Buffett Talks His Book, Voices Opposition to Bank Fee

Gee, Warren Buffett happens to own a chunk of Wells Fargo, and also provided an equity injection to Goldman Sachs. So it should come as no surprise that he has come out in a Bloomberg interview arguing against the so-called TARP fee, a charge to be levied against the non-deposit liabilities of large banks.

Now this little bit of lobbying via the media should end any delusions that Buffett is a friend of the little guy. But what is even more striking is his failure to mount a serious argument. It’s an insult to the public’s intelligence.

Here is the substantive part:

“I don’t see any reason why they should be paying a special tax,” said Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., in an interview on Bloomberg Television today. Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.”…

“Look at the damage Fannie and Freddie caused, and they were run by the Congress,” said Buffett. “Should they have a special tax on congressmen because they let this thing happen to Freddie and Fannie? I don’t think so.”

This is corn pone in lieu of logic. The idea that the fee is to punish the banks is a convenient fiction pushed by the banksters and their backers. The public is angry, but the anger is correctly founded: the banking industry got massive, unwarranted subsidies for failure, the safety nets are still operative and clearly will be redeployed in the event of future errors and chicanery. Yet no one has been brought to justice, and virtually nothing has been done to prevent a recurrence.

You can argue about the design of the tax, but there is nothing wrong with the logic. Banks pay deposit insurance for the goverment’s deposit guarantee, which adds considerable value to a business franchise (and BTW, over time proves inadequate to reimburse the full costs of rescuing depositors), Big banks have an even more generous safety net these days, and no correspondingly more aggressive regulation. Hence the fee is a valid way both to cover the cost of their more generous safety net and to discourage banks from being in the big bank category.

And Buffett is unlikely to have missed the arguments in favor of the bank fee in the Financial Times op-ed column in recent days. Mohamed El-Erian came out in favor of the fee but think the risk is not the fee per se, but that the fee will serve as a way to avoid the heavy lifting of real regulatory reform (something Buffett would not be keen about either, since reform with teeth would also crimp bank profits):

Seldom will you find a tax proposal that is viewed by so many as having so much going for it. Consider just four arguments.

First, it is politically popular….

Second, it targets a sector whose visibly higher earnings have benefited enormously from the exceptional measures taken in 2008 to save it…

Third, it is consistent with longer-term regulatory objectives….

Fourth, it generates budgetary revenues at a time when fiscal deficits have soared, domestic debt is growing at unprecedented rates, and the scope for corrective measures is limited…..

The real danger is that the selective taxation of banks may divert attention away from growing policy inconsistencies and, thus, may inadvisably substitute for urgently needed structural and regulatory measures.

Peter Boone and Simon Johnson focus on that very concern, that much tougher measures need to be taken, to rein in banks:

There is growing recognition that our financial system is running a doomsday cycle. Whenever it fails, we rely on lax money and fiscal policies to bail it out. This response teaches the financial sector a simple lesson: take large gambles to get paid handsomely, and don’t worry about the costs – they will be paid by taxpayers (through fiscal bail-outs), savers (through interest rates cut to zero), and many workers (through lost jobs). Our financial system is thus resurrected to gamble again – and to fail again. Such cycles have been manifest at least since the 1970s and they are getting larger….

For our top bankers, the fact that the system will only change marginally is fine….

First, we must sharply raise capital requirements at leveraged institutions, so shareholders rather than regulators play the leading role in making sure their money is used sensibly. This means tripling capital requirements so banks hold at least 20-25 per cent of assets in core capital.

Second, we need to end the political need to bail out every institution that fails. This can be helped by putting strict limits on the size of institutions, and forcing our largest banks, including the likes of Goldman Sachs and Barclays, to become much smaller.

Let me tell you, increasing capital ratios to 20% to 25% will have a much more dramatic impact on bank returns on equity that the paltry proposed TARP fee. Buffett should thank his lucky stars that Team Obama remains true to form and is letting banks off so easy. The rest of us should demand much more stringent measures.

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40 comments

      1. Advocatus Diaboli

        Anakin Skywalker was the chosen one in prophecy to bring balance to the force & destroy the Sith, however he joined them. Yet even though Anakin had sided with the dark Side of the force, it didn’t mean he would prevail in destroying the Sith & himself.

  1. Trainwreck

    Warren Buffet likes to pretend to be an affable lovable grandfatherly type, but deep down he is a vulture. And the last thing he wants is for the govt to tax his (govt assisted) sweetheart Goldman Sachs investment.

    Warren Buffett is also a hypocrite. He testified in front of Congress several years ago that derivatives where financial weapons of mass destruction, YET Berkshire owns tons of that stuff via Goldman Sachs, Wells Fargo, General Re, and probably other companies that I am missing.

  2. Independent Accountant

    I oppose this fee. It’s a fig leaf to conceal the banks continuing subsidies. Suppose the banks pay $9 billion a year. So? Vampire Squid pays more than that annually in bonuses. I say, raise interest rates to a competitive level and watch the banks collapse.

  3. Namazu

    On CNBC, Buffett also pointed out that Fannie/Freddie and GM received much greater benefit from TARP and TBTF, at much greater cost to the taxpayer. It’s usually hard to put a price on an implicit guarantee (a good reason not to provide any), but the GSEs are going to be a big whopping exception.

  4. bob

    The FDIC started pushing a TBTF insurnace fee right before the O man dropped the ‘tax’ idea.

    Is the FDIC still pushing its insurance idea? It seems easier to sell and back it up if you call it an insurance premium.

    As to WB, JP Morgan would love to be alive, and banking today.

  5. bob

    WB was also saying on Bloomberg that they government had made billions on its investments. I stopped listening at that point.

  6. Fu

    I respected Warren Buffet before the economic crisis, but no longer. His labeling of the crisis as an “economic Pearl Harbor” is ridiculous, and his media promotion of the idea that bank debt holders should be protected at all costs is disgusting.

  7. Vinny G.

    Buffett has been looking like a scared clown lately. This greedy old man really needs to retire before his old age dementia gets the best of him on prime time television… :)

    Vinny

    1. bob

      I think it did today, watch the video in the link, about half way though is the best part. The press stayed away from quoting the worst of his nonsensical rant.

  8. bob

    From the video in the Bloomberg link-

    I don’t see any reason why they should be paying a special tax; they take care of their own bank failures through the FDIC, they’ve been doing it since 1934. Over 3500 savings institutions have been assisted by the FDIC, never cost the tax payer one penny, been all payed for by the banks, the banks at this time are paying back huge sums to the governement, I mean its cost goldman sachs, its cost JP morgan, its cost wells fargo billions of dollars, the treasury made a terriffic profit on them, the treasury may be having trouble with AIG, they may have trouble with General motors, but I don’t think anyone thinks you outght to go to general motors, where they didn’t save the stockholders, they didn’t save the bond holders, but they, what they did was save that company and its employees, and, nobody wants to say you should tax those employees, especially because they were saved. The banks, many of the banks didn’t need to be saved, most of them, including wells fargo, most of them didn’t need to be saved, and they’ve given the government a huge profit, many of them for taking money they didn’t want to take, and they didn’t need in my view, so I think its a politically popular type of thing to propose….

    1. Yves Smith Post author

      Bob,

      With all due respect, where were you when the rescues took place?

      And the FDIC most certainly did NOT pay for all bank bailouts; the RTC required a large and very controversial authorization BY CONGRESS of extra funds to fund its working capital. The FDIC premiums are insufficient to cover the cost of banking crises.

        1. Yves Smith Post author

          Apologies! I see that is clear in what you wrote, I am multitasking badly.

          Thanks for going to the trouble of transcribing.

          It’s easy to look profitable if you can shift risks onto the government.

          1. Siggy

            It is not possible to do two things at the same time. You can do one thing at a time really fast and the appearance is that of multitasking; but, not two at the same time.

            I have never witnessed a multitasker who did any of the tasks really well. There is always some degree of notable error in each of the tasks.

            While I enjoy your blog and agree with most of your views, I do believe that you should pause and give considerable attention to altering your addiction to attempting to do two or more things at the same time. It just isn’t productive, moreover, it tends to impair your creditability.

            And, by the by, do/have you made any arrangment to make signed copies of your book available to us humble readers?

  9. Pat Donnelly

    Yves

    URGENT

    Off topic

    When I press older posts, page 2 comes up at 4th Jan and earlier!!!!!

    The piece about the UK following Iceland is the trigger?

    I still cannot read G Tett’s article! It is unavailable.

    For the sake of interested readers, I post your ref so that they may read it!!!

    http://www.nakedcapitalism.com/2010/01/could-england-be-the-next-iceland.html

    contains the FT article I refer to above:

    http://www.ft.com/cms/s/0/99b57662-012d-11df-8c5400144feabdc0.html

    I have just checked again and it is still unable to be downloaded! What is in that article? Here is an extract from nakedcapitalism:-

    “Which country experienced the biggest jump in debt, relative to gross domestic product, over the past decade?…if McKinsey consultants are to be believed, the real leverage giant – at least among the big western economies – is actually the UK. After crunching the data, McKinsey estimates that the gross level of British private and public debt is now 449 per cent of GDP – up from 350 per cent at the start of the decade.

    And even excluding the liabilities of foreign banks based in the UK, the ratio still runs at 380 per cent – higher than any country except Japan (closely followed by Spain where debt has also spiralled dramatically, according to a McKinsey report issued today.*)

    That is sobering stuff, particularly for UK voters. However, it also raises a much bigger point. In the middle of the last decade, it was often frustratingly difficult to get any data on leverage levels, since it was an issue on which precious few policymakers focused…

    Now, of course, the world is radically different. But, as McKinsey points out, there is still surprisingly little known about the actual mechanics of “deleveraging”, compared with, say, all that research that has been conducted on financial crises. And so it has tried to plug this gap by both plotting the recent pattern of global leverage levels – and then setting it in a wider historical context, to show how deleveraging has (or has not) occurred before…

    Nevertheless, some of the patterns in the report are fascinating – and valuable –precisely because they have often been ignored. Contrary to popular perception, for example, McKinsey points out that, by historical standards, most of the financial world was not crazily leveraged in the past decade. Instead, the crazy debt increase was focused on a small group of brokers, and global banks.

    Moreover, alongside the (limited) rise in broker borrowing in the past decade, there was also a far more startling increase in “real economy” debt, particularly in the household and real estate sector. “

    1. Yves Smith Post author

      Pat,

      I told you the last time you made this complaint the posts are ALL there, in Archives. I do not for the life of me know what you are complaining about.

  10. Mark

    Thanks for taking the time to highlight all of this, especially the self-serving crap Buffett is spewing. Hopefully, others see how transparent it is.

  11. Mannwich

    I listened to some of this nonsense on Bloomberg radio while in the car on my way to the doctor’s office. It had me literally smiling/barking at the radio quite “colorfully”. I hope nobody outside the car could see that. They might have thought I’d gone bonkers or something.

  12. Steve

    I mostly agree with the TARP fee and I completely agree with your description that it shouldn’t be called a punishment.

    But it seems you can’t control yourself because then you immediately spend the rest of the ‘corn pone’ paragraph describing it as a punishment. And in this light I’m reminded that while most of the ire is directed at GS they are one of the least culpable. GS was one of the least leveraged. GS correctly saw the risk and was the least exposed to mortgages and lost relatively little on mortgages. And GS was the least likely to fail.

    Shouldn’t we be focused on punishing those who never saw it coming? Those who originated the worst and the most? Those who levered the most and had inadequate capital? Those who needed to be bailed out?

    1. Yves Smith Post author

      Steve,

      There are two separate issues, and my reverting to colorful language got in the way.

      There should be investigations of fraud and bad behavior. A lot of what happened ought to be criminal, or at least actionable, and wasn’t, because the banks got a bigger and bigger unregulated playpen and were very careful about how they threaded their way through the rules that were operative. That needs to be addressed to devise a sounder regime. It’s part of what we need to do to prevent future blow-ups.

      But separate and apart from that, the TARP fee is a way (not the best, mind you) to start to address the TBTF problem, the subsidized profits the big banks have enjoyed of late, and of the advantages the big capital markets players have (that business has major network effects and has evolved into an oligopoly).

  13. Doc Holiday

    Warren can shut the F up! Maybe Warren can help explain his highly profitable relationship with AIG and his proximity to illegal activities…

    Ahhhh, the good ol days, when Warren was able to tell people how derivatives were like WMD and how he was just a lucky guy that didn’t understand them ……. he is such a pain in the ass and every bit as guilty as Madoff and the wall street mafia!

    See: The evidence is overwhelming that these were transactions created for the purpose of deceiving the market. We call that fraud,” Spitzer reportedly asserted. “It is deceptive. It is wrong. It is illegal.”

    http://www.cfo.com/article.cfm/3858370/c_3858839?f=todayinfinance_next

    To shed additional light on the transactions, federal and state regulators are meeting this morning with Berkshire Hathaway chairman Warren Buffett at the New York offices of the Securities and Exchange Commission, reported the Associated Press. During the television interview Spitzer confirmed reports that a subsidiary of one of Buffett’s companies had turned over “very powerful and substantial evidence” as part of the AIG investigation, reported Reuters. The attorney general added, however, that Buffett is a witness and not a suspect. “We believe [Buffett] can shed light on a series of transactions that…Hank Greenberg participated in,” said Spitzer, according to the AP.

  14. vlade

    I’m fascinated that in relation to the bank “fee” (I’ll call it tax) no-one raised micro-econ 101.

    Banks are creating externality. Externalities create market inefficiencies (lower marginal cost than should be). Tax raises the marginal costs. End of story. From that perspective, if anything, the tax is too low and too unstructured, as the externality has clearly non-linear dependency on size and interconnectednes of the bank.

    The other way to look at it via micro-e lens is that the gov’t guarantee is a subsidy, which, while helping both consumers and banks (to different extents) also carries relatively large dead-weight loss (again, creating market inefficiency, so talk of free efficient markets in banking is rubbish in either case). Recouping the cost of the subsidy by the tax is again a perfectly valid micro-e policy.

    Small problem is that either the externality or the subsidy is not easily quantifiable, but we could probably get within at least an order of the magnitude.

    Of course, the tax will be opposed by SIGs, but then it would be surprising if they just keeled over.

    1. Yves Smith Post author

      The weird bit is it did occur to me (the externality part) and I didn’t go there. And a fair number of economists have weighed in, no one I have seen has made that argument.

      1. vlade

        I think the subject is way too politicised/filled with emotions.
        Also, any real solution will raise banks marginal costs (tax, higher reg capital, removing of govt guarantee all put marginal cost up), which translates into higher marginal costs for everyone in the economy (be it consumers or companies), with implications for economic growth. Given the strong push for return to status quo ante and a obsession with keeping the rates down, I doubt that anyone is willing to even think about it. Using the trivial econ framework makes it blindingly obvious so is best avoided.

        1. craazyman

          Yeah it adds to the cost of the propulsion used to send us all over the economic cliff, like Thelma and Louise.

          These money men and their “logic” — what a circus of pathetic narcissism and shallow sophistry.

          They operate with the consciousness of bacteria.

  15. d4winds

    The tax is paltry, puny, and woefully inadequate to fund the implicit TBTF guarantee. Nix the guarantee…completely. As for the tax, keep or leave it as long as the guarantee goes.

  16. sherparick1

    I am shocked, shocked, that it turns out Warren Buffet is a businessman who promotes his own and his firms self-interest in his public statements. In this case, his investment in Goldman Sachs has returned a pretty preminium due to the explicit and implicit Government subsidies (none more of the subsidy then GS’s abilit to borrow at the Fed discount window at 0% and then leverage that money for trades and Treasuries returning between 3.55 to 5%). And of course now that GS is just as much a Government Sponsored Entity as Fannie and Freddie ever were, they are getting a great discount on the bond market over smaller banks and investment firms. He stills says interesting and truthful things from time to time, just not this time. His non sequiter about Freddie and Fannie, who were privately run, privately owned entities when they being run off a cliff, is pretty obvious. And of course Freddie and Fannie are being now, as once more taxpayer owned entities, to subsidize the banks and the still very soft housing market. The proposed fee is at least a first step in evening the playing field and paying the taxpayers something for the subsidies the TBTF banks are receiving, an pale when compared to the looting that shareholders of these firms suffer from as the result of the excessive compensation senior managers and traders take from the banks revenue.

  17. Siggy

    Levy the fee/tax. Let WB run off at the mouth.

    But then, will anyone really consider raising required equity? Required equity, that is where problem is. It’s other peoples money that’s being evaporated. Get familiar with the bankruptcy court. Wipe out the shareholders and the unsecured creditors and give the secured creditors a severe haircut. Then have an inquiry to determine if there has been a prosecutable offense under existing law. Issue tons of subpoenas and bury the bastards in legal fees. It is, after all, the American Way. Oh yes, in the coming mid-term and presidential elections, vote the incumbants out. “I’m Mad as Hell . . . “.

    1. bobh

      “Then have an inquiry to determine if there has been a prosecutable offense under existing law. Issue tons of subpoenas and bury the bastards in legal fees.”

      I don’t think the bastards woory too much about this. Legal fees would be a minor business expense compared to the profits. By any reasonable definition, massive fraud ocurred at every level (including the consumner level) of the credit bubble crime spree, but an attempt by a Spitzer-type to prosecute the wealthiest perps would just lead to long, drawn-out trials at which teams of the brightest lawyers on the planet get Joe Sixpack jurors so confused that some of them vote for acquittal and mistrials until the prosecutors give up. Then we would get to watch bankers on tv as they leave the court and got into their limos, talking about their gratification at being vindicated and their faith in the system. The richest crooks only do time for Ponzi scheme insanities like Madoff’s. Financial crimes of this magnitude take place in Never-Never Land, where the criminals get to say what the law is.

  18. David Smith

    I more or less subscribe to Trainwreck’s viewpoint on the great man. The aww-shucks thing is cover to let him steal your pants.

    I’m not quite as cynical to think that all his behavior is self-interested. He was very public about supporting Obama when he knew that this sort of class warfare stuff was part of the package.

  19. Steve in Philly

    Yves, do I have this right? Banks are forced to carry government bailout insurance (FDIC). But this is not enough. Because the government is promising now to bail out the whole bank, and not just the account holders, banks should be forced to pay more fees.

    But.

    What if a bank doesn’t want to be bailed out — EVER? Well, such a bank is not allowed to do business in the US. So the government can force banks to carry insurance as part of doing business, and when the cost of that insurance becomes too high due in large part to government failures, the government can force all banks to pay yet more fees, even those banks that conducted their business above board. And when those fees are not enough the government can levy a whole new tax on banks.

    How about instead of adding yet more fees and controls to fix the problems caused by the existing fees and controls, let’s try it the other way for once. Get rid of the existing controls. Leave banks free to fail or succeed. Let consumers purchase deposit insurance themselves if they want to do so.

    It amazes me that the bureaucratic mindset of constantly adding more controls, more taxes, more regulations, is the default mindset for so many intelligent people.

  20. d4winds

    re: “…increasing capital ratios to 20% to 25%…”

    Amen. It is, after all, private money which should be at risk for purely gain, not Federal money.

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