Warren Buffett on Risk

"A CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries… If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer."

--Warren Buffett, 2010 Berkshire Hathaway Letter to Shareholders

One of the investor rites of spring (as I look out my window at piles of snow....) is the Berkshire Hathaway Letter to Shareholders which showcases Buffett's folksy wisdom on things financial. Forbes has some good excerpts from the latest.

Can a Financial Meltdown Happen Again?

Happy New Year. Most people in the financial industry are likely happy to see the 2009 calendar go in the trash and have high hopes that 2010 brings a continued recovery for the battered sector. The American Economic Association is currently gathered in Atlanta, and while most agree that the worst is behind us, they are skeptical about real progress being made to avoid a similar crisis in the future. In fact, count Tom Sargent, an economist from NYU, among those who think the response so far has actually made us more vulnerable to a deeper crisis! The logic goes that the bailout has created an expectation of future bailouts for big banks, and as a result management will feel emboldened to take even more risk, knowing that the government safety net will be there. Some wonder, like we have at GlobalRiskJobs, that the window for real meaningful reform may be closing. One of the current problems is that bank lending, especially in light of the collapse of the shadow banking system, is crucial to sustaining this fragile recovery. Hence, any Draconian measures the regulators might enact must not forestall banks' willingness to lend. Other economists worry that central banks' interventions have exposed them to greater financial and political risk which could hinder their effectiveness in future crises.

Also at the top of today's news is the decision by US Senator Chris Dodd (D-CT), the chairman of the Senate banking committee and a central figure in the government’s financial bailout of 2008 and the economic stimulus package adopted last year, not to seek reelection. What effect will his lame-duck status on pending financial reform legislation? Only time will tell. Will he ignore the demands of the special interests on the left? Will he go back to his roots and stand with the banks and financial firms who traditionally donated to his campaigns? Or, will he ignore partisanship altogether as he exits and push for simply the most effective reform that he can? Interesting questions as we start the new year and push toward the finish line on financial reform.