> i want to put this in perspective. offering an opinion is one thin offering opinion that they are triple a is quite another. >> think in 2007, $500 billion were rated triple a. about $100 billion plus is when

you began to be the downgrade. maybe ey should not be rated investment grade. >> ofourse, they were subsequently downgraded. mr. buffett? >> i do not know what took place internally, but from listening to this and what i see on t chart, it looks like they twead their model. it is sometimes difficult for people to adjust their opinion that much in a short piod of time. >> that is right. too many mixed metaphors here. guess i would like to ask you, i know you testified in your internal testimony that you thought the government made the right decision in backing up these companies and that the

markets needed reassurance -- reassurance at the time. there are many to believe that that demonstrates the breadth and scope of this crisis. we have som any other crisis. enron was the seventh largest corporation in an america -- in america. none of them are required trillions of dollars of taxpays' money to bolster the privateector, and yet you still it was necesry at the time. could you elucidate? >> in december 2008, our financial system bically came to a halt. you had 30 million americans with their money in money-market funds comprising three and a half a trillion. in the first three days of that week, 170 billion cleared out that w all institutional.

individuals had not caught on yet. when 30 million people began t worry about where their money market funds are going to be, when you have paper stopped in terms of issuance, -- we sell a treasury bill for $5,000,090. at that point, your mattress was no even good enough. >> we are not proposing remedies

. . you have huge cash cushion that you like to keep it because it puts you in a protected, a safe position to take advantage of opportunities. a lot of other people in this area did not do that. they ran every capital arbitron possible to avoid putting back

in as much capital. that seems to me to be a related problem. >> they wanted to get around capital requirements in europe. if he let those insurance exist in that form and let them use them they will get used in a limited manner. >> thank you very much. >> let's move on. miss mary? >> thank you both for being here. mr. mcdaniel, i have a question about the events of the crisis. many look back at the financial crisis, i wonder if the legislative requirements that asks certain investors to invest only in rated securities, it those requirements had not existed, how agrobusiness been different? which you have had to compete on different terms? would you have had to reward people within moody's differently?

>> i do not know exactly how the business would exist if there were differences or regulatory uses of the ratings. i am supportive of a reduction of the use of ratings in regulation. i think the use of ratings in regulation offers them a basis for competing other than on the quality when they affect the certification. the effect, the certification that they have. and i think rating agenes should prosper or not based on whether market participants about you the ratings and value the rating opinion and to researchhe company has.

>> 2 with that mind -- with that in mind, we had some in the panel that suggested they could not determine that there was a connection between their abity to get the ratings rightand their actual recognition within the firm. do you think that that is true? >> we tried to reward people in terms of their position in the firm and there consultation based on vague -- there compensation based on the quality of the word. it could take a long time to a evaluate the performance of securities. but their research, their preparedness, the robustness of their reasoning are things that can be judged and we very much try to do that. >> it was not outcome oriented. >> that is able to be measured

t broad level statistically to a strong outcome. it is more difficult to judge an individual's performance especially in e short run a limited number of credits. it is easier to measure them at the broad level than the narrow level. >> . mr. buffett, with the investing world be in a better place if everyone had to do their own due diligence? >> for some, but there are those that are not equipped. they probably need to rely on some kind of standards to make sure that people don't vote totally hot wi in terms of how they invest in funds which belong to their policyholders.

and then we do not use ratings. at we're really hope for insecurities, that would give us a chance to earn a profit if we disagree on how the agencies raided them. there is one ironic point that i should mention. ifhere were 10 rating agencies, all would be well regarded, and we could ha any e of them, that would compete either on crac -- price or laxity or both. they would be out there trying to get our business and they might so try by laxity. you could argue that there is one rating agency, and they would not need to compe on eitherrice or a black city. dependence and rief come with strengtin business. -if you had a situation where

there was a lot of competition, i am not sure that rating agencies would be independent as they are. >> i uld hate to differ with you on that. if you look at equity research, there are number of batik shops specifically known for the quality of their research and th do not a engage in banking activity. they do not have that -- -- as much at stake in the origination process. so i guess my question is, if you change the way that people get paid, do you end up getting different outcomes? that is the nature of where i was headed. i had another question for you, mr. buffett, you've been a largely hands-off investor but i was curious about the due diligence process in your

investment in goldman sachs. if you talk about your conversation with management there? >> 2 that decision was made in september 2008. we were approached by every firm, at least every firm that went under, about putting money in. wn goldman shs was willing to take my on terms i found satisfactory, which had not even been the case the week before, i came to theonclusion that unless the american financial system totally fell apart, that it was going to be a sound investment. i had far more confidence in their risk management that i had with some of theother wall street firms that were coming to me earlier. if the system had fallen apart, at t federal reserve had not acted, in terms of commercial paper and the mon market funds and all,veryone would have been toast, i think, basically.

but my basic conclusion was that the american government knew what was necessary to get the engine started again. and that that was the case, goldman sachs was in fine shape. >> but they did change the terms under which they we willing to except your investment as time went on. >> they would n have paid as remotely what they did at aril 1 -- iannot remember the was september 21 or 23rd. at that point, but not only wanted to shore up confidence. and the world was notoing to come back anand financially, because i thought the federal government would have to act. it was so what is that they had to. and i thought that our $5

million would not be injured at all and the terms were attrtive. i made the decision that that was good use for the money. >> bank. >> mr. holtz-eakin. >> mr. mcdaniel, you're tking about the inherent conflict of providing rtings to the market d running the compy for profit. however affected the outcome of your rating process. how do you manage that conflict? what dyou put in place to keep that underontrol? >> from my office, i think it is important to emphasizend reemphasize the fact that we are trying to create long-term show rover value. and i think the way to do that

is to have credit ratings that are of high quality and predictive overtime. that is why it was sought and the mortgage related secities sector, there were so damaging the firm, and in addition to consequences for the larger economy and to households in america. beyond that, we had structural components of the firm that are designed to insulate and to protect the analytical process from the financial and commercial interests of the company. again, including independent policy function, and we also recently created a separate commerci organization in the firm that is separate and apart

om either credit policy for the rating analts business. >> those are recent changes? >> the policy function has existed for many years but we ha enhanced it into independence. and the commercial group is a more recent introduction. pe also have formal separated the rang agency from our other non-credit rating business. those kinds of actions, i think, aren't useful and portant, notnly for our own process be able to tn around and demonrate that they are bng handled in the right manner. >> quality ratings ended up being the key. you wanto make them as good as possible. >> absolutely.

>> i am interested in the situation that occurred in 2007 were u.s. residential mortgage- backed securities market for downgrade. and you are ratingdos, going ahead and reading them aaa. -- going ahead and breaking them aaa. --ating them aaa. >> we thought thatll the information that we had was relevant to the rating process. but the housing downturn, its magnitude, and how widely it was going to affect home prices nationwide. so as a rest, even though we felt we were including relevant

information, and we thought we were using the best information that we had available inhe rating process, it proved to be insufficient. >> you could not wait until you foundout more from your rmbs side? or was the short-term pressure to great >> the opinions were available to the team's as they developed. we were trying to incorporate their chging points of view as we were looking at other securities related to the mortgage sector. >> in the benet of hindsight, there seems to be a rush to g this stuff done. it strikes me as central to your roleand you have a chief risk officer.

and knowing the way in which these ratings were done, waiting t more information- we heard from a panel earlier today about the capital underlying cdos, but the study was not done, and the pressure from outside the organization to manage the market, all of which was striking testimony to a real effort to moving toward short- term gain at the expense of what turned out to be the reputation and the long run value. >> the housing bubbles and the collateral consequences from the housing problem, if we had thought they were going to be whathey in fact turned out to be, we wouldn't have had very different opinions on the securities. with just under estimated and dramatically underestimated the significance of the downturn. >> mr. buffett, you said you

are interested in a long-term value and not short-term profit three were you aware of the problems of the hsing-related structure ratin? >> not suiciently geared to my knowlge, i don't think i ever bought a cdo or residential mortgage-backed security. we bought one recently that we thought was perspective. i spent a lot of time -- more interested in strght equities. >> were you satisfied with their risk measure and do due diligence on all the agencies -- all the products they provided ratings on? >> i know their business model is extraordinary.

they have the ability to price. >> i want to come back to that. isn't that at odds about being confident with tir long term values and not know that they do due diligence? >> along one value was in their position, th arose naturally over a long period of time. i am in no position to judge thousands of ratings. they've gotus are not below standard & poor. -- they have got us and not before -- a notch below standards and for. they spend time with me and the key managers, but thr hours every

has moody's ever lobbied for a requirement for ratings? >> no, not to my knowledge. just the opposite. we have been -- we have spoken repeatedly publicly going back at least 15 years about the risks of including ratings in regulation and offering our support for the reduction or elimination for these ratings and regulations. >> they are required by regulation. if they were not, we still would have to have them. the law may change can be different 10 or 20 years from now, but with the reputation and

that the $20 million in cash is really there, we will not be able to issue a bond without a rating. >> what i am hearing is that from a long-term valley perspective is that the internal controls were not a great concern to you. >> granted an additional two minutes. >> i am not in a position to evaluate the internal workings. >> you are the owner. >> no. we own a significant position in procter and gamble. i do not know how they make tied and whether the process is proper. johnson and johnson had a problem with the mcneil lab. no way i would know about that. i do not know if they will do everything perfectly, but generally speaking there management has done a good job.

thank you. >> i'm going to take a minute to probe this. don't you believe that shareholders have a threshold responsibility for the proper context? and let me add to this -- predict the housing prices. there's now a whole set of information here -- sec reports and testimony of not justo repeople of the culture of moody's that may jeopardize the rating qualities, information that there were in adequate sources, and adequate pay, which may be good for the bottom line revenue that the pay was not sufficient to attract and retain that type of quality people that you have. there is a meeting talking about this that as the markets are talking -- coming apart, a big employers meeting, talking

about getting back track, and the manager finally stands up and says about it after 30 minutes, one of our attendees from the corporate sector, or you point to talk about how we're going to salvage our reputation? don't you thi a shareholder owning 20% others have made threshold responsibility in regard to these types of operations? that is number one. and knowing what you kw today, are these matters of great ncern to as a shareholder? >> aside from the real estate bubble, i do not have a record wher they have been further off in their ratings than i would expect them as normal han beings to be.

>> it talks about thresld issues like adequacy of resources, affecting rating. if we cannot count on our corpate shareholders, who can we count on? >> tape johnson and johnson. there's been a lot of material about a situation. am i an going to investigate that? i think they are going to do a fine job over time. do i think they are region returns are things, if you see a coroach, if ty have a problem at one ve, i don't think about that. we have to wonder and 60,000 employees and somebody is going to be doing something wrong. i wish i knew who was. i don't think it is been a

systemic failure. >> have you looked at the sec public reports? >> no, i have not. >> mr. mcdaniel, much can be id about the tone at the top. can you just tell me what outcomes and results you value most from your company? >> simila to our markets and made a few minutes ago, obviously iant to have a very successful business. and i believe the way to have a successful businesses to have high-quality products and services, in thisase, ratis and related research. it does nothing for our business to focus othe short run ad cut corners.

and i said, that is why it is so deeply disappointing to of had the experience that we've had in the mortgage related securities areas. >> part the product and service, what one value would you buy a the most part mark >> it relates to the long-term value of t firm. first of all, i think that it is. and we have adjusted our compensation program over time in order to try and high-quality products and service with compensation. our senior management team, the top seni most individuals in

our firm, now have as part of their compensation program three-year perrmance sha plans. and for everyone involved in moody's investnt and ring agency, there's a 50% of that plan based on the statiscal performance of our rating over that three-year period. this was introduced at the end of last year. >> this is after the crash. >> it ially an experiment. weill have to see how it works. the ability to measure ratings over multi-yea perd is something that we can do and we think that it is going to provide god alignment for our senior management. >> keeping with the idea of town at the top, in your communications with the rank and

le of moody's, it is clear that quality tromps mark share. >> i have to be concerned with all different aspects of managing a successful business. beforeore junior eloyees, their compensation, our analysts and support analyst, their compensation is in no way tied to the number of securities they rate or the number of companies that follow. >> for the share that they gain in the market. >> or that they lose in the market. >> so what were t real goals that they had when ty were working at moody' >> i care about market coverage as much as i care about mart share, if it is produced on an

unpaid basis. i still want to have market covered. i also appeared the front -- deeply about ratings quality. part of my job iso balance those interests properly and to communicate that bance in interest throughout the firm in a way that individuals understand that the long-term success of this comny has to start with product and service quality. we need quality and research quity. >> mr. buffett, much has been sa about regulatory or supervisory value throughout this. the secailed, you named the regulator that was involved, and a number of them. other than over-the-counter derivatives, can you think of a major area of of regulatory oversight that dictates major changes our system?

>> i would say that going beyond the derivatives, addressing the problems of disguised leverage, and winding leverage, which is really tough, doing it with ratios is not the answer. not the sole answer. leverage is what gets people into trouble. we were in berkshire that way. when people stretch d that it rewards for i they are inclined to stret more. you had an earlieranel about e objective of return on equity, well, of coue it does different things. the easiest way to jack up an equity is leverage. addressing it wisely is better.

but i think that is the most important thing in the regulatory world. >> are you surprised that post- enro we could have off-balance sheet financing that would of been perhaps at the core of this collapse? >> i don't know that it is necessarily at the core but i was certainly prop -- certainly surprised which is just anoer way to jack up leverage, i was surprised. there certainly were no flashg signs that they had a bunch of leverage off balance sheets. i think there are coined to be fighting the human tendency to borrow more money than you should.

it is just such as human tendency that you need something to counterbance that. >> thank you very much. >> before we go to miss born, and we've made available to us the evaluation of your cdo? do you to an annual evaluation >> i provide one to the board that they discuss among themselves. >> can we get access to that? >> certainly. >> 2 and reviewing systemic bait grounds that might have been done, have you done comprehensive reviews in the wake of all of this? >> will down on number of reviews. if there is anything that we

have not provided, we will instruct our people to do so. >> and the company did a review of the retaliati allegations. can that be made available to us? >> i am not sure. im not sure that there's a repo on that. >>i think that there is. could you please check it out? >> i will check it out. >> all like to place on the record the fact that the commission examined the assertion that was made which would lead to beaccurate that ther were various rates charged fodifferent charges t --ran --

for different tranches. >> i did not have time for comprehensive check of that. >> and neither did we but we're going to get to the bottom of it. >> make you both very muchfor appearing before. mr. buffett, i'm ing to take advantage of your being here by asking you about your derivatives and your views of them. as mr. wallison has said, your 2002 berkshire hathaway shareholders letter referred to derivatives, and this iswhat i think about all as "financial weapons of mass destruction carrying dangers that are potentially lethal." you also presently said that

they are "time bob'mbs." more recently in yo 2008 sheholder letter you said that bear stearns collapse demonstrated that time bob of unterpartyrisk he metarli described. and i would ask bettis o shareholder letters be placed in the reco. >> they wilbe. >> i'll like for u to describe your view of the role that derivatives have played in the current financial crisis. >> the leverage in the system, the huge dependency on counterparties and one of the beauties of the stock exchange is that you now have a three dy

clearing system because people realize that if you have a contract and six months later it saddles, but face to happen. the kuwait stock exchange data and trouble because they had delayed arrangement. some have unbelievably long settlement period. i could of hired the 50's smart as ph stays out of the mit to prepare some typ of report that would tell me the risk i was very and i what am not gtten any answer. it was impossible to fit your mind around that. had ninth counterparties and i could not print ou the names of some of them. there is su integrity of our balance sheet, and it was dependent on all these pple behaving, strong ought to almost 100 years. i could not design a system at

would enable me to know what the hell was going on. if that was my problem, 23,000 of them, i had passed away -- i heard about vastly greater numbers at bear stearns and women. i don't think it ia good day for the system, particularly if there are not a lot, society gets disrupted and a major way. notion, i think you stated in 2008 that the federal reserve rescue of bear stearns because the counterparty ris posed by its enormous position in derivatives would have created "a financial chain of unpredictable magnitude." is that correct? >> that is correct. in layman, we saw an example of that. i am not saying -- but when

lehman failed, and instant -- an institution with all those deals, at the end, the debt of $140 blion is selling for $30 billion in the market, so $110 billion that suld not disappear overnight. >> and with respect to the other large derivatives dealers, aig and the large investment banks and bank holding companies that needed park money, -- tarp money, you think tt pled a role as well? >> 2 i don't think aig's should help them in the first place. i think there was $300 billion

of derivatives designed for something called regulatory our version large -- regulatory arbitrage, whi was a way of transferring over. you get enough of that sort of thing going on in the financial system, you have a problem. >> despite the problems that you and the other people at berkshire hhaway experienced, what is your view of the ability of these enormous derivative dealers to successfully manage their companies and light of their enormous positions? forxample, they hold millions of contracts. at year-end 2009, oe said tt j.p. morgan's position was $78.6

trillion in notional amount. can such an enormous complex parts of your business be successfully managed by han beings? >> i think they are dangerous and i could not manage it. is hard for me to imagine a system or regulatory system that can supervise something like that. one of the ironies is that there were only fourig auditing firms in the united states. i will guarantee you a few things -- tw big firms audited by the same auditor, you will find different prices. it is mind-boggling we lost $400 million in a very benign period with npressure

iran. maybe that is why lehman brothers also much money. >> 2 you also pointed out that in your most recent shareholder letter, the 20081 that i am referring to, and bought the 20091, that it is almost impossible for an investor looking at the financial statement of these big derivatives dealers to really know what their financial situation is. >> and if you had 1000 pages of disclosure, it would be impossible. i try to tell the shareholders basically the positions are. i think i can do that. there are only a couple of classes of them and i can describe them. anybody that knows accounting and understand what i'm talking about. but i do not know how to

describe 1ilon derivative contracts. >> you are a very sophisticated and fester, and i assume in going into derivatives contracts, you carefully examined what the and that it risks are, but the leverage is. i am concerned that so many municipalities and other rge institutnal investors that may not have your sophistication have gone into these contracts. i am concerned that the embedded risks and the leverage are not fully understood. >> i am sure you're right, like jefferson county and alama. i go back -- imagine bamboozling

the ceo of bmg. i don't even know why those contras are out there. i think made time, the people buying them do not know what ey're doing. >> there's been enoous growth in this market. the bank for international settlements said that the market ountedo more than $614 trillion at the e of last year. there is enormous invation that has been going on, financial innovation, there is enormous complexity in these coracts. understand that they are very usef for hedging purposes, and i think that as a peectly legitimate purpose. i think you need some speculators in order to allow hedgers to effectively enter into positions.

i am concerned about the ermous growth of pure speculative transact inhe market, and i wonder what your view is as to the economic benefits to our society from that spelation. >> i wrote a leer to congress on the s&p index future. verwhelmingly i would distinguish between the killing and gambling. gambling is cating a risk or no risk need be created. speculation, a you're speculating what surprises will be. that is a risk that the system has to make. but when youtart wagering on stock-index futures, gambling

instincts are very strong in humans. people what 1,000 miles to a bunch of sand and would travel on planes and go to mathematically on intelligence activities. this contrasts are made on the big scale, and they're very easy and you don't have to break >> you don't have to put down any money. >> and the more complex, generally speaking, the more profit is for t originator. you can take that as a given. they became known as plain vanilla ntract because there was not any money in that.

you get more exotic instruments andhat is where the money was. >>'ll ask that the 1982 letter from mr. buffett be placed in the record. >> the to rivet markets still a time bomb -- is the derivatives market still time bomb? >> believe so. >> i appreciate that testiny because what you said about derivatives was that you need to manage our balance sheet. that is an unusual statement in the context of these characters we've heard again and again that whether it be citigroup or fannie mae, they did not manage e bae sheet.

they got over well with something so large that they could not manage it. something that lae could not have emerged. it is important to come back to that and it is important in the light of this hearing, because part of this question is, what was the management of the balance sheets of these rating agencies? was due diligence done in pricing for the risk of work collided with the most important thing going on in the economy, or was it looking at the ability to manage volume and take advantage of for the prices are? thank you. >> i would yield coissioner wallison the remainder of the time. i like the more dramatic way

that i said it. it's a man and which is an empty offer. but one of the issues that the central to the hearing is whether the problems at moody's, and we agree that there were some problems, are systemii in the sense that they extend across the board throughout moody's. or are simply you need to the housing mortgage area. -- unique to the housing rtgage area. mr. mcdaniel, what i would like you to do is to assemble as much information as you can on the other kind o non-housing back securiti that moody's has rated, and give us sense of the number of downgrades or even upgrades that occur in those

securitizations. that way we can compare the way moody's operates as a general rule against what happened in a very unusual housing area, which as youointed out, has shocked everyone, including the estimable mr. buffett. what we want to do is see that ata and get it together and furnish it to us, that would be very helpful. >> i would happy to do that. >> i am struck with the fact that with respt to the credit rating agencies, practices, and models, it seems to me that the question is not so much why did the system fail, but wh at lasted that long. and i want to ask you to take

what risk you say from the current credit rating bottles? are there current risks from the mol, essentially unchanged from where it was? >> the huge question if you are running a rating agency now is how would i would rate states and major menace of paladin's. -- major municipalities. if you are looking now it's something -- a look back later on and say these ratings were crazy, that would be the area. it's by mobile -- bimodal. it' a bet on how the federal government would act overtime. >> while thdiscline is

still there? >> i don't think moody's or standard and poor'war i have come up with anything terribly insightful about thestate of the mucipal bonds is set that there wille a terrible problem, and then -- >> is the model one that stil presents risks? >>all the associated issues did you have raised with respect to moody's. >> they're still utility and the rating agencies. i think that there is utility in the model. >> i want to end on a high note

for it if we're looking at the states and municipalities, which then makes the states and municipalities aaa, ther are a lot of people out there wondering who watches over the water and terms of other federal govement being able to do that. they had been doinghat for someime now. the is some concern about that as well. i like to go back to what we talk about and the beginning, behavior should have consequences. that shld apply to people, institutions, and government. >> we're going to te a break, members. until 2:30 p.m. and we will convene in this room. thank you, mr. buffett and mr. dannels. [captioning performed by national captioning institute]

>> good morning. the meeting of the financial crisis inquiry commission shall come to order. we have a quorum present, and so we will now begin our proceedings. today's hearing will be on the credibilit of credit tings, the iestment decisions made on the base of those ratings, and the financial crisis i want to welcome all ofou to the new school, and now it is m distinct privilege and honor on behalf of the whole commission to introduce bob kerrey, former governor, former senator from the state nebraska, now president of the new school, and our host today. senator kerrey, thank you so much for having us here. you and your staff have been terrific, and the microphone is now yours. >> well, first of all, chairman

angelides and vice chairman thomas d members of the commission, both the new school and new york city is proud, are proud to welcome you here this morning. and i appreciate very much you praising the staff because they've done all the work to make this possible, and it is always quite moving to me the fort ty make to accommodate these kinds of extremely important efforts. i don't envy you your work. this is a complicated matt. those of us who have sufficient quantitative skills but not impressive quantitative skills find ourselves actually quite unable to comprehend exactly what was going on and what went wrong. trying to manage risk today s become more and more difficult, and my own view of the matter is that, for what it's worth which is having disclosed that i have sufficient though not impressive quantitave skills probably not terribly relevant to your work, is that america did not become a

great country by trying to avoid risk. and do not believe that we'll remain a great country if we try to avoid and take risk to zero. thisity as an example benefited enormously from a public works project called the erie canal begun at the start of a great recession in 1817, took seven years to build. not a single member of the new york city assembly or senate delegation voted for the project because they considered it to be an upstate project, but the details of that story which i have acquid having come and been in this city for ten years caused me to wonder whether or not the erie canal could be built today. because we have become very risk-averse, and it's become more difficult to take on projects with almost any kind of risk attached to it. so i ve much apreciate your willingness to tackle this problem becausegetting our markets and regulating our markets -- and many of you have

d experice both regulating and having diffulty doing what you believed and now is clea i'm looking at brooksly here, was the right thing in the 1990s -- regulating those markets so they remain viable, active and trusted by the american people and the world is an extrely important task, so i welcome you once more to new school, to new york city, and i congralate and thank you for myself and, i hope, for other americans as well for your willingness to tackle this problem. >> thank you much, senator. wod you like to make a comment to the senator or reserve those for your remarks? >> no. if he's leaving, i want to say it in front of him. senator kerrey and i served on a bipartisan medicare commission, and what i always enjoy is visiting o friendsfrom former battles, and i like it because you haven't changed at all. the idea of someone who is as liberal as he is, check out his

voting record, understanding a risk which is the other side of the coin of opportunity and how this countryanages not prosiding a guarantee -- providing a guarantee for everything which means risk but succeeding because of that has always been a theme that he presented well back whenwe had a chance to make a big difference, and it's exciting to see you again in these circumstances because we're taking a risk getting out of washington. you know how cocooning washington is in terms of commissions d hearings. and this is our firstenture out of thewaington beltway. so thank you for being receptive to us, and i guess we may see you back inside the beltway. >> you do every couple of months beuse i go down there to try to -- >> turn it ov. [laughter] >> i guess i have demonstrated physically my lack of understanding of risk.

[laughter] yeah, i get down there actually quite often as it is on behalf ofhe new school trying to -- >> yeah, but you're queuing up asking for money rather than -- >> well, queuing up is all right. >> good to see you. thank you so much and thank you for your hospitalit >> let's begin our proceedings. again, thank you, president kerrey on behalf of the financial isis inquiry commission, i want to thank everyone at the new school for their hospitality, all of you for being here today. as always, i want thank vice chairman thomas and george hugh graham for taking the lead on this hearing. today's hearing on credit ratings is part of our larger investigation into the causes of the financial which economic crisis that continues to bring so much hardship to our nation. credit rating agencies have played a pivotal role in our financial markets. their good housekeeping seal of approval ided decisions by individuals and institional investors alike. financial institutions looked to

ratings to make determinations about their capital requirements, and these ratings enabled the issuance of trillions of dolla worth of subprimeortgage securities. today we're examining moody's corporation as a case study. we will have questions about why what things went so very wrong. i shoulddd that this hearing is just one aspect of our investigation. our staff has already combed thugh 430,000 pages of documents and interviewed dozens of witnesses on moody's alone. to be blunt, the picture is not pretty. from 1998 to 27, moody's revenues from rating complex financial insuments like mortgage securities grew a whopping 523%. from 2000 to its peak in 2007, the company's stock price climbed more than sixfold. moody's did very well. the investors who relied on moody's ratings did n fare so well. from 2000