OMAHA, Nebraska (AP) - Billionaires Warren Buffett and Charlie Munger say the pain many financial institutions are feeling because of the credit crunch is well deserved.

The chairman and vice-chairman of Berkshire Hathaway Inc. said on Sunday that the financial companies that engineered sub-prime mortgages and the investment funds backed by those mortgages do not deserve much sympathy as they record losses now.

Mr. Buffett said the current financial crisis is a by-product of a system that encouraged executives to "paint pretty pictures".

Mr. Munger said lots of financial institutions acted with stupidity and overreached to improve earnings in recent years.

"I think you have to start with the idea that a lot of the current troubles are richly deserved," Mr. Munger said.

The complexity of the tactics that financial institutions often employ makes it difficult to determine what those companies are worth - even for Mr. Buffett.

"There are some financial institutions I can't value," Mr. Buffett said.

He said if someone had $1 million (650,000 euros) to invest in 10 stocks, it would be easier to find good values in the Korean stock market than among US banks because the banks are so complicated.

Mr. Buffett said he recently read a 270-page annual report that an investment bank filed with the Securities and Exchange Commission, and he had unanswered questions about 25 pages of the report.

"They're cleaning up their act now to some degree because they had to," Mr. Buffett said.

Mr. Munger said he does not think investment banks spend enough time thinking about risk and ways to avoid it like he and Mr. Buffett do at Berkshire.

"We try to behave as if Berkshire stock was all owned by crippled relatives," Mr. Munger said.

Mr. Buffett said the pain is not over yet for financial institutions, but he said nobody can predict how many more times banks will have to write down the value of their assets.

The largest US bank, Citigroup Inc., alone has taken more than $45 billion (29.11 billion euros) of write-downs and credit losses since June 30.

Mr. Buffett and Mr. Munger spent nearly three hours answering reporters' questions on Sunday at their only planned news conference of the year. It is one of the events surrounding Berkshire's annual shareholders meeting that attracted 31,000 people to Omaha on Saturday.

Mr. Buffett reiterated that he believes the US economy is in a recession by his definition, even if it has not yet met the commonly used criteria of two quarters of negative growth.

He said his definition of a recession is when most people and businesses are not doing as well as they were three, six or nine months ago.

"I would say that we're in a recession clearly," Mr. Buffett said.

He said the Federal Reserve's bailout of Bear Stearns Cos. likely prevented a crisis among investment banks because Bear Stearns held a large number of derivative contracts with other investment banks. If Bear Stearns went bankrupt, all those derivatives would have to be valued at zero or unloaded quickly.

But he and Mr. Munger agreed that not every business or investment bank should be rescued, because failure is an important part of capitalism.

"Capitalism without failure is like Christianity without hell," Mr. Buffett said.

Lenders and investors who were dumb enough to deal in sub-prime mortgages should not receive any special help, Mr. Buffett said, but if homeowners were deceived about the terms of an adjustable mortgages, they should be helped.

"People make mistakes in capitalism," Mr. Buffett said. "They shouldn't be penalised for being misled, but they shouldn't be protected from mistakes."

Mr. Buffett said the mortgage mess grew partly out of the belief many people had that their homes would always increase in value. And he said many of the mortgages that are in trouble are ones with which owners refinanced and took out more cash than they would ever paid for the home.

Those homeowners and lenders were all counting on today's home prices to bail them out of yesterday's decision.

"People tend to forget how well the system worked when we had rules that prevented this complexity and aggression," Mr. Munger said.

Berkshire owns more than 60 companies including insurance, clothing, furniture, jewellrey and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.