Banking & Finance

On Competition: Buffett In Denial on Moody's (MCO, BRK-B, MHP, MORN, GS)

Jon C. Ogg

Moody’s Corp. (NYSE: MCO) has had the benefit of having Warren Buffett behind the company as the largest shareholder via Berkshire Hathaway Inc. (NYSE: BRK-B).  What is interesting is how the bond ratings agencies have been known for some time to have played a major role in the financial crisis due to having a model of being paid to rate bond and debt issuance.  And Berkshire held 31.8 million shares as of last quarter and that number is now smaller yet on more share sales

.  The interesting notion is that Buffett defended his stake in Moody’s at the recent annual shareholder meeting, yet it is obvious that Berkshire is on the out here.  It almost seems as though after news of more competition and SEC woes that maybe Mr. Buffett is just in denial about the business prospects for Moody’s.

News is out that Bloomberg is now going to start with U.S. corporate debt ratings and then look at international issues.  This follows a roll-out at the end of 2009 from Morningstar Inc. (NASDAQ: MORN) on covering the top 100 companies corporate credit ratings.  How that effort is progressing is still too soon to make a final determination.

At the meeting of holders, Buffett did defend holding a stake in Moody’s.  Too bad. What Buffett did not say was that he was about 18 months late in recognizing that the investment in a ratings agency on a pure-play basis was a flawed business model.  Buffett noted that ratings agencies still have wonderful businesses with significant pricing power.

The McGraw-Hills Companies, Inc. (NYSE: MHP) at least has many publishing operations that offset the impact the company will take over its ownership of Standard & Poor’s.  If Buffett was holding that company, he could at least say it has other diversified operations.

Buffett also much more strongly defended Lloyd Blankfein and Goldman Sachs Group Inc. (NYSE: GS), and this was not exactly met with shareholder enthusiasm.   It is far too soon to know if Buffett has been in denial about the Goldman Sachs case or not.  Either way, that notion may test his ‘political backing’ based upon his pocketbook.

We originally noted during the period when Buffett was gobbling up BNSF that Moody’s was one of many stakes that Buffett should have eliminated entirely.  The SEC news against Moody’s this week only adds more fuel to this fire.  If Buffett wants to hold this position, it should at least be with a far smaller stake than that of the largest shareholder.

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