Buffett Tells FCIC It Can t Stop 2011-02-11 14:10:31.

806 GMT

Too Big to Fail

(Update1)

(Updates with Wallison s comment in penultimate paragraph.) By Andrew Frye 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

Wallison said. its former chairman. weren t the only traders interviewed by the commission to lay some of the blame for the 2008 crisis on the Fed and Alan Greenspan. Soros. and in some sense encouraged.845 GMT (Adds Greenspan is an adviser to Paulson in fifth paragraph. and fewer creditors were going to be worried about their capitalization.George Soros and John Paulson. Participants in the market thought that all large firms. Saijel Kishan and Gillian Wee Feb. said Michael Steinhardt. another interviewee and a hedge-fund industry pioneer. from collapse in 2008. Paulson Say Fed at Fault in Crisis (Update1) 2011-02-11 14:51:08. Paulson. at least larger than Bear Stearns. Soros. made $15 billion betting against subprime mortgages in 2007. the extraordinary excesses of the period. Greenspan allowed.S. chairman of the $27 billion Soros Fund Management LLC. Dan Kraut To contact the reporter on this story: Andrew Frye in New York at +1-212-617-1869 or afrye@bloomberg. Both men were interviewed by the Financial Crisis Inquiry Commission in October. Companies probably didn t believe they had to raise as much capital as they might have needed because the government would ultimately rescue them.net To contact the editor responsible for this story: Dan Kraut at +1-212-617-2432 or dkraut2@bloomberg. who headed the U. whose Paulson & Co. central bank for almost 19 years before retiring in 2006. It was like the pope blessing the things that went on in World . and Paulson. criticism of his policies has grown. according to interviews released yesterday. said the Fed should have saved Lehman Brothers Holdings Inc. was the original sin made by regulators in 2008 because it signaled that other firms would get aid. 70. Since then.) By Katherine Burton. who oversee two of the world s largest hedge funds. For Related News and Information: Government rescue programs: RESQ <GO> Berkshire s equity holdings: BRK/A US <Equity> PHDC5 <GO> Buffett-related audio & video: BRK/A US <Equity> TCNI AV <GO> More on Buffett: BIO WARREN BUFFETT <GO> --Editors: Dan Reichl. 55. Greenspan. 11 (Bloomberg) -. would be rescued.government guarantees. said better supervision of home loans by the central bank would have helped prevent the crisis. 80.net Billionaires Soros. say the Federal Reserve helped cause the financial crisis through inaction and lack of oversight. was heralded for keeping economic growth steady and inflation low when he stepped down.

Greenspan is an adviser to Paulson s New York-based hedge fund. It s the theories adopted by both the regulators and the market participants that proved to be false. It s the efficientmarket hypothesis and the rational expectations theory. Last April. Did we make mistakes? Of course we made mistakes. Demanding that proper underwriting guidelines be followed. according to Soros. requiring a down payment. and other financial companies. You depend on certain people to be your moral police and that s what he was. even if it s just 5 percent. Greenspan said the central bank under his leadership made mistakes while attempting to ensure the sound regulation of financial institutions. What we tried to do was the best we could with the data that we had. which triggered the failure of Lehman Brothers and led to government bailouts of insurer American International Group Inc.War II. Greenspan didn t respond to a call seeking comment after regular business hours yesterday at his Washington-based consulting firm. Soros told the panel. people make decisions based on their rational outlook while influenced by past experiences. he said. False Market Theories The crisis was avoidable. The efficient-market hypothesis holds that prices reflect all relevant information available to market participants. Best We Could Congress created the commission to investigate the causes of the crisis. Soros said. I don t think Lehman should have been allowed to fail. The Fed should have stepped in to rescue Lehman before the investment bank went bankrupt. Steven Crabill To contact the reporters on this story: . I know of no way that can be altered under the existing structure. The Fed did very little to oversee mortgage underwriting from 2000 to 2006. in my opinion. he said. Under the rational expectations theory. Paulson said. not allowing no doc loans. The Fed. For Related News and Information: Top stories: TOP <GO> Hedge fund news: NI HEDGE <GO> Top hedge-fund stories: TNI HEDGE WWTOP <GO> Hedge-fund news: HEDN <GO> Hedgefund Web pages: HGFD <GO> World hedge-fund rankings: WHF <GO> --Editors: Josh Friedman. would have gone a long way toward preventing the crisis. Greenspan Associates LLC. has very wide discretionary powers which were not used. and he didn t act appropriately. Greenspan told the commission in Washington.

net To contact the editor responsible for this story: Christian Baumgaertel at +1-617-210-4624 or cbaumgaertel@bloomberg.113 GMT Paulson (Update1) (Updates with Thain s call to Lewis in seventh paragraph. on September 13. 17. Banking chiefs weren t strong enough during 2008 meetings in insisting that then-Treasury Department Secretary Henry Paulson reverse his opposition to a U.S. 11 (Bloomberg) -. he said. the group of us. you guys cannot do this. then-CEO of Bank of America. based in New York. Saijel Kishan in New York at +1-212-617-6662 or skishan@bloomberg. We collectively. filed the largest bankruptcy in U. Credit Freeze The complete freezing of the credit markets that came after Lehman made the situation much. their firms weakened by the crisis. The banking executives. Lloyd Blankfein of Goldman Sachs Group Inc. to try to get the banks to help fund a rescue. Thain said. valuing the firm at about $50 billion. according to audio files released yesterday.S. interview. It would ve been much less likely that TARP and all the things that followed would ve been necessary if Lehman hadn t been allowed to go bankrupt. and the purchase of Merrill by Bank of America Corp. Paulson convened CEOs including Thain. Thain called Kenneth D. couldn t be persuaded to contribute about $20 billion to backstop Lehman s bad assets. North Carolina-based Bank of America probably would have bought Lehman s profitable operations. we should have just grabbed them and shaken them and said. .) By Hugh Son Feb. to suggest a strategic transaction.Merrill Lynch & Co. Shaken 2011-02-11 20:49:09. 2008.S.-led rescue of Lehman. Lehman. he said. before the weekend s end. Look. Lewis. Thain said. Thain said.Katherine Burton in New York at +1-212-617-2335 or kburton@bloomberg. Allowing Lehman to go bankrupt was the single biggest mistake of the financial crisis. roiling markets and helping contribute to the bailout of insurer American International Group Inc. Had the U. much worse. Thain told FCIC interviewers in a Sept.net Thain Says He Should Have Grabbed.S. provided that support.net. history. Days before Lehman s September 2008 collapse. Thain said Wall Street leaders should have tried harder to convince U. straining under losses on mortgage-related securities. Thain told the Financial Crisis Inquiry Commission. the $700 billion Troubled Asset Relief Program may not have been needed. and Jamie Dimon of JPMorgan Chase & Co. Worried that the government wouldn t help Merrill Lynch.net. Merrill s board approved a $29-per-share deal. 2010. Gillian Wee in New York at +1-212-617-3318 or gwee3@bloomberg. Barclays Plc or Charlotte. regulators they needed to prevent the failure of Lehman Brothers Holdings Inc. s former Chief Executive Officer John A.

Thain said.net To contact the editors responsible for this story: Rick Green at +1-212-617-5804 or rgreen18@bloomberg. declined to comment.net . Curtis Ritter.net. a spokeswoman for Paulson. he said. Thain said. all contributing to the too big to fail problem. Lehman s collapse and AIG s bailout the same week contributed to the biggest rewrite of financial rules since the Depression as lawmakers sought to limit risk and create a way to unwind risky companies. For Related News and Information: BofA capital structure: BAC US <Equity> CAST <GO> BofA cost of capital: BAC US <Equity> WACC <GO> BofA credit profile: BAC US <Equity> CRPR <GO> Top banking news: BNK <GO> --Editors: Rick Green. didn t immediately return a call. The argument presented later by regulators that they lacked the legal authority to save Lehman was never raised during discussions with the CEOs at the Federal Reserve Bank of New York. and there are zillions and zillions of derivative contracts that connect them. who is now CEO and chairman of New York-based commercial lender CIT Group Inc. Lawmaker Criticisms Paulson allowed Lehman to fail because of political considerations. On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.Bank of America would later receive $45 billion in two rounds of government aid. In his book. and Michele Davis. a spokesman for CIT. They re more interconnected. The firm repaid the funds in 2009. David Scheer at +1-212617-2358 or dscheer@bloomberg. rescue. including lawmaker criticism of the Bear Stearns Cos. some of which was needed because of losses on Merrill s assets. there are fewer of them. Financial firms have gotten bigger and more systemically important in the last decade. said Thain. Paulson said he told the CEOs not to expect government money because otherwise some of them might think that Good Old Hank would come to the rescue. Dan Kraut To contact the reporter on this story: Hugh Son in New York at +1-212-617-7872 or hson1@bloomberg.

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