Buffett Castigates Wall Street, Bankers, Regulators on Blunders

Buffett Castigates Wall Street, Bankers, Regulators on Blunders

By Josh P. Hamilton and Erik Holm
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May 5 (Bloomberg) -- Billionaire Warren Buffett castigated investment bankers, home lenders and regulators for letting the financial system spin out of control and causing a run on Bear Stearns Cos. that almost brought down more of the biggest banks.

``Wall Street is going to go where the money is and not worry about consequences,'' Buffett said during a news conference yesterday, a day after his Berkshire Hathaway Inc.'s annual meeting. ``You've got a lot of leeway in running a bank to not tell the truth for quite a while.''

Buffett and investing partner Charlie Munger also lambasted credit raters, bond insurers and policymakers for two days as a record 31,000 attended the annual affair in Omaha, Nebraska. In between scoldings, Buffett told investors more damage lay ahead and dropped hints about where Berkshire is looking for purchases abroad as the dollar falls.

``There's going to be more pain,'' said Buffett, who repeated that the U.S. is in a recession. Even after the Federal Reserve arranged JPMorgan Chase & Co.'s $2.4 billion rescue of Bear Stearns in March, ``that doesn't mean the losses are over by a long shot.''

The world's biggest banks and securities firms absorbed at least $312 billion in asset writedowns and credit losses in the past 16 months after the collapse of the subprime mortgage market, comprised of loans to people weak credit.

``Both the regulators and the accountants have failed the rest of us terribly'' said Munger, Berkshire's vice chairman. ``If this were an Alice in Wonderland fable, you'd say it's too extreme. It wouldn't work as satire. Adults are not going to behave this way.''

Cascading Failures

Federal intervention saved New York-based Bear Stearns, once the fifth-largest U.S. securities firm, from bankruptcy in March after billions in subprime losses led to a run on the firm.

``If Bear Stearns had gone, the next day somebody else would have gone,'' Buffett said in an interview with Bloomberg Television at the start of the annual meeting. Buffett said he turned down an offer from an unidentified official to lead the rescue because Berkshire didn't have enough capital or time to assess the situation.

Buffett, 77, and Munger, 84, built Omaha-based Berkshire into a $200 billion investment and holding company, buying companies whose management they trusted and whose business models they deemed superior. Buffett owns about a third of the shares, making him the world's richest man, according to Forbes magazine.

Distortions

Buffett said credit-rating firms helped distort the financial system by pushing bond insurers to show earnings growth that wasn't possible from insuring municipal bonds. The insurers began guaranteeing riskier securities including subprime mortgage bonds -- which helped that market expand worldwide -- ``to meet earnings expectations of Wall Street and the ratings agencies,'' he said.

Bond insurers shouldn't have AAA ratings if they borrow money at 14 percent or if their stock has dropped 95 percent, Buffett said at the news conference. MBIA Inc. and Ambac Financial Group Inc. are the biggest bond insurers, and both struggled this year to retain their AAA ratings after losses tied to subprime loans.

Berkshire, whose credit is also AAA, owns almost 20 percent of Moody's Corp., one of the biggest U.S. rating firms.

``The rating agencies have already made considered judgments and, obviously, they are in a better position than anyone to make those assessments,'' said MBIA spokesman Willard Hill in an e- mailed statement. Officials at Ambac, Moody's and ratings firm Standard & Poor's couldn't be reached for comment.

Lower Profit

``Everything they're talking about has happened, with financial market meltdowns as a result,'' said Tom Russo, who helps manage $3 billion as a partner in Gardner, Russo & Gardner, in Lancaster, Pennsylvania, including Berkshire shares, after listening to Buffett and Munger. ``The lust for leverage remains but the regulations are gone, giving the opportunity to exercise that lust.''

Berkshire said last week that quarterly profit plunged 64 percent to the lowest since 2005 as the company marked down the value of derivative contracts. First-quarter net income decreased to $940 million, or $607 a share.

Buffett embarks on a European trip this month to scout for acquisitions. With about $35 billion in cash to help pay for a purchase, Buffett has complained he can't find anything big enough in the U.S. to have impact on Berkshire. He has been investing in China, Israel and the U.K. to spur profit growth.

A Berkshire subsidiary is ``probably close'' to a ``mid- size'' U.K. purchase, Buffett said yesterday. He added that Berkshire will look at insurance units being sold by Royal Bank of Scotland Group Plc, the U.K. lender reeling from asset writedowns.

Asian currencies will rise against the weaker dollar, in part because of bad U.S. economic policy, Buffett said, and he's shopping for companies on that continent. He also expects an increasing in ``scapegoating'' China for economic ills, which he called a mistake.

``Getting paranoid about the Chinese is crazy,'' he said.