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Moody's stock dives as Warren Buffett pares his stake

July 23, 2009 | 11:48 am

Shares of credit-rating firm Moody's Corp. are up from their lows early today but still in the red on news late Wednesday that Warren Buffett cut his holdings in the firm.

Buffett’s Berkshire Hathaway Inc. said in a federal filing that it had sold 8 million Moody’s shares this week, reducing its stake to 40 million shares.

Moody’s shares fell as low as $23.70 today and were off $1.09, or 4.1%, to $25.43 at about 11:45 a.m. PDT.

Berkshire remains Moody’s largest shareholder, with 17% of the company. But the decision to reduce the stake is another blow to the already badly tarnished images of Moody’s and the other two major ratings firms, Standard & Poor’s and Fitch Ratings.

Buffettwarren Their track record in assigning AAA ratings to mortgage-backed bonds that later collapsed will haunt them forever, of course. The California Public Employees’ Retirement System sued Moody’s, S&P and Fitch this month, alleging they’re responsible for more than $1 billion in losses incurred by the pension fund.

Now the push is on at the federal level to punish the industry with closer Securities and Exchange Commission supervision and rules aimed at reducing the companies’ inherent conflicts of interest in the ratings game.

Still, Buffett defended Moody’s at Berkshire’s May 2 annual meeting. From Bloomberg News:

Buffett said that he still believes assigning ratings to debt "is a good business" because of the limited number of competitors.

"They made a mistake that many, many people made," Buffett told shareholders. "There was almost a total belief throughout the country that house prices certainly wouldn’t fall significantly."

Although Buffett could be edging away from Moody’s for fundamental reasons, Bloomberg notes that there may be another reason for the stock sales:

U.S. accounting rules require firms to account for holdings differently when they own more than one-fifth of a company’s shares -- a position Berkshire found itself in after Moody’s repurchased shares from other investors to reduce the total amount outstanding.

The accounting requirements may have contributed to Berkshire’s decision to reduce its stake, said Michael Quigley, a portfolio manager at Wedgewood Partners Inc. in St. Louis. Wedgewood invests about 7.8% of its $500 million of assets in Berkshire shares.

"There’s definitely that legislative threat, lawsuits are definitely on the horizon," Quigley said. "But it’s probably more them being uncomfortable owning more than 20%."

-- Tom Petruno

Photo: Warren Buffett. Credit: Paul White / Associated Press