Billionaire investor Warren Buffett distanced himself from embattled credit rating agencies, saying they have lost some of their investment appeal amid criticism of their role in fueling the financial crisis.

As the star witness at a Wednesday hearing of the Financial Crisis Inquiry Commission, Buffett agreed credit raters erred in failing to foresee the scope of the U.S. housing crisis but said they were not alone in this miscalculation.

In this particular case, they made a mistake that virtually everybody in the country made, Buffett said. It was the granddaddy of all bubbles.

The chief executive of Berkshire Hathaway Inc, a major investor in credit rater Moody's Corp, declined to advocate harsh remedies such as the removal of top executives at rating firms.

Buffett said reforms should target financial firms with too much leverage, and punish chief executives and boards that require unusual government aid. The rating agencies did not take taxpayer bailouts during the 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.

Moody's, McGraw-Hill Cos' Standard and Poor's and Fimalac SA's Fitch Ratings have been widely faulted for fueling the crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast.

Congress is weighing legislation that could curb their power to win and retain business.

Berkshire owns 13 percent of Moody's, down from nearly 20 percent a year ago, and Buffett said he would have sold more sooner had he foreseen the housing downturn.

Buffett's hesitancy to offer specifics prompted dismay from panel Vice Chairman Bill Thomas, a former chairman of the House of Representatives Ways and Means Committee.

Thomas told the 79-year-old, arguably the world's most admired investor, that he should use his influence to promote needed reforms. You've got to do more, Thomas said.

Certainly I could have done more, Buffett responded.

LIGHTNING ROD

Buffett testified alongside Moody's Chief Executive Raymond McDaniel, a lightning rod for criticism of credit raters.

Congress is weighing legislation to curb the agencies' power, and upend their decades-old business model of having issuers pay for ratings and shop around among agencies.

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.

Buffett, for his part, said he still loves credit raters' business model, but that investors should do their own credit homework rather than depend 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.

Speaking earlier on CNBC television, Buffett also distanced himself from Moody's management. He said he had no recent contact with it, and did not know that Moody's in March got an SEC Wells notice indicating possible civil charges related to a failure to timely downgrade some European debt.

NOT PRETTY

The crisis panel has held several hearings featuring top finance officials, including Goldman Chief Executive Lloyd Blankfein and former Bear Stearns Cos chief James Cayne.

Phil Angelides, a former California treasurer who chairs the panel, opened the hearing by criticizing 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 that expanded rapidly in structured finance, causing the company's stock to rise more than sixfold from 2000 to 2007. Investors who relied on Moody's ratings did not fare so well, he said.

The panel is required to issue its findings by December 15, a month after mid-term Congressional elections.

Moody's shares peaked at $76.09 in February 2007. They traded Wednesday afternoon up 2.2 percent at $19.73.

Next week, congressional negotiators will attempt to reconcile House and Senate versions of financial reform legislation, including measures that would tighten oversight of the ratings industry.

One proposal by Senator Al Franken, a Minnesota Democrat, would create a panel to match issuers with rating agencies on a semi-random basis, in an effort to foster competition.

LUCY RICARDO

Some former Moody's officials said they felt intimidation from bosses to assign rosy ratings to win new business.

It was very clear to me that my future at the firm and my compensation would be based on the market share, said 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.

In his prepared remarks, former Moody's vice president Mark Froeba said management intimidation created a docile population of analysts afraid to upset investment bankers.

Gary Witt, a former Moody's managing director, expressed concern to the panel that before the crisis hit, Moody's lacked the resources to ensure its ratings were correct.

McDaniel got support from Brian Clarkson, a former Moody's president credited with the agency's expansion in structured finance before he unexpectedly left the company in 2008.

Calling the integrity of Moody's analysts beyond dispute, Clarkson in his written testimony suggested that the commission look to brokers and underwriters, rather than rating agencies, as a target for reform.

(Reporting by Elinor Comlay, Kim Dixon and Jonathan Stempel; Additional reporting by Christian Plumb, Helen Kearney, Michael Miller and Karey Wutkowski)

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