Berkshire's Bond Insurer, Moody's Stake Face Probe

Berkshire's Bond Insurer, Moody's Stake Face Probe

May 1 (Bloomberg) -- Billionaire Warren Buffett's Berkshire Hathaway Inc. faces a probe by Connecticut's attorney general for possible conflicts created by owning almost 20 percent of credit ratings company Moody's Corp. while also running a new municipal bond insurer.

Connecticut is investigating the ``clear and direct conflict of interest for Moody's to rate a company owned by such a significant Moody's shareholder,'' Attorney General Richard Blumenthal said in an interview yesterday.

Moody's gave its top rating last week to Berkshire Hathaway Assurance Corp., created in December as existing bond insurers struggled to maintain their AAA ratings. A favorable rating for Berkshire by New York-based Moody's, or a lower rating for competitors including MBIA Inc. and Ambac Financial Group Inc., may give Buffett's company an advantage.

``We have been aware of this issue, and it has been very actively and immediately involved in our investigation,'' said Blumenthal, referring to a previously announced antitrust probe of ratings companies. ``This financial relationship is part and parcel of the issues involved in our antitrust investigation.''

Officials at Omaha, Nebraska-based Berkshire weren't immediately available for comment.

``We have a strict policy that's been in place since we've been a public company that allows us to manage any potential conflicts of interest,'' said Tony Mirenda, a spokesman for Moody's. ``We have a longstanding policy of not discussing our ratings with shareholders and non-employee members of the board of directors.'' Berkshire is ``a passive investor that has never contacted us regarding our ratings.''

Debt Downgrades

Berkshire has held about 48 million shares of Moody's since at least 2002, data compiled by Bloomberg show.

Standard & Poor's, a unit of McGraw-Hill Cos., also gave its highest grade to Berkshire's four-month-old unit, which offers municipal bondholders protection from default by state and local governments.

Blumenthal wouldn't speculate today on possible consequences of his probe for Berkshire and Moody's, adding that a remedy ``may need to be broader than dealing with one company, or on the relationship between two companies.'' He declined to say if subpoenas were issued.

Blumenthal had earlier disclosed an antitrust investigation into whether the three largest credit-ratings companies rank debt against issuers' wishes, then demand payment. Connecticut is also probing whether the companies threaten to downgrade debt unless they're awarded business to rate all of an issuer's securities, and the practice of offering ratings discounts in return for exclusive contracts.

Possible Solutions

The conflict exists and Moody's should voluntarily recuse itself from ratings tied to Berkshire's unit, said John Coffee, professor of securities law at Columbia University in New York.

``I don't think this is a serious issue,'' said Monish Pabrai, managing director of Pabrai Investment Funds and a Berkshire stockholder, in a Bloomberg Radio interview. Berkshire could resolve the problem by reducing its stake in Moody's ``or they could work out an agreement where they would not have any voting rights.''

Buffett started the bond insurer in December at the urging of insurance regulators, who were seeking ways to help governments find new places to buy the coverage when losses jeopardized the AAA ratings at MBIA, Ambac and other established companies. States and municipalities pay bond insurers to guarantee their debt, effectively putting the bond insurance companies' rating in place of their own to lower the interest rate they pay to borrow.

Perception's Role

``It's only natural that you comport yourself in a way that pleases your owners,'' said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, who has also been critical of Berkshire's venture into bond insurance. ``The perception, at the very least, is problematic. Are they going to rate municipal bonds fairly, or do it in a way that helps maximize income from Berkshire's bond insurance operation?''

Buffett, ranked the world's richest man by Forbes magazine, transformed Berkshire from a failing textile maker into an enterprise with businesses ranging from ice cream and underwear to corporate jet leasing.

Detroit Sale

Detroit planned to sell $385 million of bonds today carrying insurance from Berkshire Hathaway Assurance, marking the first foray by the guarantor into the primary market for U.S. municipal debt. Berkshire may have already insured at least 255 existing bonds totaling more than $2.3 billion, based on data compiled by Bloomberg.

Buffett earlier offered to shore up municipal bonds guaranteed by MBIA, Ambac and FGIC Corp. in a bid to gain 33 percent of the debt insurance market. The companies didn't accept.

The attorneys general offices in California, Florida, Massachusetts, New Jersey and Texas didn't have immediate comments or didn't immediately return phone calls. MBIA spokesman Jim McCarthy declined to comment.

BLOOMBERG