Chapter 7. Financial Astrology—AAA Falling Stars

 

I can't recall we've ever asked for management changes in companies we've invested in. If they did the wrong thing, they should go.

 
 --Warren Buffett, Wall Street Journal, May 23, 2008

At the end of 2007, Berkshire Hathaway owned 48 million shares of Moody's Corporation, one of the top three rating agencies (the same shares Berkshire owned when I first met Warren Buffett in 2005), representing just over 19 percent of the capital stock. The cost basis of the shares is $499 million. At the end of 2002, the value was just under $1 billion. By the end of 2006, the value was around $3.3 billion, but it dropped to $1.7 billion at the end of 2007.[157] The sharp increase in revenues is due chiefly to revenues generated from rating structured financial products, and the sharp decrease was due to the disillusionment of the market with the integrity of the ratings.

The collateralized debt obligation market grew from around $275 billion in 2000, to about $2 trillion in 2007; then the market stalled. By June 11, 2008, Total Securitization reported that CDOs in default exceeded $200 billion.[158] Investors included insurance companies, bank investment portfolios, mutual funds, pension funds, hedge funds, money mangers, and more. Every sector of society is affected as misrated products cause actual principal losses combined with loss in value due to declining market prices and illiquidity. More than that, liquidity—coming up with needed cash—is ...

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