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Buffett Tells FCIC It Can’t Stop ‘Too Big to Fail’

Berkshire Hathaway Chairman Warren Buffett. Photographer: Nelson Ching/Bloomberg
Berkshire Hathaway Chairman Warren Buffett. Photographer: Nelson Ching/Bloomberg

Feb. 11 (Bloomberg) -- Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., told the Financial Crisis Inquiry Commission that taxpayers will always be on the hook for collapses at the biggest U.S. companies.

“You will always have institutions that are too big to fail, and sometimes they will fail,” Buffett, 80, told the FCIC in a May 26 interview, according to a recording released by the panel yesterday. “We still have them now. We’ll have them after your commission report.”

The Dodd-Frank financial reform act, enacted in July, was touted by President Barack Obama as a means to ending bailouts and protecting taxpayers from firms that are “too big to fail.” Federal Reserve Chairman Ben S. Bernanke, who made more than $3 trillion of assistance available during the crisis, has said the “too-big-to-fail” issue can be eliminated only when investors believe the U.S. won’t rescue firms.

Investors were rescued in 2008 by Bernanke and then-Treasury Secretary Henry Paulson, whose relief programs cushioned declines for stockholders and bailed out bondholders at firms including American International Group Inc. Buffett, who injected $5 billion in Goldman Sachs Group Inc. at the depths of the crisis, said he was betting on the success of government intervention.

Buffett told the FCIC that he believed the U.S. would step in to provide liquidity to the market again if needed. The government would restart programs like the Commercial Paper Funding Facility, in which the U.S. backed short-term corporate debts, if crisis conditions return, Buffett said.

Act Promptly

“I do think that if you ran into a similar situation today the government would guarantee commercial paper again. They’d have to,” Buffett said. “You have to believe the government, the federal government, will act and they will act promptly and decisively.”

Berkshire bought preferred stock in New York-based Goldman Sachs in 2008 after the collapse of rival securities firm Lehman Brothers Holdings Inc. Omaha, Nebraska-based Berkshire gets a 10 percent annual dividend on the investment and received warrants to buy $5 billion in common stock with a strike price of $115 a share. Goldman Sachs traded for more than $165 on the New York Stock Exchange yesterday.

“It was a bet essentially on the fact that the government would not really shirk its responsibility at a time like that,” Buffett said.

‘Original Sin’

Peter Wallison, a commissioner on the panel, said at a hearing in September that Bear Stearns Cos.’s rescue by JPMorgan Chase & Co., facilitated with government guarantees, was the “original sin” made by regulators in 2008 because it signaled that other firms would get aid.

“Participants in the market thought that all large firms, at least larger than Bear Stearns, would be rescued,” Wallison said. “Companies probably didn’t believe they had to raise as much capital as they might have needed because the government would ultimately rescue them, and fewer creditors were going to be worried about their capitalization.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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