Buffett: ‘Too Big to Fail’ Not Going Away

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Warren Buffett said Thursday that one way to ensure banks don’t take on too much risk is to penalize chief executives whose banks get into trouble.

In an interview with Fox Business Network’s Liz Claman, the billionaire chairman of Berkshire Hathaway (BRK.A)said he’d need to know more about significant banking reforms proposed earlier in the day by the Obama administration before commenting on their potential impact.

The reforms propose restrictions on the size of big U.S. banks and the amount of risk they can take on.

The so-called Oracle of Omaha said regulation is an important part of any effective financial system.  In addition, Buffett said there likely will always be financial institutions “too big to fail.” However, he said it’s inherently difficult for regulators to police risk.

Buffett suggested he might not oppose a return to regulations included in the Glass-Steagall Act, financial legislation enacted during the Great Depression which separated the roles of banks between the commercial and the investment sides. Some of those laws have been repealed in recent years as Congress has supported banking deregulation.

But “it’s hard to put the genie back into the bottle,” Buffett said.

What needs to change is the incentives for bank leaders, Buffett said. CEOs of banks forced to go to the government for bailouts should be “destroyed financially,” he said.

Buffett, whose firm invested $5 billion in Goldman Sachs (GS: 161.16, -6.72, -4%) last year, said the Obama administration’s proposal would not prompt him to sell any of those shares.

“I’m not tempted at all” to sell Goldman stock, he said. “I would not be bearish on Goldman Sachs at all.”

Claman suggested some say Obama is demonizing the banks, blaming them for the recent economic downturn. Buffett responded that there’s plenty of blame to go around for the housing bubble that burst three years ago, leading to a massive credit crisis that rocked Wall Street and nearly felled the U.S. economy.

“The bubble took in everyone,” he said. “We all fell into this trap of thinking housing prices could go nowhere but up.”

Buffett added that he continues to support the policies of the Obama administration, as well as the administration’s top economic officials, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.