Times uses Kosher-Rabbi-Pork Analogy to explain Warren Buffet's Moodys Investment

With the recent meltdown of our financial system, people have started asking, where were the ratings agencies? And with that question we turn to the Times' story, "Warren Buffett Unusually Silent on Credit Rating Agencies" by DAVID SEGAL.

In his annual Berkshire Hathaway letter, Warren E. Buffett recently urged investors to pose tough questions at the shareholders meeting in May. Here is one on the mind of some Buffett watchers: When are you going to fix Moody’s?

Mr. Buffett, known as the Oracle of Omaha, owns a stake of roughly 20 percent in the Moody’s Corporation, parent of one of the three rating agencies that grade debt issued by corporations and banks looking to raise money. In recent months, Moody’s Investors Service and its rivals, Standard & Poor’s and Fitch Ratings, have been prominent in virtually every account of the What Went Wrong horror story that is the financial crisis...

Yes, there is more than just one story waiting to be told here. But if you want to understand investments, you need a lot of good analogies. Here is one, not so very penetrating attempt...

...Mr. Buffett also seems to have said nothing about a problem that some contend is just as serious and endemic: because ratings are required in so many transactions, the agencies’ inaccurate ratings have no effect on their own bottom lines. And a company that is paid regardless of its performance is a company that will eventually underperform, says Frank Partnoy, a professor of law at the University of San Diego.

“Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not,’ ” says Mr. Partnoy, a former derivatives trader. “If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”

The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,” Mr. Partnoy says, “and they’re not too happy about it.”...

Kosher, rabbis and pork - now I understand Warren Buffet's Moodys Investment and the entire financial crisis! (Not.)