Watch for the sparks to fly Wednesday as the Fiscal Crisis Inquiry Commission turns its focus on the credit rating agencies, which many believe played a key role in the near collapse of the U.S. economy.
Financier Warren E. Buffett, chairman and chief executive officer of Berkshire Hathaway , and Raymond W. McDaniel, chairman and chief executive officer of Moody’s Corp., will be among those called to testify during the FCIC hearing.
According to Fortune magazine’s Carol Loomis, who is Buffett’s long-time friend, the editor of his newsletter and a shareholder, the financial giant refused invitations to voluntarily testify before the commission. Gary Cohen, the FCIC’s general counsel, confirmed Buffett was issued a subpoena to testify.
Still one of Moody’s biggest shareholders, Buffett began selling off his interest in the rating company last summer.
While most of the commission’s hearings have been held in Washington, D.C., Wednesday’s will be held at The New School in New York City.
The bipartisan commission, which was created by Congress, is headed by Democrat Phil Angelides, California’s former state treasurer, and former Republican Congressman Bill Thomas of Bakersfield, Calif.
In an interview with Dianne Hardisty, which appeared in The Bakersfield Californian in December, on the eve of the commission’s first major hearing, Thomas was highly critical of credit rating agencies in providing a false sense of security around risky investment schemes.
"What really happened was that all these large banks were carrying these strange instruments of consolidated mortgages. And all of a sudden they weren't worth that much,” Thomas told Hardisty. “Well, how much were they worth? We didn't know for sure. Moody's gave them a triple-A rating so they could sell them to other people. But if you look at the rating game, you pay for the rating. So you end up hiring one of the firms that gave you a triple-A.
"It's a lot like what happened to the accounting firms that recommended how and where you invested your money, and then went over the books and, guess what, they concluded that was a great place to invest your money. Except it blew up. You can't have people on both sides of a ledger when they are carrying out a function,” Thomas said.
"People were buying triple-A ratings. Maybe they weren't triple-A. Maybe they were junk. Banks had these on their books and they didn't know if they were worth anything. It wasn't that they didn't have enough money. They just didn't know what they had."
This week, New York Times columnist Ross Sorkin likened the system to restaurant reviews.
“Restaurant reviews might seem suspect if they were paid for by the restaurants being reviewed,” Sorkin wrote. “But that is essentially how things work in the credit rating business. Even now, after all we have learned, Moody’s, S.&P. and Fitch are still paid by the banks and companies whose securities they evaluate.”
During his December interview, Thomas noted that commissioners “are not out to embarrass people. We are out to find the facts. As the facts come out, a number of people will have to be embarrassed because they were in positions of responsibility and didn't do what people in these positions should do."
Commission Chairman Angelides told Fox Business’ Charlie Gasparino last week that so far, the vast majority of information the FCIC and its staff of about 40 investigators have found doesn’t fall into the “illegal” category.
“Most of what we see is not illegal activity,” he said. “What we are seeing is something that is actually more profound. These guys didn’t think they were doing anything wrong because of the use of risk to make money was universally celebrated on Wall Street.”
When the commission reaches its Dec. 15, 2010, deadline, the goal is to leave Americans with a book to explain what happened and a yard stick to measure the efforts of this Congress and future Congresses to fix the problems, said Thomas.
About the author: Dianne Hardisty retired as The Bakersfield Californian’s editorial page editor in 2009. She now is a freelance writer in Bakersfield specializing in business and government issues. Hardisty's articles often appear on her Examiner webpage.
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