Warren Buffett on “Too Big to Fail”

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“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. you noticed? yeah. we did notice. a lot of people have been paying attention to this. you have to tile with the sec tonight to say what you were buying in the last quarter. can you tell us now what you were buying? i would like to make it interesting. and, joe and andrew and you are always torturing me with these quizzes that you give. you know, you send scott cohen out some place and have him issue some enigmatic word and i’m supposed to figure out where he is and all that. i would like — you mentioned movies. if you remember in the graduate when mr. mcguire called benjamin into his — at the party very early and he said now just one word, plastics. he put his arm around plastics. so i’m going to say one word. and i want you to figure out where we put all that money. and the word is harold. harold? harold. think about it. harold. harold the name? benjamin didn’t know — harold or herald? harold the name. harold. okay. now i’m on google. harold and kumar. joe and andrew, i’m attaching one condition to this. you can’t look at the e-mail that’s are coming in. some of your viewers are going to — harold and kumar, they’re making the sequel. you are investing in a movie studio? just think about it. harold and kumar? we’ll talk. i’ll give you a little time on this one. but billions and billions of dollars are riding on this. seriously? yep. billions of dollars you invested in the last quarter and the clue is harold? right. not plastics. incidentally, how much older do you think mrs. robinson actually was. i know that, six years. she was like 35, right? 37. 37? she was six years older than he was. he was 31. dust continue hoffman. but if you look in the hotel room, you thought it was more than. that i actually started laughing uncontrolably to the point where my family practically kick med out of the theater. back to harold, can you give us another clue? i’ve given you multiple clues. harold. i can’t imagine you would buy into a movie company, warren. would you? is that lion’s gate? i always think of consumer products. we can talk about something else while you think about it or whatever you like to do. all right. give us a little bit of time. i’ll tell you. i’ll bet — we’re working the computers here. i’m going to tell you. hold on. does it have anything to — no. but i’m sitting here with three people with iqs of at least 450 in aggregate. i won’t give you the — is it southwestern energy? are you using google to look up harold? i am. is that an okay guess? no. okay. i’m trying. can you give us another hint? i’ve given you a lot. i’ve given you multiple hints. what is the other hint? you have to figure that out, too. is it — harold and the graduate. is that the other hint? does the graduate have anything to do with it? what about time warner? sort of indirectly. time warner. you wouldn’t buy time warner stock, would you? where are you getting harold? harold and kumar is a warner brothers movie. that’s a good guess. mcgraw-hill? okay. no. we’re going to think about it. you are ready for it? you are going to tell us? i’ll tell you if you like. okay. tell us after the break. after the break. all right. we’re going to keep this going. can we look at the viewer e-mail over the break? okay. look at the viewer e-mail over the break. i bet somebody sent it in already.

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