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Buffett is already defending Moody's with statements that appear to be reasonable, but are in fact completely incoherent. Here's what he says about the top brass at bailed out banks:

"When society has to step in to save institutions . . . the CEO should go away broke."

So far, so good. But what about the CEO of Moody's and other rating agencies who fueled the bubble, sabotaged investors, but were clever enough to design a business model that was insulated from the housing fallout? For the CEOs of rating agencies, Buffett suddenly has sympathy:

"The entire American public eventually was caught up in a belief that housing prices could not fall dramatically . . . I believed it . . . that's the nature of bubbles, they become mass delusions . . . . They made a mistake that virtually everybody in the country made."

In short, Buffett wants us to come down on the top bankers, but not the CEOs of a rating agencies. And it just so happens that Buffett is the largest shareholder in Moody's, one of the top rating agencies.

This is a total contradiction. Why have sympathy for the poor rating agency execs but not the bank execs, if everybody is operating under the same delusion? Sure, the government didn't bailout rating agencies, but the bank bailouts were fueled in part by actions committed by rating agencies, who slapped top ratings on garbage subprime mortgage securities that banks bought. If rating agencies contributed significantly to the need for vast, socially destructive bailouts-- and there is no question that they did-- their executives should be held accountable for that social fallout.

Buffett's argument seems to be that, since Moody's managed to profit from its own social sabotage, it should be immune from public or regulatory scrutiny. If anything, the fact that Moody's can profit from socially destructive activity should be an irrefutable argument in favor of discharging its management team and regulating the business. In other lines of business, people who profit from socially destructive activity are called criminals (think: stealing an old lady's purse).

One rather amazing aspect of Moody's business is their economic research wing. They bought a company run by economist Mark Zandi, who is a very credible economist who, although usually an adviser to Republicans, does serious and respectable research. Like most economists, Zandi is frequently wrong, but he doesn't do nonsense corporate talking points or nonsense fake-research to bolster particular corporations or sectors. But while Zandi was making a very credible case that the U.S. housing market was in trouble, another wing of Moody's business was slapping top ratings on housing securities. Either they didn't believe their own economic research-- in which case, they shouldn't have been putting it out-- or they didn't believe in their ratings. Whichever way Moody's screwed up, their management cannot be seen as anything but corrupt predators.

In other words, management ignored the advice of their own economic research, and ignored it for several years, and made a killing on it. Rating agency profits are not tied to the performance of their ratings-- they're tied to up-front fees they get for making the rating. Those fees are paid not by investors who use the ratings, but by the banks who issue the securities.

That ability to score huge profits regardless of the performance of their own ratings is exactly why Buffett wants to protect the current Moody's management and the current regulatory structure. Moody's team has been very good at securing big profits for the company's shareholders, while sending society off a cliff. Sen. Al Franken, D-Minn., has introduced a bill that would end the conflict of interest between bankers and rating agencies. If that conflict of interest is ended, Buffett's profit machine would be severely impacted. Moody's would have to actually be good at what it does in order to make big bucks.

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