First, the staff asked Buffett about his due diligence before purchasing the rating agency Moody’s Corporations (MCO) and his involvement in the company’s operation after his purchase.
Moody’s is blamed for contributing to the financial crisis during 2007 to 2009. First, it rated many of the Mortgage Backed Securities (MBS) far above the grades they deserved and then at the height of the crisis, it downgraded the securities hastily.
Buffett purchased his shares for Berkshire Hathaway (BRK.A) after MCO was split from Dun & Bradstreet in 1999. For a long time, he owned as much as 48 million, and did not sell any until 2Q2009. He is latest seen selling MCO in the middle of October 13, 2010. After the sale, he still owns 28.5 million shares, or about 12.33% of the company’s shares outstanding. In the interview, he admitted that he did not sell the company when the stock prices were much higher during the past decade.
As discussed in the interview, one thing Buffett did well during the past decade is to sell the two GSC’s – Freddie Mac and Fannie Mae, at good profit. Buffett figured that the two were serving two masters: the government and the shareholders and they were arbitraging on the government’s implied guarantee, which Buffett claimed they were not supposed to do.
Buffett was asked about his motivation of writing an op-ed for NY Times in October 2008, in which Buffett encouraged people to buy the US stocks. He did that on his own, and he was convinced that government would take the action and have the economy restored.
Buffett commented that without the government assistance during the crisis, “it would be a disaster, the biggest disaster of all times.”
In the past, Buffett called derivatives “financial weapon of mass destruction”, but his company has also engaged in selling financial derivatives such as long term put on certain market indexes. Buffett called the product his company sells “insurance”. The difference is the leverage and amount liquidity the derivatives inject into the system.
Buffett gave a good lesson on the difference between investing, speculating, and gambling. When Buffett invests in a stock, he focuses on how much the asset is worthy and does not care what the market will do to its price. Speculating only focuses on the price movements.
In interview Buffett also answered a host other topics such as “too big to fail”, executive compensation, derivatives, and capital requirement ratio of financial institutions.
Find the file and listen to it yourself by clicking here.