Warren Buffett said bank CEOs and directors who mismanage their institutions should face disciplinary consequences so as not to reward irresponsible behavior.
While the Berkshire Hathaway CEO stopped short of explicitly calling for criminal prosecutions and prison sentences, his argument reopens old wounds from the 2008 global financial crisis. Not one major Wall Street banker ever went to jail for their role in that debacle, which plunged the U.S. economy into its longest and—prior to COVID—deepest postwar recession, costing taxpayers an estimated $500 billion by one calculation.
Speaking to his shareholders at the conglomerate’s annual meeting in Omaha this weekend, the 92-year-old said banks should innovate when it comes to their technology, but their management, such as their appetite for risk, must remain conservative.
“If the CEO gets the bank in trouble, both the CEO and the directors should suffer,” Buffett said on Saturday, without being more specific. “You have to have a punishment for the people that do the wrong thing.”
His comments come after First Republic Bank, Silicon Valley Bank and Signature Bank all collapsed within an eight-week period recently as depositors withdrew their money in fear and investors dumped their shares. Together the trio of banks were the second, third and fourth-largest lenders to fail in U.S. history, sparking a contagion that threatens to infect other healthier and better managed regional banks.
Buffett, whose own father lost his job because of a bank run in 1931, warned that no one on the boards of the failed institutions had any excuse not to know what would happen because the red flags were readily apparent in the SEC filings of those companies.
The absence of painful consequences such as jail time can encourage and entrench bad behavior by bank leaders, according to critics of the go-light approach. In fact, government records show the prosecution of white-collar offenses has been declining for more than a decade. The number for 2022 marked a new all-time low since tracking began during the Reagan administration.
Buffett pointed out there was barely any downside for those responsible for banking crises, arguing on Saturday that no one ever appears to suffer either the loss of social status or personal wealth that might deter excessive risk-taking.
“It teaches the lesson, if you run a bank and you screw it up, you’re still a rich guy and the clubs don’t drop you and the charity groups don’t quit asking you to their benefits,” the Berkshire Hathaway CEO said, “and the world goes on and that is not a good lesson to teach people who are holding the behavior of the economy in their hands.”
While the government did guarantee depositors would be made whole, including those who exceeded the insured $250,000 limit, importantly it did not bail out investors. The FDIC seized all three lenders and sold them off in an open bidding process, wiping out shareholders in the process.
The "Oracle of Omaha" and his 99-year-old partner, Charlie Munger—an investing legend in his own right—also criticized the culture change on Wall Street over the past two decades. They said former Treasury Secretary Robert Rubin made a fateful error when he and others pushed to end the Glass-Steagall Act during the former Goldman Sachs exec's term in the Clinton administration.
That law, passed following the Wall Street Crash of 1929, prohibited commercial lenders from owning or operating riskier investment banks.
Its subsequent repeal in 1999 helped create institutes that became too big to fail, encouraging bankers to make speculative bets in the belief the government would use taxpayer money to bail them out when things go wrong, critics say.
“I think a banker should be more like an engineer,” said Munger, who voiced his disapproval for those bankers who seek to enrich themselves.
While Dodd-Frank’s Volcker Rule effectively made risky trading illegal after it was signed into law following the 2008 subprime crisis, little else has changed, and regulations resulting from the crisis—including oversight over regional lenders like those that failed—already were partially rolled back under banking industry pressure.
“You’ve got to have the penalties hit the people that caused the problems," Buffett said, "and if they took risks that they shouldn’t have, it needs to fall on them if you’re going to change how people are going to behave in the future.”
