“There is no staff. I make all the investment decisions and I do all my own analysis.” —Warren Buffett
FCIC Interview of Warren Buffett, May 26, 2010
On May 26th, 2010, the Financial Crisis Inquiry Commission—that was formed by Congress in 2009—interviewed Warren Buffett as part their investigation of the causes of the financial crisis, both globally and domestically, and to do a report due at the end of this year, December 15, 2010, to the President and to Congress, which we also plan to release to the American public. Tasked not only with investigating the causes of the financial crisis, but also looking at specific issues that Congress had enumerated in the Fraud Enforcement Recovery Act, which formed the Commission.
In the interview Warren Buffett is asked a few questions, and shares his views and insights, to enable the Commission to better understand the causes of the financial crisis.
Further the Commission also asks a few questions about Moody’s, since Warren Buffett was (at the time) a significant shareholder in Moody’s.
Warren Buffett: Dun and Bradstreet and Moody’s are Great Businesses
Let’s see what Warren had to say about why he thought both Dun and Bradstreet and Moody’s were such a great businesses (emphasis added).
MR. BONDI: I understand, sir, that in 1999 and in February 2000, you invested in Dun and Bradstreet.
MR. BUFFETT: That’s correct. I don’t have the dates, but that sounds right. Yes, sir.
MR. BONDI: And am I correct, sir, in saying you made no purchases after Moody’s spun off from Dun and Bradstreet?
MR. BUFFETT: I believe that’s correct.
MR. BONDI: Okay. What kind of due diligence did you and your staff do when you first purchased Dun and Bradstreet in 1999 and then again in 2000?
MR. BUFFETT: Yes. There is no staff. I make all the investment decisions, and I do all my own analysis. And basically it was an evaluation of both Dun and Bradstreet and Moody’s, but of the economics of their business. And I never met with anybody. Dun and Bradstreet had a very good business, and Moody’s had an even better business. And basically, the single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.
MR. BONDI: Now, you’ve described the importance of quality management in your investing decisions and I know your mentor, Benjamin Graham — I happen to have read his book as well –- has described the importance of management. What attracted you to the management of Moody’s when you made your initial investments?
MR. BUFFETT: I knew nothing about the management of Moody’s. The –- I’ve also said many times in reports and elsewhere that when a management with reputation for brilliance gets hooked up with a business with a reputation for bad economics, it’s the reputation of the business that remains intact.
If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station — I’m talking of the past — you know, your idiot nephew could run it. And if you’ve got a really good business, it doesn’t make any difference.
I mean, it makes some difference maybe in capital allocation or something of the sort, but the extraordinary business does not require good management.
MR. BONDI: What interaction —
MR. BUFFETT: I’m not making any reference to Moody’s management, I don’t really know them. But it really –- you know, if you own the only newspaper in town, up until the last five years or so, you have pricing power and you didn’t have to go to the office.
MR. BONDI: And do you have any opinions, sir, of how well management of Moody’s has performed?
MR. BUFFETT: It’s hard to evaluate when you have a business that has that much pricing power. I mean, they have done very well in terms of huge returns on tangible assets, almost infinite. And they have –- they have grown along with the business that generally the capital markets became more active and all that.
So in the end –- and then raised prices –- we’re both — we’re a customer of Moody’s, too, so I see this from both sides, and -– we’re an unwilling customer, but we’re a customer nevertheless. And what I see as a customer is reflected in what’s happened in their financial record.
MR. BONDI: And I’ve seen in many places where you’ve been referred to as a passive investor in Moody’s. Is that a fair characterization, and what sort of interactions and communications have you had with the board and with management at Moody’s?
MR. BUFFETT: At the very start, there was a fellow named Cliff Alexander who was the chairman of Dun and Bradstreet while they were breaking it up.
He met me –- I met him in connection with something else, years earlier; and so we had a lunch at one time. But he wasn’t really an operating manager. He was there sort of to see –- oversee the breakup of the situation.
Since we really own stock in both Dun and Bradstreet and Moody’s when they got split up, I’ve never been in Moody’s office, I don’t think I’ve ever initiated a call to them. I would say that three or four times as part of a general road show, their CEO and they think they have to do that. I have no interest in it basically, and I never requested a meeting. It just –- it was part of what they thought investor relations were all about. And we don’t believe much in that.
MR. BONDI: What about any board members? Have you pressed for the election of any board member to Moody’s —
MR. BUFFETT: No, no —
MR. BONDI: — board?
MR. BUFFETT: — I have no interest in it.
MR. BONDI: And we’ve talked about just verbal communications. Have you sent any letters or submitted any memos or ideas for strategy decisions at Moody’s?
MR. BUFFETT: No.
MR. BONDI: In —
MR. BUFFETT: If I thought they needed me, I wouldn’t have bought the stock.
MR. BONDI: In 2006, Moody’s began to repurchase its shares, buying back its shares that were outstanding, and they did so from 2006 to 2008, according to our records.
Why didn’t you sell back your shares to Moody’s at that time? I know subsequent in 2009 you sold some shares, but from ‘06 to ‘09, during the buyback, did you consider selling your shares back, and if so, why didn’t you?
MR. BUFFETT: No, I thought they had an extraordinary business, and — you know, they still have an extraordinary business. It’s now subject to a different threat, which we’ll get into later, I’m sure.
MR. BONDI: Uh-huh.
MR. BUFFETT: But –- but I made a mistake in that it got to very lofty heights and we didn’t sell –- it didn’t make any difference if we were selling to them or selling in the market. But there are very few businesses that had the competitive position that Moody’s and Standard and Poor’s had. They both have the same position, essentially. There are very few businesses like that in the world. They are — it’s a natural duopoly to some extent. Now, that may get changed, but it has historically been a natural duopoly, where anybody coming in and offering to cut their price in half had no chance of success. And there’s not many businesses where someone can come in and offer to cut the price in half and somebody doesn’t think about shifting. But that’s the nature of the ratings business. And it’s a naturally obtained one.
It’s assisted by the fact that the two of them became a standard for regulators and all of that, so it’s been assisted by the governmental actions over time. But it’s a natural duopoly.
Warren Buffett: The Reason Why I Sold Freddie Mac and Fannie Mae
MR. BONDI: Now, earlier you referenced the GSEs and it’s been reported than in 2000 you sold nearly all of your Freddie Mac and Fannie Mae shares. What persuaded you in 2000 to think that those were no longer good investments?
MR. BUFFETT: Well, I didn’t know that they weren’t going to be good investments, but I was concerned about the management at both Freddie Mac and Fannie Mae, although our holdings were concentrated in Fannie Mac.
They were trying to -– and proclaiming that they could increase earnings per share in some low double-digit range or something of the sort. And any time a large financial institution starts promising regular earnings increases, you’re going to have trouble, you know?
I mean, it isn’t given to man to be able to run a financial institution where different interest-rate scenarios will prevail on all of that so as to produce kind of smooth, regular earnings from a very large base to start with; and so if people are thinking that way, they are going to do things, maybe in accounting -– as it turns out to be the case in both Freddie and Fannie –- but also in operations that I would regard as unsound. And I don’t know when it will happen. I don’t even know for sure if it will happen.
It will happen eventually, if they keep up that policy; and so we just decided –- or I just decided to get out.
MR. BONDI: The Washington Post reported on October 31 st , 2007, that you had provided some testimony the day before in a case against Freddie Mac’s CEO where you had indicated that you became troubled when Freddie Mac made an investment unrelated to its mission.
And you were quoted in that article as saying that you didn’t think that it made any sense at all and you were concerned about what they might be doing that I didn’t know about.
MR. BUFFETT: Yes, well, that was —
MR. BONDI: What was that investment that was unrelated to its mission?
MR. BUFFETT: As I remember, it was Phillip Morris bonds. I could be wrong. It might have been R.J. Reynolds or something. But they had made a large investment in that.
Now, they are dealing essentially with government-guaranteed credit, so we know about that and we had it ratified subsequently about what has happened.
So, here was an institution that was trying to serve two masters: Wall Street and their investors, and Congress. And they were using this power to do something that was totally unrelated to the mission. And then they gave me some half-baked explanation about how it increased liquidity, which was just nonsense.
And the truth was that they were arbitraging the government’s credit, and for something that the government really didn’t intend for them to do. And, you know, there is seldom just one cockroach in the kitchen. You know, you turn on the light and, all of sudden, they all start scurrying around. And I wasn’t –- I couldn’t find the light switch, but I had seen one.
- Recording of FCIC Interview with Warren Buffett, May 26, 2010
- PDF Transcript of FCIC Interview with Warren Buffett, May 26, 2010
- Word Transcript of FCIC Interview with Warren Buffett, May 26, 2010
- FCIC Resource Library: Interviews
- Dun and Bradstreet: Annual Reports and Proxies
- Moody’s: Annual Reports and Proxy Statements