NEW YORK (Reuters) - Warren Buffett has said the hundreds of billions of dollars of taxpayer-funded bailouts of corporate America will eventually pay off.
But he thinks they shouldn’t pay off for the wealthy people whose carelessness or ignorance made them necessary.
In his annual letter to shareholders of his Berkshire Hathaway Inc, Buffett offered acerbic criticism of financial industry chiefs and directors whose poor risk control nearly ran their companies into the ground.
He said that while these often-wealthy individuals “still live in grand style,” it is the ordinary shareholders who have borne most of the burden of such failures, sometimes seeing more than 90 percent of their holdings wiped out.
Buffett said the four biggest “financial fiascos” in the last two years cost shareholders north of $500 billion. That’s roughly the gross domestic product of Indonesia: population, around 240,000,000.
“A board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control,” Buffett wrote.
“If he’s incapable of handling that job, he should look for other employment,” he went on. “If he fails at it — with the government thereupon required to step in with funds or guarantees — the financial consequences for him and his board should be severe.”
Buffett did not identify the companies he was referring to. His office did not immediately return a request for comment.
But there is no shortage of financial companies where shareholders’ investments fell by more than 90 percent.
Among them: American International Group Inc, Bear Stearns Cos, Citigroup Inc, Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc and Washington Mutual Inc.
“He took the gloves off, asking for a pound of flesh from those who saw their own personal finances hold up largely undiminished while they wiped half a trillion dollars from the nation,” said Thomas Russo, a principal at Gardner, Russo & Gardner in Lancaster, Pennsylvania. It owns Berkshire stock.
Some companies are now trying to tie executive pay closer to longer-term performance, good and bad.
Scott Alvarez, general counsel of the Federal Reserve, this week said the central bank expects soon to issue final guidance on pay practices intended to stop excess risk taking at banks.
“Compensation practices were not the sole cause of the financial crisis, but they were a contributing cause,” he said.
Buffett agrees that deterrence matters. “CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well,” he wrote.
Some CEOs have taken steps that could lessen potential shareholder and political fallout.
Citigroup Chief Executive Vikram Pandit is taking a $1 salary to run that bank. But he also has $79.7 million sitting in an account tied to his 2007 sale of his hedge fund firm, a Friday proxy filing shows. Pandit’s compensation at Citigroup was roughly $38.2 million in 2008.
Buffett takes a $100,000 annual salary to run Berkshire. As the world’s second-richest person, he can afford to do that.
“There is nothing new about corporate America committing atrocities against stockholders,” said Frank Betz, a principal at Carret/Zane Capital Management LLP in Warren, New Jersey. “But CEOs now get paid so much more than the rank-and-file.”
Yet even Buffett’s risk management sometimes comes into question, as in 2008 when Berkshire suffered billions of dollars of paper losses on derivatives contracts tied mainly to the performance of various stock market indexes.
That bet looked better in 2009, resulting in $3.62 billion of pre-tax gains. But Berkshire derivatives provide $6.3 billion of premiums that Buffett can invest as he wishes. And the bets will pay off if the stock indexes rise over long time periods, as they usually do, notwithstanding the last decade.
Buffett maintained he would not overextend Berkshire.
“Too-big-to-fail is not a fallback position at Berkshire,” he wrote. “We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.”
Reporting by Jonathan Stempel