Congress grills Moody's officials

U.S. lawmakers grilled top officials at Moody's Corp. Wednesday for the ratings agency's role in exacerbating the financial crisis.

"Moody's is certainly not satisfied with the performance of these ratings," CEO Raymond McDaniel told the Senate Permanent Subcommittee on Investigations, which has been probing the causes of the financial crisis since April.

Moody's and other agencies have been criticized for giving arbitrary high ratings to complex investments backed by risky mortgages and other assets. When homeowners defaulted on their mortgages, the system was flooded as billions of dollars of investments in downgraded assets were dumped at the same time.

While acknowledging the company is working internally on changing its business model, McDaniel told lawmakers in prepared remarks that still doesn't mean investors should rely on them for investment decisions.

"[They are] not a buy, sell or hold recommendation," he said.

The agencies have been under fire since the panel's chairman, Democratic Senator Carl Levin, said regulatory overhaul is needed to curb the industry's inherent conflicts of interest. The industry takes frequent criticism for their funding model — they are paid by the banks whose investments they rate.

One of the suggestions the panel has made to avoid that conflict of interest is to not allow banks to pick the agencies that rate them. An independent board, appointed by regulators, would choose the rating firms, even as banks pay for the service.

Asked why Moody's ratings failed leading up to the housing crisis, former managing director Eric Kolchinsky blamed a "factory mentality" where resource-strapped employees were pressured to rate as many deals as possible to grow the company's market share.

Bankers, in turn, knew they could get their investments rated quickly, even if they didn't provide Moody's with enough advance notice to properly  evaluate the product, Kolchinsky said.

"Bankers knew we couldn't say no to a deal," he said. "They took advantage of that."

Buffett defends agencies

Billionaire investor Warren Buffett also addressed lawmakers Wednesday, after previously declining multiple requests to speak. Buffett said he doesn't rely on credit ratings when making investment decisions, yet Buffett's Berkshire Hathaway is the single largest shareholder in Moody's.

Buffett said ratings agencies were not to blame for the crisis, as no one could have predicted the scope of devastation as the housing market unwound. 

"They made virtually the same mistake everyone else made," Buffett said.

He also rejected the idea of a conflict of interest in the industry's compensation, and said lawmakers are unlikely to come up with a better system.

"If you go to something other than user-pay, it gets really tricky," he said. "I am not arguing that this is the perfect model, I am just saying it is difficult to think of an alternative."

Five other Moody's executives were scheduled to appear on Wednesday afternoon. The committee will deliver a report on the causes of the crisis in mid-December.