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Jacob Wolinsky
Jacob Wolinsky
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Warren Buffett's Testimony Before The Financial Crisis Inquiry Commission Part I

I had the time to listen to Warren Buffett’s testimony before the Financial Crisis Inquiry Commission. I did not write up a verbatim transcript, but jotted down some notes while listening to it. The testimony took nearly two hours, and I took about five pages of notes. I will be releasing them in a few series of articles. To listen to the audio click on the following link- http://www.fcic.gov/interviews/view/19. Below is the first part of the testimony.

Buffett does own analysis and investments and he likes the economics of their business. Buffett likes the business model, and the fact that they have pricing power.

Importance of management – Buffett knew nothing of Moody management. Poor management can exist with a *really* good business (newspapers of the past and other monopolies like the only newspaper in town, you have pricing power) Likewise, hard to evaluate management in a business without pricing power.

Buffett was asked whether he is a passive investor with Moodys? What is his connections and meetings with the board?

He said he has never been in Moody’s offices, never called them, and three or four times they would stop by and say hello. Warren has no interest in board members being pushed for election, no memos submitted for strategy decisions “If I thought they needed me I wouldn’t have bought the stock!” (Laughter). Moody’s and the rating agencies exist as a natural duopoly. They are not only assisted by the governmental regulations, they are also in an industry where if a competitor came in and cut the prices, the new competitor couldn’t survive.

Investors should do their own analysis, but Buffet doesn’t know how to answer “would you suggest doing away with credit ratings systems.” He says they could serve as a crude tool but it is not an easy question to answer.

The cause of financial crisis was psychological – a bubble happens when people believe that something that can’t go down does (housing market). The failure of the ratings systems did contribute to the financial crisis, but no more than anyone else. The models didn’t take everything into account (but he also says the neither did the minds of 300 million Americans).

Different people all picked it up at different times, but some saw it months or years ahead of times. The media saying “the bubble is popping” can contribute to the bubble actually popping itself. “A pin lies in wait for every bubble” – Buffett

Could have gone out and shorted stocks, but doesn’t short stocks. Buffett foresaw both the tech bubble and the housing bubble far before it burst.

In the next part of the testimony, Buffett discusses inflation, bonds versus stocks, investment versus speculation, CDSs, and bailouts and moral risk. I will be posting Part II tomorrow.


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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