Warren Buffett On "Too Big To Fail" Banks | May 6, 2011 | Summary and Q&A

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November 14, 2020
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Warren Buffett On "Too Big To Fail" Banks | May 6, 2011

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Summary

In this video, Warren Buffett shares his reaction to the proposal by the president to go after big banks and limit their risks. He suggests that if a bank needs government help, the CEO and his wife should forfeit all their net worth. He also discusses the importance of changing incentives and creating personal downside for CEOs. Buffett further talks about the limitations of defining and policing risk and expresses his thoughts on bringing back Glass-Steagall. He emphasizes the need for banks to bear the consequences of their actions and expresses skepticism towards simple regulations. Buffett also discusses the potential impact of the proposal on banks like Goldman Sachs.

Questions & Answers

Q: What does Buffett think about the president's proposal to go after big banks and limit their risks?

Buffett states that he hasn't heard the proposal due to being in a director's meeting, but he believes that some banks will always be "too big to fail." He suggests that the CEO of a failing institution should face significant financial consequences, with the CEO and his wife forfeiting all their net worth. According to Buffett, the incentives for CEOs need to change.

Q: Is the president right in wanting to limit the scope and size of risks that banks can take?

Buffett mentions that without more information, it is difficult to determine the right approach. He believes that regulating risk is challenging, especially with regard to large transactions between major institutions. One possible solution, according to Buffett, is to ensure that the CEO bears a hefty penalty if the bank encounters trouble.

Q: Does Buffett support bringing back Glass-Steagall?

Buffett acknowledges that he was not opposed to Glass-Steagall when it was in place. While he suggests it might be challenging to reintroduce it, he emphasizes the importance of banks bearing the consequences of their actions and preventing moral hazard. Buffett believes that CEOs and bank shareholders should suffer the consequences of risky decisions.

Q: What are Buffett's thoughts on Fannie Mae and Freddie Mac?

Buffett mentions that Fannie Mae and Freddie Mac were overseen by Congress and had an office solely dedicated to supervising them. Despite this, they still ran into significant problems, which raises doubts about the efficacy of simple regulations. Buffett prefers personal downside for individuals to be more effective than relying solely on regulations.

Q: Will banks like Goldman Sachs split off and get rid of their bank charters if the proposal gains traction?

Buffett states that it would be logical for banks like Goldman Sachs to consider that option. However, he clarifies that the banking aspect is only a small part of such institutions. While Goldman Sachs has faced increased scrutiny, Buffett expresses confidence in the company's function and does not feel tempted to sell his shares.

Takeaways

Warren Buffett emphasizes the need for CEOs to face significant financial consequences if their banks require government assistance. He believes in changing incentives and creating personal downside for individuals in leadership positions. Buffett expresses doubt about the effectiveness of simple regulations and suggests that banks should bear the consequences of their actions. Additionally, he acknowledges the potential impact of the proposal on banks like Goldman Sachs but remains bullish on their future.

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