Warren Buffett: 'Too Big To Fail' Will Never Be Resolved

No matter what the government does, taxpayer bailouts of the financial sector will sometimes be necessary, according to the nation's second richest man.

As markets crashed in the fall of 2008, government officials feared that if certain financial institutions failed, the entire financial system -- or perhaps even the entire economy -- would come down with them. In the months after the government extended a $700 billion bailout to the financial sector, lawmakers have striven to ensure that no institution poses such a systemic risk that it would be too big, or too interconnected, to be allowed to fail.

But famed investor Warren Buffett, whose own firm profited handsomely from the bailout, said bailouts are an inevitable feature of finance, Bloomberg reports.

Buffett, who is personally worth at least $45 billion, told the government panel charged with investigating the causes of the financial crisis that its work would not prevent the phenomenon of "too big to fail."

"You will always have institutions that are too big to fail, and sometimes they will fail," Buffett told the Financial Crisis Inquiry Commission in May, according to Bloomberg. His recorded comments were released Thursday by the FCIC, Bloomberg notes. (You can read the full set of FCIC documents here.)

"We still have them now. We'll have them after your commission report."

Buffett's diagnosis joins a chorus of similar warnings. Yale economist Robert Shiller, speaking last fall at The Economist's Buttonwood Conference in New York City, said the Dodd-Frank financial reform legislation would not stop financial firms from being of systemic importance.

"What we've seen so far is not going to eliminate the problem of systemic risk, because it's a very difficult problem. It involves the nature of the banking system, which is inherently vulnerable," Shiller said. "It's vulnerable to runs and collapses, just like steam engines are vulnerable."

Ending "too big to fail" has been a priority for government officials. Much talk was spent on a so-called "resolution authority," which would theoretically allow the government to break up banks on the verge of failure. But even before the bill was passed, Federal Reserve chairman Ben Bernanke expressed doubts that such authority would work.

As of now, the nation's four biggest banks are able to get even bigger before they even reach the government-imposed limits, HuffPost's Shahien Nasiripour reported.

Buffett, for his part, made a successful bet that the government would bail out the financial sector. His firm injected $5 billion into Goldman Sachs during the worst of the crisis, as part of a highly lucrative deal. Buffett's preferred stock earns a 10 percent dividend annually.

Last fall, when Goldman was reportedly trying to exit the deal early, the bank was paying Buffett's firm about $1.3 million every day. As the Wall Street Journal noted, that's about $15 per second.

Comments

[jwilson1]

12:16 PM on 02/27/2011

OK but send the criminals to jail...bankers need to be held accountable.

[EveAngel]

10:18 AM on 02/27/2011

In a free society that is supposed to embrace property rights and capitalism, having companies that can privatize their profits but socialize their losses is unacceptable. - theamericandreamfilm dot com

[George Lekatis]

04:01 PM on 02/25/2011

The G20 try to hit the "too big to fail" model.

Example 1: One of the important parts of the regulatory reform is the regulation of the systemically important financial institutions (SIFIs) - these institutions whose disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.

According to Jaime Caruana, General Manager, Bank for International Settlements:

"The Basel Committee and the Financial Stability Board (FSB) are developing a well integrated approach to systemically important financial institutions (SIFIs) which could include some combination of capital surcharges, contingent capital and bail-in debt. In addition to these higher loss absorbency capacity measures, the FSB has stated that it expects policy towards SIFIs to include:

1. The capacity to resolve national and global SIFIs without disruption to the financial system and without taxpayer support;

2. Increased intensity of SIFI supervision; and

3. A peer review process to promote consistent national policies in this area."

Example 2: The bankassurance model (bank and insurance company combinations) declines. Banks sell insurance subsidiaries because of the increased regulatory capital under Basel III

George Lekatis
http://www.basel-iii-association.com

[OllaBarabolla]

07:07 PM on 02/15/2011

Yep! It's "bailout" when the taxpayers have to prop up the failing companies of our corrupt elites, but " socialism" or " redistribution of income" when it's time to help the working poor or middle class.

[Pandoras Folly]

11:41 AM on 02/14/2011

We can build better and more reliable things than steam engines. Heck a sterling engine if you want to go for shear efficiency and its just as old.

[DA A Man]

03:07 AM on 02/14/2011

Warren Buffet sounds like a real communist

[argyle]

12:00 AM on 02/14/2011

Properly regulated banks don't fail unless the money used to fund them itself fails. Investment houses should fail on a regular basis. The two ought to be unrelated and Mr. Buffet knows this.

[doneflyin]

09:51 PM on 02/13/2011

Here's Warren talking his book again. Without the bailouts BRK.B would have taken a huge hit and probably would never have recovered. Warren looked into the Abyss and didn't like what he saw.
When he came out in support of Goldman's fraudulent Abacus fund, he crossed over to the Dark Side.
He won't be back. He's now committed to Welfare Capitalism.

[chazzman]

09:35 PM on 02/13/2011

Warrent Buffett plans to give his fortune to charity with the Melanda and Bill Gates Foundation to administered. This is with the agreement of his HEIRS. Buffett is a great man and should be applauded for his generosity.

[DanSc]

08:28 PM on 02/13/2011

Looks like the government's policy of cradle-to-the-grave socialism for Wall Street firms will continue.

[Derek Lantin]

06:35 PM on 02/13/2011

Sir

One can only admire Mr. Buffet. One of the world’s richest men, down-to-earth and blessed with a delight, whimsical sense of humor.

In one of his year end reports, he reported that he had abandoned plans to run his investment fund after his death. “That would,” he quipped, ”have given an entirely new meaning to the expression ‘thinking outside of the box’.”

Sincerely, Derek Lantin. http://dereklantin.booksabuzz.com

[robbed of it all]

12:06 PM on 02/13/2011

Losses from failed business models are only for the little people, you know the ones with no representation.

[jwpilcher]

11:52 AM on 02/13/2011

The premise that closing a megabank is any harder than closing a regional bank is a fallacy propagated by megabank executives and politicians who would serve as their proxy.

The process is the same as what has been done thousands of times since the olden days of the 80's, during the S&L crisis under the RTC (Resolution Trust Corporation).
1. You replace the executives with FDIC managers and consultants, backstop all deposits, and let the same employees and bank branches continue to operate as business as usual.
2. You scrutinize operations and processes and audit the assets on the books.
3. You freeze all liabilities and wipe out all equity holders.
4. Once #2 is done you auction off the assets in a way to maximize the bank's return and use the proceeds to repay debt holders (bonds and lenders). Shortfall losses pass thru to debtors and lenders.
5. When you're done, in theory you have a new balance sheet and a ton of deposits, employees, and bank branches. At that point you break it up into small banks/businesses and either sell them or issue new charters to responsible bank entrepreneurs.

I have been a consultant for the FDIC and have seen how seamlessly this process works firsthand. There is nothing different with respect to megabanks except that more divisions and businesses need to be cleaned up and sold, or liquidated.

[schatsie]

11:01 AM on 02/13/2011

In other words, Buffett is winning so he doesn't want the crooked deck replaced.....

[mrclark]

09:25 AM on 02/13/2011

It is truly amazing how so many of the wealthy who claim to be true capitalists when the chips are down feel that the system needs to bail them out. No company is irreplaceable as some other entity will fill the void. Buffett like most of his group feel that they do something that no one else can. This theory is full of holes and there is always someone who can do their job. The failure of his argument is he wants to protect the status quo for it benefits him and those he deals with. As long as the same people who created the mess are in power though his argument is accurate for those who created the mess now see that they can get away with putting the debt on the public when their bets that go bad come due.