NEW YORK (Reuters) - The Oracle of Omaha, for once, may have failed to impress his audience. Warren Buffett, the billionaire whose investments are followed religiously on Wall Street, had no easy remedies when grilled on Wednesday about the role of credit rating agencies in fueling the financial crisis.
Testifying before the Financial Crisis Inquiry Commission, Buffett did not meaningfully retreat from his defense of Moody's Corp's business model, though his Berkshire Hathaway Inc has cut its stake in Moody's to 13 percent from nearly 20 percent a year ago.
Moody's shares have fallen 74 percent since February 2007, and Buffett said he would have sold more shares had he foreseen the housing downturn.
Yet the 79-year-old appeared to dismay panel members in offering no clear fixes to one of the rating industry's most criticized practices -- the payment by issuers for ratings.
"I'm not sure he fully comprehends the range of questions raised about Moody's business practices and culture," Chairman Phil Angelides said in an interview after the hearing.
During the hearing, Vice Chairman Bill Thomas appeared exasperated as Buffett hesitated to endorse specific reforms.
"You've got to do more," Thomas, a former chairman of the House of Representatives Ways and Means Committee, told him.
"Certainly I could have done more," Buffett responded.
Testifying under subpoena after resisting entreaties to come forth voluntarily, Buffett said rating agencies and others miscalculated the housing market after being lulled by the "narcotic" of seemingly ever-increasing home prices.
Admitting he had been no more prescient, Buffett said Moody's and McGraw-Hill Cos' Standard & Poor's unit "made a mistake that virtually everybody in the country made.
"It was the granddaddy of all bubbles," he added.
Buffett declined to advocate harsh remedies such as the removal of top executives from credit raters.
He said reforms should instead target financial companies with too much leverage, and punish chief executives and boards that require unusual government aid. Rating agencies did not take taxpayer bailouts during the 2008 crisis.
"I am much more inclined to come down hard on the CEOs of the institutions that caused the United States government to necessarily bolster them, than I am on someone who made a mistake that 300 million other Americans made," he said.
Congress is weighing legislation to curb the agencies' power, and up-end their decades-old model of having issuers pay for ratings and shop around among agencies.
Moody's, S&P and Fimalac SA's Fitch Ratings are widely faulted for fueling the crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast.
Also testifying was Moody's Chief Executive Raymond McDaniel, a lightning rod for criticism of the industry. More than two-thirds of Moody's revenue comes from ratings.
"We believed that ratings were our best opinion at the time that we assigned them," McDaniel testified. "The regret is genuine and deep."
He also said there is an "important public good" served by the current issuer-pays model, saying that ratings are later released publicly for free. McDaniel blamed the financial crisis mainly on weakened housing and tightened credit.
For his part, Buffett said he still loves credit raters' business model, citing a "duopoly" that Moody's and S&P enjoy, but said investors should do their own credit homework rather than rely on agencies to do it for them, perhaps incorrectly.
Buffett has used a similar argument to defend Goldman Sachs Group Inc's marketing of securities that led to a U.S. Securities and Exchange Commission civil fraud lawsuit against the Wall Street bank in April.
Berkshire owns $5 billion of Goldman preferred securities and warrants to buy an equal amount of common stock.
"Buffett continues to talk his book," said Joshua Rosner, managing director of Graham Fisher & Co in New York. "He appeared to own Moody's not because it was either a well-run or fundamentally defensible business, but rather because it was legislated and mandated into being."
The billionaire also had supporters. Panel members were "looking for someone to hang, and they were trying to enlist Buffett in their lynch squad," said Jerry Bruni, who oversees $425 million at JV Bruni and Co in Colorado Springs, Colorado and owns Berkshire stock. "Buffett was not taking them up."
The crisis panel has held several hearings featuring top finance officials, including Goldman Chief Executive Lloyd Blankfein. Its findings are due by December 15.
Angelides, a former California treasurer, criticized Moody's for bestowing thousands of high ratings on risky debt that later became unhinged.
"To be blunt, the picture is not pretty," Angelides said. He called Moody's a "triple-A factory" whose expansion drove a sixfold jump in its stock price from 2000 to 2007. "Investors who relied on Moody's ratings did not fare so well," he said.
Next week, Congressional negotiators will try to reconcile proposed House and Senate financial reform bills, including measures to tighten oversight of credit raters, reduce investor reliance on ratings, and allow more lawsuits against agencies.
One proposal by Senator Al Franken, a Minnesota Democrat, would create a board to match the agencies with debt issues, preventing issuers from shopping their business around.
Some former Moody's officials said they felt intimidation from bosses to assign rosy ratings to win new business and appease investment bankers who arrange securities offerings.
"It was very clear to me that my future at the firm and my compensation would be based on the market share," testified Eric Kolchinsky, a "whistleblower" who once ran a unit that rated subprime collateralized debt obligations.
Asked whether pressure to keep up with large business volumes was like the scene in the television show "I Love Lucy" where Lucy Ricardo struggles to package chocolates speeding down a conveyor belt, he answered, "Oh yes, all the time."
Former Moody's managing director Gary Witt expressed concern that Moody's, prior to the crisis, lacked resources to rate debt correctly.
Angelides later echoed this idea in a discussion of structured finance, telling McDaniel: "It seems to me the resources were not applied to understanding these products."
Brian Clarkson, a former Moody's president credited with driving its structured finance growth, canceled his testimony Wednesday to undergo emergency surgery.
Speaking earlier on CNBC television, Buffett said he did not know that Moody's in March got a "Wells notice" indicating possible SEC civil charges related to a failure to timely downgrade some European debt.
Moody's shares closed Wednesday up 60 cents, or 3.1 percent, at $19.90.
Reporting by Elinor Comlay, Kim Dixon and Jonathan Stempel; Additional reporting by Christian Plumb, Helen Kearney, Michael Miller, Walden Siew, Dan Wilchins and Karey Wutkowski; Editing by Tim Dobbyn