‘CEOs should lose all if company fails’

LEGENDARY US investor Warren Buffett has questioned the moves by US President Barack Obama to limit the risk US banks can take as trading entities.

Buffett, who is chairman of Berkshire Hathaway, said risk was hard to define and therefore hard to limit.

One way to counter excessive risk taking, he said, is to make it so the chief executive of the institution that fails or that goes to the government for help really gets destroyed himself financially.

Why should the chief executive come out any better than somebody who gets laid off? he said in an interview with Fox television.

The US will always have banks that are too big to fail, he said. He was responding to the plan by Obama to introduce tougher measures to limit the amount of risk banks can take.

Buffet said he would put the onus on chief executives and make them pay.

He said: “If a bank had to go to the government for help, the CEO and his wife would forfeit all their net worth. And that would apply to any CEO that had been there in the previous two years.”

The incentive packages need to be changed.

The pressure a few years ago was to try to report higher quarterly earnings every quarter. “That’s what Wall Street applauded; that’s what the world applauded. It is nice to have carrots, but you need sticks.

“I really think there ought to be huge downsides because the CEO has to be the chief risk officer of a big bank,” Buffett said.

The Obama proposals are expected to include size and complexity limits specifically on proprietary trading.

This is the second move in a month by the US president on the banks.

Earlier this month his administration announced a levy on the largest banks to recoup $90bn over 10 years. Some industry groups have sought legal advice about challenging the levy in the courts.

Sources said the latest risk limit proposals are likely to stop short of the return to a forced separation between riskier investment banking and the utility functions of retail and commercial banking.