Financial Crisis Inquiry CommissionStaff Audiotape of Interview with Warren Buffett,Berkshire Hathaway

May 26, 2010

Santangel’s Review produces original research on undiscovered investors. Each quarterwe publish one prole of a money manager whose outstanding long-term track recordis largely unknown to the wider community of fund allocators. Our clients include familyofces, high net worth individuals, hedge fund managers, funds of funds, and endowments.

F  fee mle ue  t j u mlg lt lee vtwww.tgelevew.m

TranscripTion oF This inTri

is proidd by

www.santangelsreview.com

arrn bFFTT:

There is no staff. I make all theinvestment decisions and I do all my own analysis. And basically it was anevaluation both of Dun and Bradstreetand Moody’s but of the economics of their business. And I never met withanybody. Dun and Bradstreet had a very good business and Moody’s hadan even better business. And basically the single most important decisionin evaluating a business is pricingpower. You’ve got the power to raiseprices without losing business to acompetitor, and you’ve got a very goodbusiness. And if you have to have aprayer session before raising the priceby a tenth of a cent (laughs), then yougot a terrible business. And I’ve beenin both and I know the difference.

inTrir:

Now, you’ve described the importanceof quality management in yourinvesting decisions and I know your mentor Benjamin Graham,I happen to have read his book asas well since you are a signicantshareholder in Moody’s. And if youdon’t mind, let’s ask rst about Moody’sspecically.

inTrir:

I understand sir, that in 1999 and inFebruary of 2000 you invested in Dunand Bradstreet.

arrn bFFTT:

That’s correct. I don’t have the dates,but that sounds right.

inTrir:

Yes sir. And am I correct, sir, insaying that you made no purchasesafter Moody’s spun off from Dun andBradstreet?

arrn bFFTT:

I believe that’s correct.

inTrir:

What kind of due diligence did you and your staff do when you rst purchasedDun and Bradstreet in 1999 and thenagain in 2000?

inTrir:

Thank you. Mr. Buffett we’re with thestaff of the Financial Crisis Inquiry Commission. We were formed by Congress in 2009 to investigate thecauses of the nancial crisis bothglobally and domestically. And to doa report, due at the end of this year,December 15, 2010 to the Presidentand to Congress which we also plan torelease to the American public. We’retasked not only with investigating thecauses of the nancial crisis but lookingat specic issues that Congress hasenumerated in the Fraud EnforcementRecovery Act which formed theCommission. The Commission is a bi-partisan Commission, six Democratsand four Republican Commissionersand we are with the staff of theCommission. We wanted to ask you afew questions today and get your viewsand your insights so that we may betterunderstand the causes of the nancialcrisis. In addition, we would like toask you a few questions about Moody’s

FCIC Interview with Warren Buffett | 2www.santangelsreview.com

arrn bFFTT:

If I thought they needed me I wouldn’thave bought the stock. (laughs)

inTrir:

In 2006 Moody’s began to re-purchaseits shares, buying back its shares that were outstanding and they did sofrom 2006 to 2008 according to ourrecords. Why didn’t you sell back yourshares to Moody’s at that time? I knowsubsequent in 2009 you’ve sold someshares but from ‘06 to ‘09 during thebuy-back did you consider selling yourshares back and if so, why didn’t you?

arrn bFFTT:

Oh, I thought they had an extraordinary business and, you know, they still havean extraordinary business now subjectto a different threat which we’ll get intolater, I’m sure. But I made a mistakein that it got to very lofty heights and we didn’t sell. It wouldn’t have madeany difference whether we were sellingto them or selling in the market. Butthere are very few businesses that hadthe competitive position that Moody’sand Standard and Poor’s had, they both had the same position essentially. Very few businesses like that in the world. It’s a natural duopoly to someextent, now that may get changed,but it has historically been a naturalduopoly where anybody coming in andoffering to cut their price in half hadno chance of success. And there arenot many businesses where somebody could come in to cut the price in half.And if somebody doesn’t think aboutshifting, but that’s the nature of theratings business and it’s a naturally obtained one. I mean, it’s assisted by the fact that the two of them becamethe standard for regulators and allof that. So it’s been assisted by thegovernmental actions over time. Butit’s a natural duopoly.

inTrir:

Now, Mr. Buffett, you’ve been reportedas saying that you don’t use ratings.customer nevertheless. And what Isee as a customer is reected in what’shappened in their nancial record.

inTrir:

And I’ve seen in many places where you’ve been referred to as a passiveinvestor of Moody’s. Is that a faircharacterization and what sort of interactions and communicationshave you had with the Board and withmanagement of Moody’s?

arrn bFFTT:

At the very start there was a fellownamed Cliff Alexander who was theChairman of Dun and Bradstreet whilethey were breaking it up. He met me, Imet him in connection with somethingelse years earlier. So we had a lunchat one time, but he wasn’t really anoperating manager, he was there sortto oversee the breakup of the situation.Since we really owned stock in bothDun and Bradstreet and Moody’s when they got split up, I’d never beenin Moody’s ofces. I don’t think I’veever initiated a call to them. I wouldsay that three or four times as part of ageneral road show their CEO and theinvestor relations person would stopby and they think they have to do that.I have no interest in it basically and Inever requested a meeting. It just, it was part of what they thought investorrelations were all about. And we don’tbelieve much in that.

inTrir:

What about any Board members?Have you pressed for the election of any Board members to Moody’s Board?

arrn bFFTT:

No, I have no interest in it.

inTrir:

And, we’ve talked about just verbalcommunications. Have you sent any letters or submitted any memos orideas for strategy decisions to Moody’s?

arrn bFFTT:

No, no. well, has described the importance of management. What attracted you tothe management of Moody’s when youmade your initial investments?

arrn bFFTT:

I knew nothing about the managementof Moody’s. I’ve also said many timesin annual reports and elsewhere thatone of the many, but with reputationof for brilliance in him gets hookedup with a business with a reputationof bad economics, it’s the reputationof 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 in the past, you know, your idiot nephew could run it. Andif you’ve got a really good business, itdoesn’t make any difference. It makessome difference maybe in capitalallocation or something of the sort, butthe extraordinary business does notrequire good management.

arrn bFFTT:

I’m not making any reference toMoody’s management, I didn’t knowthem, but it really, you know, if youown the only newspaper in town uptill the last ve years or so, you havepricing power and you didn’t have togo to the ofce.

inTrir:

And do you have any opinion, sir, of how well management of Moody’s hasperformed?

arrn bFFTT:

It’s hard to evaluate when you have abusiness that has that much pricingpower. I mean, they have done very well in terms of huge returns ontangible assets, almost innite. Andthey have, they have grown along with a business that generally capitalmarkets became more active and allthat. So in the end--and they’ve raisedprices--we’re a customer of Moody’stoo so I see this from both sides andan unwilling customer, but we’re a

FCIC Interview with Warren Buffett | 3www.santangelsreview.com

inTrir:

I do want to ask you some questionsabout the formation of that bubble, if I may ask a couple more on the ratingagency side and then shift to that. Andthat is, do I take it, though, that youbelieve that at least the failure of theratings contributed in some part to thenancial crisis?

arrn bFFTT:

But I do think it was, I think every aspect of society contributed to it virtually. But they fell prey to the samedelusion that existed throughout thecountry eventually. And it meant thatthe models they had were no good.They didn’t contemplate, but neitherdid the models in the minds of 300million Americans contemplate what was going to happen.

inTrir:

And similarly, sir, the ratings agencies,both Moody’s and S&P downgradedsecurities en masse in July of 2007,July, roughly starting around July 10,2007. And then again in mid Octoberof 2007. Many have pointed to thesedowngrades as contributing to thecrisis. Do you believe that thesedowngrades, the sudden downgradescontributed to uncertainty in themarket or the looming crisis?

arrn bFFTT:

Well, I think that the realization by people that a bubble was starting topop and, you know, everybody doesn’t wake up a six a.m. on some morningand nd it out. But Freddie Mac,Fannie Mae they all felt different inthe middle of 2007 than they did inthe middle of 2006 or 2005. So people were watching a movie and they thought the movie had a happy endingand all of a sudden the events on thescreen started telling them somethingdifferent. And different people in theaudience picked it up maybe differenthours, different days, different weeks.But at some point the bubble popped.determine proper capital or to preventbuccaneers of one sort from going outand speculating in the case of banks with money that’s obtained through agovernment guarantee. So that is notan easy question.

inTrir:

As I mentioned at the outset we’reinvestigating the causes of the nancialcrisis and I would like to get youropinion as to whether credit ratingsand their apparent failure to predictaccurately credit quality of structurednance products like residentialmortgage backed securities andcollateralized debt obligations. Didthat failure or apparent failure cause orcontribute to the nancial crisis?

arrn bFFTT:

It didn’t cause it but there were a vastnumber of things that contributed toit. The basic cause was, you know,embedded in, partly in psychology,partly in reality in a growing and nally pervasive belief that house pricescouldn’t go down. And everybody succumbed, virtually everybody succumbed to that. But that’s, the only way you get a bubble is when basically a very high percentage of the populationbuys into some originally soundpremise--and it’s quite interestinghow that develops--originally soundpremise that becomes distorted as timepasses and people forget the originalsound premise and start focusing solely on the price action. So the media,investors, mortgage bankers, theAmerican public, me, you know, my neighbor, rating agencies, Congress, you name it. People overwhelmingly came to believe that house prices couldnot fall signicantly. And since it wasthe biggest asset class in the country and it was the easiest class to borrowagainst it created, you know, probably the biggest bubble in our history. It’llbe a bubble that will be rememberedalong with South Sea bubble and[unintelligible] bubble.

arrn bFFTT:

That’s right.

inTrir:

But the world does.

arrn bFFTT:

That’s right.

arrn bFFTT:

But we pay for ratings which I don’tlike. (laughs)

inTrir:

My question is one of more policy and philosophy and that is, would theAmerican economy be better off inthe long run if credit ratings were notso embedded in our regulations andif market participants relied less oncredit ratings?

arrn bFFTT:

Well, I think it might be better off if everybody that invested signicantsums of money did their own analysisbut that is not the way the world works.And regulators have a terrible problemin setting capital requirements all of that sort of thing without some kindof standards that they look to even if those are far from perfect standards.I can’t really judge it perfectly fromthe regulators’ standpoint. From theinvestors’ standpoint, I think thatinvestors should do their own analysisand we always do.

inTrir:

Would you support the removal of references to credit ratings fromregulations?

arrn bFFTT:

That’s a tough question. I mean, youget into, you get into, you know, how you regulate insurance companies andbanks. And we are very signicantly in the insurance business and we aretold that we can only own triple Band above and different--there are allkinds of different rules in differentstates and even different countries.And those may serve as a crude tool to