Warren Buffett on “Too Big to Fail”

“You have to make it that a CEO of an institution that requires society to bail out that institution to walk away broke,” says Warren Buffett, Berkshire Hathaway chairman/CEO.

Video and transcript below:

we’re on buffet watch this morning. becky quick made the trip to omaha. she joins is now with berkshire hathaway chairman and ceo warren buffett. the last inflight movie that welch saw was sound of music. for buffet, it wasn’t even a talking movie, the last one he saw. just a second. he says he’s going to get even with you now, joe. look out. i’ve gotten — should i — are you going leave? can i ask him a question? go ahead. jump in, joe. i’m going to let you get even with me, too, warren. okay. i want to talk — this is andrew’s too big to fail book and everybody associates that with andrew. i got sort of a — my view has evolved. you pointed that out last week. i have real problems with too big to fail. i think that the occupy wall street movement, they may not know exactly why they’re upset. but the notion you can — i was talking about it over the weekend. let’s say you’re a public employee and went to las vegas with tax money. you were allowed to put as much tax money that you want on black or red or on black jack. and if you lost it, the taxpayers lost it and you didn’t care. if you made it, you got to keep it. that’s basically what too big to fail institutions are able to do. and to leave, you know, to leave with taxpayer money with the profits. i see why occupy wall street is — has a problem with. that although i’m not sure that they understand. can we have enough regulations for these big institutions to keep them honest, warren, or do we need to break them up? well, i would use this example. what happened is that some of these — the people you refer to went to las vegas and they didn’t go with taxpayer money. they went with shareholder money. and they were making a bunch of beds where hails they won and tails the shareholders lost. if the shareholders lost all of their money, one of the reasons they can make the bets is because people felt the government would come in to back up the shareholders. they were lowsing the shareholders money. on t.a.r.p., the government will make a profit. they didn’t have to turn out that way. it did turn out that way. the shareholders still lost tons of money. i say the guy that goes to las vegas and loses the money should leave broke himself and — but it isn’t that everybody got off light. the owners of the bank got killed. but you have a vested interest in too big to fail, warren. you were able to — you were able to buy goldman sachs and able to buy ge or buy bank of america recently. so it implied — you almost got a put there with some of your purchases. i’m a shareholder. the shareholders got wiped out at wamu, wachovia, fannie, freddie, almost at citi, almost at aig. go down the line. so as a shareholder, i’m now protected f i were the ceo, i might be protected. but not as a shareholder. but it’s not fixed yet, is it? no. there’s parts of that are definitely not fixed. and i’ve written about that. i think you’ve got to make so it the ceo of an institution that requires society to bail out as institution that, ceo goes away broke and his wife goes away broke. and the directors pay a big penalty too. that still might not help, too. if they’re that big and that systemically important, then they’re still going to get bailed out. and that’s the problem. i mean we need to make so it that they’re not that systemically important. they’re still going to get bailed out at this point. well, the ones that — actually, if you look at the banks, you know, they have not cost the taxpayer anything. i know. fannie and freddie have cost the taxpayer plenty. it is still the moral hazard that’s been built up. who knows how badly that damage is, some of the decision that’s are being made right now. even though we have our money back. i’ll say this. when we buy our b of a preferred, we do not expect the government to pay off our preferred. we do expect the government to pay off depositors. okay. warren, one other question that evolves from the financial crisis and the too big to fail issue, goes back to the question about derivatives and their impact on the crisis but also their role going forward. you called derivatives weapons of mass destruction. and as i was looking through the earnings report from last quarter, berkshire losted 2 $2 billion because of derivatives. is there a way to square that circle for you? we entered at 200 plus derivative contracts, i have. i suspect we’ll make money of those. we have substantial amounts of money. they’re very, very small compared to either our assets or earning power. we can handle any of those, any transaction we have without any — any discomfort whatsoever. and very few of them require any collateral. but even if they dshgs we would have clot ral. do you have to post collateral? for thethe $2 billion loss, do have to post? no. why is that? we won’t enter into any contract that we think could cause me to lose five minutes of sleep if the dow went down 2,000 points tomorrow. those contracts though, the derivatives contracts are long term bets that several of the major stock indices like the s & p 500 will go up over the course of 10, 12 years. the reason they won’t go down a lot, we get the whole — we’re holding $4.5 billion that we’ve had the use of now for five we have the use of for another ten or so years. which we get to make money with. and if we settle the contracts today at the levels of the index, they would be settled for a whole lot less than the liability that we show. and — i’m happy with the contracts. is the earliest contract 2018? they go to 2026, i think. do you think there’s a chance that the indexes could go down from where they are today because the europe problems are still overhanging? sure, they can go down. but they can go up, too. if they stay the same, our liability will be quite a bit less than we show on our balance sheet. okay. why don’t we talk a little bit more about the earnings. you mentioned the strength of the businesses that you’ve seen and how strong the american economy is as a result. you also spent a lot of time in the last quarter buying equities.