2013: Is Berkshire too big to fail?

ANDREW ROSS SORKIN: You’ll know why I’m asking this question in a second, and why I picked it.

This question is the following: “Is Berkshire too big to fail? On the same topic — ”

WARREN BUFFETT: I think I heard of a book by that name. Who wrote it? (Laughs)

ANDREW ROSS SORKIN: “On the same topic, how do you feel about Dodd-Frank? And now that it’s being implemented, how is it impacting Berkshire’s insurance businesses and our investments in banks like Wells Fargo and Goldman Sachs?”

WARREN BUFFETT: Yeah. I don’t think it’s affecting Berkshire’s insurance businesses, to my knowledge. I mean — we’re — we’ve had — to my knowledge, you know, we’ve never had anything that impinges on our activity arising from a too-big-to-fail doctrine.

The capital ratios for large banks are being established at somewhat higher levels than smaller banks, and that obviously affects return on equity.

The ratios, as I understand it, for Wells are not as high as they would be for Citi or J.P. Morgan, but they’re higher than they would be for a local bank in Omaha.

And the higher the capital ratio, the lower the return on equity will be.

I consider the banking system in the United States to be stronger than, certainly, any time in the last 25 years.

Capital is dramatically higher. A lot of the — well, a very significant part — of the loans that were troublesome are gone. The loans that have been put on the last four or five years are far better.

It’s a — I think we’ve got — the Canadian banking system is very strong, but compared to Europe, I think our banks — or compared to our banks of 20 years ago — I think they’re dramatically stronger than they were then.

I do not worry about the banking system being the cause of the next bubble. I mean, it will be something else.

I mean, we will have bubbles in capitalism. Capitalism goes to excess, and it’s because of the humans that operate it.

And we will have that again, but usually you don’t get it the same way as you got it before. I don’t think it will be a housing boom next time.

But, I am — you know, I feel very good about our investment in Wells Fargo. I feel very good about our investment in U.S. Bank. I feel very good about our investment in M&T.

All of those are very strong banks pursuing, in my view, sound practices, and they should result — they should be decent investments, over time.

They won’t earn as high a return on tangible equity, nearly as high a return as they would have seven or eight years ago, because the rules have been changed. And they have been changed to provide thicker equities, and that pulls down return on equity.

Charlie has been known to express himself on this subject, and I’ll give him the floor.

CHARLIE MUNGER: Well, I’m a little less optimistic about the banking system, long-term, than you are.

I would like to see something more extreme, in terms of limiting bank activities. I do not see why massive derivative books should be mixed up with insured — deposits that are insured — by the country.

WARREN BUFFETT: I’m with Charlie on that. (Applause)

CHARLIE MUNGER: The more bankers want to be like investment bankers instead of bankers, the worse I like it. (Applause)

I don’t want to say more.

WARREN BUFFETT: Yeah. (Laughter)

CHARLIE MUNGER: I get in enough trouble on the subject already.

WARREN BUFFETT: (Laughs) I can—I can see the journalists just licking their chops over there waiting for Charlie to throw a thunderbolt, but he’s unusually restrained.