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Munger: It's time to break up the banks

May 6, 2013: 6:00 AM ET

Warren Buffett's chief lieutenant, Charlie Munger, says Brown-Vitter won't work.

big_banksFORTUNE -- Add Charlie Munger to the list of top financial executives who think the nation's biggest banks should be broken up.

In an interview with CNN at Berkshire Hathaway's annual meeting, Munger, who is Warren Buffett's chief lieutenant, said he thinks the big banks are still too complicated and dangerous for the economy. But he doesn't think a recently proposed bill by Senators Sherrod Brown and David Vitter, which has gotten praise from others who want to rein in big banks, is the answer.

"I think if you increase the capital requirements and let them do what they want, they will just get in trouble again," says Munger.

Munger's preferred prescription sounds like a stricter version of the Volcker Rule, which was meant to limit risky trading at the banks and was included in Dodd-Frank, but has yet to be implemented. He would force the banks to get out of their business of underwriting and trading derivatives, financial contracts that allow you to speculate, some say hedge, on commodities, interest rates, and other things. About a year ago, JPMorgan Chase (JPM) announced it had lost billions on a credit derivative hedge that had not worked out as expected.

MORE: Buffett worries about Fed's 'huge experiment'

"I think banks should be more heavily regulated," said Munger. "We shouldn't have vast derivatives books in banks with insured deposits."

In the past year, there has been a small stream of former top Wall Street executives, including former Citigroup (C) CEO Sandy Weill, who have said they are now for breaking up the banks. What's notable about Munger, though, is that he is not only a financial services veteran. He is also one of the top executives of a company, Berkshire (BRKA), that is one of the largest investors in some of the nation's largest banks, including Bank of America (BAC) and Wells Fargo (WFC).

Still, Munger seemed to suggest it was the role of the regulators, not big investors, to push for changes. Munger said he and Buffett make investment decisions based on the world they are in, not what they wished it to be, which is fair.

MORE: 6 things I learned at Berkshire's annual meeting

But Munger also said he thought more regulations could make banks more profitable. By getting out of risky businesses, banks may end up giving back much less of their bull market gains in the down years. But if that's true, then isn't Munger's fiduciary responsibility to Berkshire shareholders to push for change? If the change would make the banks more profitable, and presumably Berkshire's investors more money, I think the answer is yes.

On Saturday at Berkshire's annual meeting, Buffett said he thought the big banks were safer than they have been in years. But Berkshire doesn't own derivative-heavy JPMorgan. Goldman Sachs (GS) has a derivatives business, but it has relatively few traditional bank deposits. The only Berkshire holding that seems to significantly break the Munger rule is Bank of America.

"You are asking me questions about my prescription for the country," says Munger. "Well that would obviously be different from the prescription of our leading bankers."

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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