Will Buffett 'Talk His Book' in Front of Financial Crisis Investigators?

Warren Buffett will testify to Financial Crisis Inquiry Commission
Warren Buffett will testify to Financial Crisis Inquiry Commission

When Warren Buffett testifies in front of the Financial Crisis Inquiry Commission (FCIC) on June 2, the plan is for the commission to tap into his extensive knowledge of financial markets in its efforts to determine what caused the crisis. But given that Buffett is appearing under a subpoena, rather than voluntarily, he is facing a problem: How will the Oracle of Omaha resist the temptation to talk his own book?

"Talking your book" describes the popular pundit practice of going before the public, purportedly to give an objective analysis of market activity, but instead making statements designed to boost the value of one's own investment holdings. Some media outlets have gone so far as to ask pundits to disclose their holdings before they go on the air so that listeners will know whether they are talking their books. While holding investments may lead to commentators and experts having deeper knowledge about certain companies and industries, it also makes it hard for observers to trust their objectivity.

Buffett certainly has a conflict of interest between his desire to provide the FCIC with objective analysis and his desire to boost the value of his holdings. For example, Buffett's firm, Berkshire Hathaway (BRK.A), holds derivatives, those financial weapons of mass destruction that cost his company $1.7 billion in the first quarter of 2008. He also owns $5 billion worth of Goldman Sachs (GS) preferred stock yielding 10%. And he has a 13% interest in ratings agency Moody's (MCO).

Investing Icon Had Fingers in a Lot of Bad Pies

Where's Buffett's conflict? While the FCIC is supposed to rule definitively on these matters, I think there's ample evidence already that without derivatives such as credit default swaps, American International Group (AIG) would not have cost the U.S. government $182.3 billion in bailouts and guarantees.

Moreover, of that money, $12.9 billion would not have gone to a 100-cents-on-the-dollar backdoor bailout of Goldman. Thanks to the SEC's fraud charges related to Goldman's sale of Abacus 2007-AC1, a synthetic collateralized debt obligation which cost investors $1 billion, the investment bank has been swept into the financial crisis investigation.

And Moody's -- which bears a significant share of the responsibility for the financial crisis -- accepted millions in fees from the investment banks to provide AAA-ratings on mortgage-backed securities. Now, those mortgage-backed securities are not so AAA -- 91% of sub-prime mortgage-backed securities issued in 2007 that were AAA-rated at the time are now junk-rated according to The New York Times.

While he may be able to plead that he had nothing to do with Goldman's Abacus scandal, which happened before he bought his stake, Buffett will have some " 'splainin' to do" when it comes to Moody's: Buffett has owned Moody's stock for a decade.

As I wrote in a May 2 DailyFinance article, Buffett is a PR genius. Still, he'll need all of that PR genius and more to talk his own book while simultaneously adhering to the oath he'll be asked to swear (as former Treasury Secretary Henry Paulson did on May 6) to tell the truth in front of the FCIC.

Peter Cohan owns shares of AIG, but has no financial interest in the other securities mentioned.