WASHINGTON —
In raising concerns about the possibility of severe disruptions in the municipal market, Buffett was responding to a question posed by Phil Angelides, chairman of the
While much of the hearing focused on the agencies’ unduly high ratings of mortgage-related structured finance products, Angelides asked if Buffett saw any other risks with the rating agencies’ current models.
“If you are looking now at something where you could look back later on and say, 'These ratings were crazy,’ that would be the area,” the Oracle of Omaha said of states and localities paper. “I don’t think
Though Buffett, who is the largest shareholder in Moody’s, said that he believes there is “utility” to the rating agencies, he suggested he would only rate munis triple-A if the federal government were likely to step in and assist a distressed state or locality.
“If the federal government won’t step in to help them, who knows what they are?” he said.
His remarks come just months after Moody’s and
Buffett’s concerns also come as his Berkshire Hathaway Assurance Corp. has limited the number of bond deals it will agree to insure, backing just $40 million in 2009 compared with $595 million the year before.
In a March interview, Ajit Jain, who runs BHAC, which was launched in 2007, said the company did not find the “economics of the business attractive enough to be able to justify risking capital, so, you know, we haven’t been doing much.”
In a letter to shareholders last year, Buffett struck a cautious tone in his discussion of muni bond insurance. He argued that reliance on historically low default rates was misleading as the data dealt primarily with an uninsured market. With insurance in the picture, he said municipalities would have less incentive to make concessions and could instead force the insurers to pony up.
Some municipal market participants Wednesday dismissed Buffett’s concerns, saying issuers are so stressed already that if a wave of governmental defaults were going to occur, it would likely already have happened already.
The number of bonds currently in default proceedings totals $6.3 billion across 221 issues — of which only 14 are rated debt — according to Municipal Market Advisors, which compiles default data collected by the Municipal Securities Rulemaking Board.
But some market participants speculated that the
During the height of the financial crisis, the
Angelides’ commission was established last year by Congress and charged with figuring out what caused the financial crisis. The 10-member, bipartisan panel is examining 22 facets of the crisis, including financial institutions’ reliance on rating agencies and the use of ratings in regulation and securitizations.
The commission has the power to hold hearings and subpoena witnesses and documents. It expects to deliver a report on the crisis in December.