In his evidence to the US Financial Crisis Inquiry Commission Warren Buffett has rejected criticism of Moody’s, saying that they made the same mistakes that everyone else in relation to the housing market crash. This ignores the nature of the mistakes made by Moody’s.

Few people expected the US housing market to fall as quickly and as far as it did. However, the ratings given by Moody’s were not so much dependent on the fall of the market as a whole but on the number of individual defaults in a portfolio of mortgages. Here, the risk of a broad-based fall in the average house price is not the issue – more important is the chance of a large number of homeowners being simultaneously unable to make repayments on their mortgages. This means that the key information that ratings of mortgage-backed securities should allow for is way in which the defaults of individual mortgage holders are linked. It turns out that whilst the defaults might be quite random in the good times, in the bad times a failing economy will affect many mortgage holders in exactly the same way. Failing to allow properly for the links between mortgage defaults was the problem that Moody’s had, not failing to call the housing market correctly.