Warren Buffett on Bank Regulation
Summary
TLDRIn this transcript, the speaker emphasizes the need for a strong, independent financial regulator to prevent excessive risk-taking by financial institutions. They discuss the challenges of regulation, referencing past failures like Freddie and Fannie, and advocate for a nuanced approach that considers different types of leverage. The speaker also calls for accountability, suggesting penalties for directors and CEOs of institutions that fail, and criticizes the lack of consequences for those who contributed to the financial crisis. They touch on the 'too big to fail' dilemma and the moral hazard it presents, while also reflecting on personal experiences during the crisis.
Takeaways
- 📈 The speaker advocates for a single, powerful regulator to oversee financial institutions, emphasizing the need for someone with authority to prevent excessive risk-taking and leverage.
- 🏦 The speaker discusses the challenges faced by financial institutions in meeting the promise of increasing earnings per share every quarter, which can lead to risky off-balance-sheet activities.
- 📉 The speaker references the failures of Freddie Mac and Fannie Mae, which were heavily regulated but still engaged in risky practices, highlighting the difficulty of effective regulation.
- 💼 The speaker expresses admiration for the Federal Reserve's response during the financial crisis, particularly the actions of Ben Bernanke, and the importance of decisive, swift action.
- 🚫 The speaker argues against setting a fixed leverage ratio, as it doesn't account for the different risk profiles of banks' assets, emphasizing the need for nuanced regulation.
- 💡 The speaker suggests that a smart and strong regulator should understand the complexities of different types of leverage and be willing to speak out about generalized problems in the financial system.
- 🚨 The speaker is in favor of penalties for directors and CEOs of financial institutions that fail, especially those deemed 'too big to fail,' arguing that they should bear significant consequences for their actions.
- 💰 The speaker criticizes the lack of personal financial consequences for leaders of institutions that contributed to the financial crisis, suggesting that they should not have profited from their mistakes.
- 🔒 The speaker supports the idea of 'clawbacks' and restrictions on executive compensation, as well as the prohibition of director's liability insurance, to align incentives with risk management.
- 📉 The speaker reflects on the financial crisis, acknowledging missed opportunities for investment and the difficulty of predicting market movements, even for those deeply involved.
Q & A
What is the speaker's view on having a single big regulator for banks?
-The speaker believes in having one strong and independent regulator, like the Federal Reserve, to oversee banks and prevent excessive leverage and risky practices.
Why does the speaker think financial institutions might take on too much leverage?
-The speaker suggests that financial institutions, driven by the pressure to increase earnings per share every quarter, might engage in risky practices and leverage without proper oversight.
What role does the speaker think Freddie and Fannie played in the financial crisis?
-The speaker implies that Freddie and Fannie, despite being regulated, committed many of the same sins that led to the financial crisis by engaging in off-balance-sheet activities.
How does the speaker feel about the Federal Reserve's response during the financial crisis?
-While acknowledging that the Federal Reserve was not perfect, the speaker expresses admiration for their swift actions, particularly under Bernanke's leadership, to stabilize the financial system.
What does the speaker suggest about establishing a specific leverage ratio for banks?
-The speaker argues against a one-size-fits-all leverage ratio, emphasizing the need for a nuanced approach that considers the type of assets a bank holds.
Why does the speaker advocate for a smart and strong regulator?
-The speaker wants a regulator who understands the complexities of different types of leverage and can effectively communicate and enforce regulations to prevent systemic risks.
What does the speaker propose regarding the accountability of directors and CEOs of large financial institutions?
-The speaker suggests that directors and CEOs of institutions 'too big to fail' should face significant penalties, including financial losses, if they fail in their duties and risk the stability of the financial system.
How does the speaker feel about the public's perception of the financial crisis and its aftermath?
-The speaker recognizes the public's frustration with the lack of personal consequences for leaders of financial institutions that contributed to the crisis, noting that the public sees no one going to jail or suffering significant losses.
What is the speaker's opinion on the 'too big to fail' doctrine?
-The speaker acknowledges the reality of 'too big to fail' institutions and the moral hazard they create, but also emphasizes the need for tougher consequences for those in charge when they fail.
What does the speaker think about the current stance of financial executives on risk management and clawbacks?
-The speaker expresses skepticism about the true commitment of financial executives to risk management and clawbacks, suggesting that their current stance might be more about appearances than actual change.
How does the speaker reflect on his own actions during the financial crisis?
-The speaker admits that he could have made smarter financial decisions during the crisis, such as waiting to invest in the market, but also recognizes the uncertainty and urgency of the situation at the time.
Outlines
🏦 The Need for a Strong Financial Regulator
The speaker emphasizes the necessity for a powerful and independent financial regulator to prevent excessive risk-taking by financial institutions. They argue that without oversight, entities may engage in leveraged activities that could destabilize the financial system. The speaker cites the Federal Reserve as an effective regulator, acknowledging its imperfections but also its crucial role in responding to crises. They highlight the importance of a regulator who can act swiftly, like guaranteeing money market funds and ensuring the flow of commercial paper, which Congress could not do with the required speed. The speaker also discusses the complexity of setting leverage ratios, suggesting that a one-size-fits-all approach is not effective, and that a nuanced understanding of different types of leverage is necessary. They advocate for a regulator who can speak out about generalized problems, not just individual institution issues, and who has the courage to address systemic risks.
💼 Accountability and Consequences for Financial Institutions
The speaker discusses the concept of 'too big to fail' financial institutions and the moral hazard they present. They express frustration with the lack of severe consequences for executives and directors of large financial institutions that contribute to financial crises. The speaker suggests that if these institutions fail and require government intervention, those responsible should face significant penalties, including financial losses and the possibility of criminal charges. They argue for a system where executives and directors are held personally accountable for their actions, with mechanisms like clawbacks and restrictions on director's liability insurance. The speaker also reflects on the government's response to the financial crisis, acknowledging the moral hazard but also recognizing the necessity of government intervention to prevent systemic collapse. They express a desire for a more equitable system where those at the top face consequences proportional to the risks they take.
Mindmap
Keywords
💡Deregulation
💡Leverage
💡Off-balance-sheet
💡Freddie and Fannie
💡Federal Reserve
💡Commercial paper
💡Leverage ratio
💡Moral hazard
💡Compensation system
💡Clawbacks
💡Too big to fail
Highlights
The need for a single, powerful regulator to prevent financial institutions from taking on too much risk.
The importance of a regulator with independence and real muscle to maintain the stability of the financial system.
The Federal Reserve's role as a capable regulator, despite not being perfect during the financial crisis.
The necessity for speed in regulatory responses, as exemplified by the actions taken to save the financial system.
The challenge of establishing a one-size-fits-all leverage ratio for banks due to differing risk profiles.
The idea that a smart and strong regulator should understand the nuances of different types of leverage.
The importance of a regulator who can speak out about generalized problems in the financial system.
The concept that financial institutions that are 'too big to fail' should face severe consequences if they fail.
The argument that directors and CEOs of large financial institutions should be held accountable for their actions.
The view that financial institutions should not allow executives to profit excessively from risky behavior.
The suggestion that there should be a penalty for directors who fail in their oversight responsibilities.
The belief that the financial community should have a sense of responsibility and accountability.
The observation that the public is frustrated by the lack of jail time for leaders who contributed to the financial crisis.
The idea that stockholders in large financial institutions have suffered significant losses, unlike top executives.
The argument for clawbacks and restrictive compensation systems to align executive incentives with long-term stability.
The opinion that directors should not be able to buy liability insurance to shield themselves from the consequences of their decisions.
The reflection on the moral hazard of bailing out large financial institutions and the public's perception of fairness.
The discussion on the potential for smarter financial decisions during the crisis, such as waiting to invest in the market.
Transcripts
and banks do deregulation I need one
regulator one big regulator that was me
I would like it I mean because you need
you need somebody that does have a big
step you know I mean it left to their
own devices people will take on too much
leverage they may not this year next
year hanging but the financial
institutions particularly promising
they're going to increase the earnings
per share every quarter and they'll do
off-balance-sheet things and all of all
of these sins that were committed a few
years ago you know Freddie and Fannie
did a lot of them too and they were
regulated by - and regulated margining
in the office every day so we've had
Congress regulate the two of the five or
six most important financial
institutions United States and it was a
total flop so it's tough being a
regulator and you've it but you want
somebody that is independent somebody
it's got real muscle and hopefully
somebody that you know has an
understanding of what you need to do to
keep the system working oil - and that's
the Federal Reserve I think they're good
at it you know I've had you know they
weren't perfect this time around and
they're now but but Congress wasn't
perfect either
but once the problem came they responded
and you had the untold admiration for
Bernanke if the end have had the
authority yeah and maybe maybe if he
even hadn't thought he had a little more
authority than even did have last fall
there's something to that you know I
mean you had to have somebody that would
step up guarantee money market funds you
know Keaton keep commercial paper
flowing do these things that many people
could have done and certainly Congress
couldn't have done them with the speed
and you know that speed was absolutely
essential I mean you did not have a lot
of time to save this page and they
understood that they and we understand
reacted and gained a lot of power and
and used it there's also this you cannot
establish a particular leverage ratio
can you you don't say that fifteen to
one as far as it should ever be if you
have a bank that owns nothing but
short-term government bonds they can
have fifty to one and they gotta you
know they've got a whole bunch of money
lent out to other guys who are leveraged
in various ways and very speculative
things five to ones too much so pure
numbers don't work so what works that's
the problem that is the problem anyways
I'd be all over what works I mean yeah
it's the problem give me a possible way
of dealing with
I would like to have a very smart strong
regulator that understood the nuances of
different kinds of leverage and and and
what it might mean and and one who would
be willing not only to use those rules
at individual institutions but who would
speak out to the country can speak out
too often an avid meaningful but who
would speak out to the country about a
generalized problem because that's what
we needed it wasn't it wasn't the fact
that it was Bank a or Bank B or Bank see
what was happening was that you were
having a bubble that everybody was
joining in and and speaking out on that
which requires a lot of guts and I may
even get ignored although if it comes
from somebody that is running the Fed
you know or whomever or the front of the
United States I mean there can be people
that will have an impact on that you've
said that you're not in favor of too
much coddling and that you'd like to see
the stick use more absolutely tell us
what you meant well what I mean is that
if you run a financial institution and
it's financial institutions
overwhelmingly they do tend to create
the problems because there's this
aggregate aggregation of capital one if
you run a financial institution that in
effect can bring down the system unless
the federal government steps and you get
at that point I think something very bad
should happen you know I don't think you
should walk away with a lot of money or
even with 10 percent of your previous
net worth or anything absorb and I think
the directors who selected you and let
you operate in that manner should have
some real downside you know I'm not for
shooting them but would be they what do
you can't buy insurance
no I yeah well I would probably have in
terms of the very large financial
institutions that if they if they had to
go to the government you know and the
government had to act because there are
going to always be too big to fail
institutions it drives regulators crazy
but that's the reality and if an
institution comes in and says if we go
down the we're pulling the whole country
down with us I think that the directors
and there's a CEO of an institution like
I think the director says you certainly
have to give back you know this should
five times the highest fee they've
received in the preview because you're
sitting around those places now getting
two to three hundred thousand dollars in
here you know and and for them all I
want for my two hundred the three
hundred thousand dollars a year is
somebody that is selecting and designing
a compensation system for the person
they put in charge the CEO who should be
the chief risk officer I want them to
have a system that penalize --is that
person very very significantly and if
they don't they don't create that kind
of if they pick the wrong person or they
let that person go off the reservation I
want them to pay also alright so let me
just son you you you want there to be a
penalty for directors who do not do
their job that what any but you
recognize that there are gonna be
financial institutions that are too big
to fail it has been and will continue to
be to be you can't simply say we're
gonna let anybody fail no matter how big
no matter what the consequence are not
just gonna have a mom-and-pop bank on
every corner and do you think that the
financial community has any sense of of
I'm sorry well most of them to do it I
mean in the sense that if you take the
leaders of these institutions that got
him in a lot of them are gone now
they're gone with more money than I
would like have them gone with and I
think what's infuriating to the American
public if you take the people in Omaha
you know exams they have seen lots of
unemployment they've seen you know many
cases their their homes or their friends
homes foreclosed they seen all this
these things happen to them and you know
nobody's gone to jail and as far as
they're concerned the leaders of
institution a B or C that that have in a
big way contributed to these problems
you know ten million instead of 100
million or something like that but they
don't say anybody want to jail they
don't see anybody they don't see anybody
being held a very responsible and they
don't believe that if they were in the
same place a much lower investment that
anybody would have come along and taken
care of them well yeah and and they're
right about that I mean if I if I have a
tiny little business it fails it doesn't
affect the United States but if you have
Freddie manic a macron Fannie Mae and or
AIG or
yeah they and they they would have
affected I mean we could not stand those
dominoes
and it drives people crazy that we
couldn't but we couldn't I mean if those
a few more Domino's had fallen if that
weekend of September 12th the 14th or
whatever it was it if one more Domino
that you know Merrill Lynch going Morgan
Stanley would have been next the
dominoes were so lined up and they're so
big that it without the government they
would have gone down they would've gone
up but bear this in mind they talk about
moral hazard on this there's a moral
hazard if you look at City 90% of the
market values disappeared if you look at
Freddie Mac 90% of the market value the
common more than that's may a IG all of
them so the stockholders have gotten
totally creamed the owners have gotten
totally creamed so it's not like anybody
it was a sonic holder of City or Freddie
or Fannie or AIG or you name it is
thinking ha ha you know the system's
gonna save me because it didn't save it
they got killed but the guys at the top
did not get ya in most cases did not get
killed and they're the ones that made
the mistake should they have gotten
killed so they should have been harder
so how would the government have done
that I would probably have something
with those kind of institutions where no
one got rich from running an institution
like that until about five years after
they left I mean yeah and I have had a
very restrictive and I have clawbacks
and I'd be plenty tough and I'd be tough
on the directors if they hadn't put in
those none of our and they say that now
if you listened to the executives today
they say we're in favor claw backs and
we've we've instituted those kinds of
things I don't know whether they have
well they they've done some but I
probably squirt
against this sort of risk I wouldn't let
him buy director's office and insurance
liability insurance we don't have that
at Berkshire you know I mean if our
shareholders are gonna go down I want me
to go down with them and the directors
to get out with them I've you know we've
taken on the job and and and you know if
the ship goes down we shouldn't we
should not get the first line when you
look at that year this is a bookbinder
all sort of area you're in their moments
for you I mean you were at the other end
of phone calls from people who who
watered money
and in some cases advice but definitely
money so the most unwanted money you
know are there moment you look back and
what you said know that you might have
said yes I mean do you have any sense of
you just call you I know I mean it's
just like saying you're at the plane
that comes here you gotta have a
second to decide whether to swing yeah
you know no I know you're not a man to
agonize but I mean have you mean oh I
could have done way smarter things yeah
no no I wait Mike
I did not optimize the period could you
had money and they needed money and they
would have given up a lot for that money
yeah plus the bottom of the market was
six months later I mean it was
significantly lower so if I just saved
the money just put in the market six
months later I'd have done way better
than making these deals right but I
didn't know that at the time so you said
I'm optimistic but I'm not sure my
optimism is justified well I
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