Buffett Breakfast on CNBC (Transcript)

Here’s the transcript of the Warren Buffett Squawk Box sitdown this morning.

BECKY QUICK, co-anchor: Good morning, everybody, and welcome to SQUAWK
BOX right here on CNBC. I’m Becky Quick along with Joe Kernen. Carl’s
off today, but Joe, we have a very special guest with us this morning.
We are talking about Warren Buffett. He’s here with us, and he is here
with us for the next three hours. We are very excited to be spending
this time. We are here at the Nebraska Furniture Mart. And, Warren, it’s
great to have you here. Thank you very much for joining us this morning.

Mr. WARREN BUFFETT: I enjoy everything about it except the hour.

QUICK: “Except the hour,” and we do appreciate your getting up extra
early. We should point out it’s 5 AM here in Omaha, so you are quite the
trooper for coming out.

Mr. BUFFETT: Thanks.

QUICK: I know we’ve got the next three hours to spend with you, and, in
most instances, I might think, three hours is an incredibly long time,
but I have to tell you, given everything with the state of the economy
right now, three hours may not be enough time. So, again, we appreciate
your time with us today.

Mr. BUFFETT: Thanks. Mm-hmm.

QUICK: Warren, why don’t we start off talking right away about the
economy? Because that’s what people are wondering right now. What’s
happening with the economy? We hear all the time from people who are
very concerned and, frankly, quite frightened about what’s happening
right now.

Mr. BUFFETT: Yeah. Well, when we talked in September.

JOE KERNEN, co-anchor: Warren, hold on.

Mr. BUFFETT: Yeah?

KERNEN: I’m sorry to break in. Merck and Schering-Plough are merging,

QUICK: Whoa.


QUICK: All right.

KERNEN: I’m sorry.

QUICK: Merck and Schering-Plough merging. We thought we already had
enough to talk about with you this morning, Warren, but why don’t we
start off with some news?

KERNEN: I would never presume to jump in like that on the Oracle; but,
I’m sorry, board of directors unanimously approving a definitive merger
under which the companies will combine under the name Merck in a stock
and cash transaction. Schering-Plough shareholders will receive .5767
shares of Merck and $10.50 in cash for each share of Schering-Plough.
Each Merck share will obviously be a–become a share of the combined
company. Richard Clark, the chairman, president and CEO of Merck will
lead the combined company. This is–this is a real blockbuster and right
at 6 AM on a Monday. And I think you’d have to say, Warren, as far as
animal spirits, this could be–you know, this may not–this may not
solve all of our problems, but it certainly is an endorsement of
American business and–in that M&A is alive and well.

Mr. BUFFETT: Yeah. Animals spirits are always there. The only question
is who has the funds to kind of carry out the ideas that the animal
spirits come up with? But, particularly in pharma, they have good
balance sheets, generally, and they can make deals.


QUICK: Are you surprised to see a deal of this size right now, though?

Mr. BUFFETT: Well, I’m surprised at any deal this size even now, sure.
That’s true. It’s very hard to make deals for companies in most



KERNEN: Yeah. Schering-Plough closed at $17.63, and, at current values,
this is $23.61 for Schering-Plough for a total of $41.1 billion for this
deal. I guess you’d also have to say that the whole Vioxx controversy.
We can lay that to rest now for the them to be feeling comfortable
enough to acquire Schering-Plough for $41 billion, but…


KERNEN: …this is a pleasant, pleasant ride. And, Warren, you
own–you’re all over the place with–you own foreign drug companies, you
own stakes in–stakes in foreign drug companies and in some domestic
companies as well. It’s always been one of your favourites.

Mr. BUFFETT: But we don’t own any Schering, that’s why you see these
tears coming down my face.

QUICK: What about Merck? Do you own any Merck either?

Mr. BUFFETT: No, not any Merck.

QUICK: Not in your private account either?


QUICK: OK. What is…

KERNEN: What’s your biggest holding? You do have some–I know you–what
are your foreign drug company that you have stakes in, Warren?

Mr. BUFFETT: Sanofi and the biggest one is Sanofi-Aventis, and we have
J&J domestically.

KERNEN: Right. OK. All right, Beck.

QUICK: OK. So, Warren, we’re going to talk more about this merger and
what this means. I mean, do you expect to see other deals that would
come as a result of this?

Mr. BUFFETT: Well, every deal does tend to brew another deal, I mean.


Mr. BUFFETT: Particularly with people in the industry. If, you know, if
Coca-Cola buys something, Pepsi thinks about something in the same


Mr. BUFFETT: I’ve been in enough board meetings to hear that. There’s
a–there’s a lot of–every CEO has, you know, has a little bit of that
‘all the other kids are doing it,’ you know.

QUICK: Right. We’ll talk a lot more about this, but let’s get back to
the state of the economy…

Mr. BUFFETT: Sure.

QUICK: …in general as well. What do you see right now? You spooked a
lot of people last week when you talked about how the economy was in
tatters and would be there for quite some time.

Mr. BUFFETT: Yeah. The economy, ever since we talked in September, we
talked about it being an economic Pearl Harbor and how–what was
happening in the financial world would move over to the real world very
quickly. It’s fallen off a cliff, and not only has the economy slowed
down a lot, people have really changed their behaviour like nothing I’ve
ever seen. Luxury goods and that sort of thing have just sort of
stopped, and that’s why Walmart is doing well and you know, and I won’t
name the ones that are doing poorly. But there’s been a reset in
people’s minds, and we see that in something like Geico where year after
year after year we say you can save some money insuring with Geico, and
year after year there’s been a certain number of people who have said,
‘You know, I’ve got this pal, Rotary Joe, and I’ve been insuring with
him and for 100 bucks, why should I shift?’ Every week we’re just seeing
it build and build. More and more people are calling. Our price
differentials haven’t widened, our advertising isn’t that much
different, but the American public really has changed their buying
habits. On the reverse side, our jewelry stores just get killed in a
period like this. And high end gets hurt the most, next down gets hurt
the second most, and the lowest people get hurt the least.

QUICK: What’s happening? What–you knew–you told us a while ago, you
told us this was an economic Pearl Harbor about six months ago, but did
this happen more quickly or more severely than even you expected?

Mr. BUFFETT: It certainly happened close to the worst case. I mean, you
never know what’s going to happen, but I would not have–I would not
have thought there could’ve been a much worse case than what has
happened. Although, I will say this, the Fed did some things in
September when it happened…

QUICK: Mm-hmm.

Mr. BUFFETT: …that were vital in keeping the place going. I mean, when
the–if they hadn’t have insured money market accounts and, in effect,
commercial paper, you know, you and I would be meeting at McDonald’s
this morning.

QUICK: Instead.

Mr. BUFFETT: Yeah. Right.

QUICK: So why do you think consumers have gotten as frightened as they

Mr. BUFFETT: Well…

QUICK: The fear doesn’t like too strong of a word.

Mr. BUFFETT: No. They’re scared, and fear is very contagious.


Mr. BUFFETT: And I’ve never seen the consumer or the Americans just
generally more fearful than this. And they’re also confused. And you can
get fearful very quickly, but you don’t get confident, you know, in five
minutes. You can get fearful in five minutes, but you won’t get
confident for some time. And government is going to play an enormous
factor in how fast it comes back. And if you’re confused and fearful,
you don’t get over being fearful till you aren’t confused. I mean, the
message has to be very, very clear as to what government will be doing.
And I think we’ve had–and it’s the nature of the political process,
somewhat, but we’ve had muddled messages, and the American public does
not know what–they feel that they don’t know what’s going on and their
reaction, then, is to absolutely pull back.

QUICK: So there’ve been a lot of fingers of blame that have pointed in a
lot of different directions. But you’re saying the message from
Washington has been confused or…

Mr. BUFFETT: Well, I think it’s the nature of things.

QUICK: Right.

Mr. BUFFETT: I mean, I think people watch 535 members of Congress each
give their view of what every player is doing and all of that sort of
thing, and I think that, you know, you had a change of administrations
and you’re dealing with things that people don’t understand. I mean,
when you first brought up the term SIV or something like that or when
you talk about credit default swaps or you talk about–it’s–when the
public hears that, they just, they think something’s wrong and they
don’t understand it.

QUICK: And still, this is the worst case scenario from what you had
imagined. What went wrong? Why did we wind up in that worst case

Mr. BUFFETT: Well, we went wrong originally because we had a belief
that–and everybody had the belief. I had it, the government had it,
mortgage lenders had it, borrowers had it, media had it, everybody
thought house prices could go nothing but up and–or at least they
couldn’t go down a lot. And once you had that belief–and it was
nationwide–it didn’t make any difference what you lent on the house
because if the guy couldn’t pay, you’d sell it at a profit anyway or you
wouldn’t lose much money. So you had 11 trillion of residential mortgage
debt built on this theory that who was borrowing it, what their income
was really wasn’t that important because the house itself had to go up
in price. And when that tumbled and houses which might’ve been worth 22
trillion at the peak are worth maybe four or five trillion less, A, it’s
a huge amount out of people’s net worth. It’s the biggest asset most
people have. And then secondarily, all of these instruments that were
built on it, which people didn’t understand too well, started toppling
to various degrees in value and then that exposed other things. I mean,
it was like, you know, some kid saying, ‘The emperor has no clothes.’
And then after he says that, he said, ‘On top of that, the emperor
doesn’t have any underwear either.’ You know. I mean, various layers
have been–and they interact. When people get scared, they change their
buying habits. When they quit buying as much, people lay off. We are in
a very, very vicious negative feedback cycle. It will end, but, believe
me, I mean, I don’t want this to be the last line of the movie, the last
line of my annual report that America’s best days lie ahead. And we can
talk about why that is, but–and that is the final answer. But how fast
we get there depends enormously on not only the wisdom of government
policy, but the degree in which it’s communicated properly. People–when
you have a Pearl Harbor, you have to know the nation is going to be
united on December 8th to take care of whatever comes up. And we have
little squabbles, otherwise we put them aside and everybody goes to work
on defence plans, we start building planes, we start building ships,
even though they’re not going to be ready tomorrow, people join. The
Army doesn’t blame the Navy because there were too many ships in Pearl
Harbor, and it shouldn’t have happened. The Army doesn’t say, ‘Well, it
was your fault, so we’re not going to send our troops.’ None of that
sort of thing. We got united, and we really need that now.

QUICK: Do you think that there has not been that to that extent? There’s
not enough of the united front right now?

Mr. BUFFETT: Yeah, I think–and I can understand why because,
economically–Pearl Harbor itself, you knew exactly what had happened
and we wiped out a good bit of the fleet and all of that and people knew
in a general way what had to be done and they knew who they had to
respond to a leader who was unquestionably the commander and chief. And
so you didn’t have–start congressional hearings on December 8th, you
know, that were going to last for weeks while all of the commanders and
the various people were in various ways pilloried or taunted or whatever
about ‘Why in the world did they let this happen?’ and the Republicans
didn’t say, ‘You Democrats have been in since 1933, and it’s all your
fault.’ None of that. I mean, people said, ‘We’ve got to get something
done.’ And they–and they trusted their leadership to do it and put
aside mostly the partisan stuff and the–and we went–and everybody,
incidentally, felt we’d win the war, even though we, you know, for the
first six months, we were–Corregidor fell and we had the death march of
Bataan, all kinds of–there was terrible, terrible news, but we knew
that if we stuck together and we followed leadership, we would–we would

QUICK: We’re going to have a lot more time to talk about solutions this
morning, but in terms of the economy, where do you think it goes from
here? What’s the best case scenario and the worst case scenario?

Mr. BUFFETT: Well, it can’t turn around on a dime. That doesn’t happen.
I mean, it–a lot of stuff works this way. When 600,000 more people
become unemployed last month, that not only affects those 600,000, it
affects them terribly, but it affects everybody else. They get scared
about losing their jobs. The percentage of people are scared about
losing their jobs in this country is way higher than the actual numbers
that are going to lose them, but they’re behaving in an entirely
different manner. I mean, they are not–they are not going to go into
a–even at Costco or Walmart, their jewelry departments are way down,
but other departments are up. People, they started saving money. For
years we told them to save money, and now they’re saving money, and
that’s a double whammy. So we’ve had this great economic machine like
nothing the world’s ever seen, and it started sputtering a little, and
we said, ‘Well, maybe we should kind of slow it down and see what
happens.’ And it sputters more. And what we may not realise is that
there’s interaction, that the slower you run the machine at, the more it
sputters. So it’s a job to get it working again, and it won’t happen
fast, Becky, I mean–and unemployment will lag at the end, the actual
turn around.

QUICK: We’re already talking about unemployment at 8 per cent. Where do
you see it headed?

Mr. BUFFETT: I can’t name a number because, frankly, it depends to an
extent on the wisdom of government policies. It’s going to go higher.
It’s probably going to go a fair amount higher, but on the other hand,
five years from now I can guarantee you that the machine will be running
fine, but I’d like to get there a lot faster than five years. And we

QUICK: And, Joe, did you want to jump in here, too?

KERNEN: I want to–you just said something interesting, Mr. Buffett, and
that is it depends on the wisdom of our policies. And I understand, you
know, in a time of war everyone rallying behind the commander and chief.
But, obviously, there are differences on what the wisdom of our polices
should be from here on out. Now, the “loyal opposition” is going to be
about, as it’s called, will be behind the president, but certainly you
could see that if we–if people think there’s some wrong-minded policies
that are being rushed into law at this point because of the crisis, I
mean, that’s–it’s the loyal opposition’s duty to say what they feel,

Mr. BUFFETT: Right. And, Joe, it–if you’re in a war, and we really are
on an economic war, there’s a obligation to the majority to behave in
ways that don’t go around inflaming the minority. If on December 8th
when–maybe it’s December 7th, when Roosevelt convened Congress to have
a vote on the war, he didn’t say, ‘I’m throwing in about 10 of my pet
projects,’ and you didn’t have congress people putting on 8,000 earmarks
onto the declaration of war in 1941.

Mr. BUFFETT: So I think–I think that the minority has–they really do
have an obligation to support things that in general are clearly
designed to fight the war in a big way. And I don’t think you should–I
don’t think before D-Day on June–on June 5th you ought to have–or June
1st, maybe, have a congressional hearing and have 535 people give their
opinion about where the troops should land and, you know, what the
weather should be and how many troops should land and all of that. And I
think after June 6th you don’t–you don’t have another hearing that
says, ‘Gee, if we’d just landed a mile north.’

KERNEN: Yeah, but you might–might not have fixed…

Mr. BUFFETT: But I say…

KERNEN: You might not–you might not have fixed global warming the day
after–the day after D-Day, Warren.

Mr. BUFFETT: Absolutely. And I think that the–I think that the
Republicans have an obligation to regard this as an economic war and to
realise you need one leader and, in general, support of that. But I
think that the–I think that the Democrats–and I voted for Obama and I
strongly support him, and I think he’s the right guy–but I think they
should not use this–when they’re calling for unity on a question this
important, they should not use it to roll the Republicans all.


Mr. BUFFETT: I think–I think a lot of things should be–job one is to
win the war, job–the economic war, job two is to win the economic war,
and job three. And you can’t expect people to unite behind you if you’re
trying to jam a whole bunch of things down their throat. So I would–I
would absolutely say for the–for the interim, till we get this one
solved, I would not be pushing a lot of things that are–you know are
contentious, and I also–I also would do no finger-pointing whatsoever.
I would–you know, I would not say, you know, ‘George’–‘the previous
administration got us into this.’ Forget it. I mean, you know, the Navy
made a mistake at Pearl Harbor and had too many ships there. But the
idea that we’d spend our time after that, you know, pointing fingers at
the Navy, we needed the Navy. So I would–I would–I would–no
finger-pointing, no vengeance, none of that stuff. Just look forward.

KERNEN: All right.

QUICK: And, obviously, we’ve gotten thousands and thousands of e-mails
that have come in here. Joe, we’re going to be getting to that in just a
moment, as well.

KERNEN: Great. And we’ll have more, Becky and Warren, on this
Merck/Schering-Plough merger. We’ve got some details about when it’s
going to be accretive. You know, Merck’s paying about a 7 per cent
dividend. What do they think about the combined company, whether that
dividend holds, we’ll get to that when we come back. And you watch us
ask guests questions every morning; today it’s your turn. Warren Buffett
is fielding your e-mails. Log on, write in, [email protected], as you
can see, is the e-mail address down there at the bottom. We’ll have his
answers when we return.

KERNEN: If you’re just tuning in this morning, it’s merger Monday. Well,
that’s something we haven’t heard in a while. Merck and Schering-Plough
announcing a $41 billion deal. Merck is acquiring Schering for cash and
stock value. And Schering-Plough at $23.61, pretty nice premium there,
and that would set a new high for Schering-Plough for the last 52 weeks;
although, you remember, it had been up around 30. There’s a lot going on
here. It’s 10.50 cash from Merck, plus .5767 shares. Remember that Merck
and Schering-Plough collaborate on Vytorin, which is Zocor and Zetia. So
this makes a lot of sense. President and CEO Richard Clark will lead the
combined company. He’s the Merck chairman and CEO. Remember Fred Hassan,
also dressed up, I believe it was Pharmacia and sold that company as
well, and for years people thought that Schering-Plough could be getting
dressed up for sale. It will be accretive, slightly, after the first
full year of the merger, which they expect to close in the fourth
quarter. That dividend of $1.52 that Merck pays for that 6.7 per cent
yield, the company says it’s going to try to continue to pay that
dividend. They intend on paying that dividend for 2009. They’re
confirming–or reaffirming that nongap 315 to 330 for the year, which is
vs. a 326 estimate. So that’s pretty exciting this morning. I’ll get a
market check when we can on Merck, see how that looks this morning,
Becky; 2274 is the close. We’ll see what–I don’t have a bid and an ask
yet on how Merck’s going to trade.

QUICK: OK, we’ll keep an eye on that. And meantime, we are back with
Warren Buffett. We’ve got a lot of viewer e-mails that have been coming
in. We’ve got thousands of them, so we’re going to get to those right
away. But, Warren, you had one thing you wanted to clarify?

Mr. BUFFETT: Well, I was going to mention to Joe that you’ve heard this
comment recently from some Democrats recently that a ‘crisis is a
terrible thing to waste.’

QUICK: Yeah.

Mr. BUFFETT: Now, just rephrase that and since it’s, in my view, it’s an
economic war, and–I don’t think anybody on December 7th would have said
a ‘war is a terrible thing to waste, and therefore we’re going to try
and ram through a whole bunch of things and–but we expect to–expect
the other party to unite behind us on the–on the big problem.’ It’s
just a mistake, I think, when you’ve got one overriding objective, to
try and muddle it up with a bunch of other things.

QUICK: OK, so that’s your point…

KERNEN: Great.

QUICK: …is that on both sides people should be coming back in and…


Mr. BUFFETT: Absolutely. We need them. We need them.

QUICK: OK. Let’s get to some of these viewer e-mails, because we do have
a lot of them that have come in. Steve from Minneapolis writes in, and
his question is, “Do you believe that the following statement is still
true today? ‘So far as I can discover, paper money systems have always
wound up with collapse and economic chaos.'” By the way, that was a
statement from Congressman Howard Buffett, your father.

Mr. BUFFETT: Sounds like my dad, yeah.

QUICK: Yeah.

Mr. BUFFETT: I heard that every night at the dinner table for a long
time. Well, I would say this. It’s going to be a very, very rare paper
money that appreciates over time. I mean, the–and we are doing things
now that are potentially very inflationary. I mean, that–it’s the
nature of fighting the war we’re in. And, incidentally, when we fought
World War II it was very, very inflationary, and we–and we took all
kinds of activities to try and minimize that impact. But, you know, if
you–if you look at this bill that–and I didn’t know Steve was going to
ask you that. But, you know, on the back it says, “In God we trust,”

QUICK: Yeah, right.

Mr. BUFFETT: And on the front it says, ‘In the Federal Reserve, we
trust,’ basically.

QUICK: Right.

Mr. BUFFETT: It’s a Federal Reserve note. Now, if you go down to the
Federal Reserve bank and you say, ‘I’d like to exchange this for
something else,’ the nice lady there will say, ‘Would you–would you
like,’ what is it? Two 10s or four 5s?

QUICK: Right.

Mr. BUFFETT: I mean, you–it just–it is paper money, and if you keep
issuing more of it–and M2 has been growing very rapidly if you go to
the Federal Reserve site and see that, and should be in a period like
this. But that is inflationary. The more of these you have out compared
to the economic activity, the less it’s worth.

QUICK: All right. Well, let me jump ahead based on that…

Mr. BUFFETT: I’d better get this off the table before you grab it. Yeah.

QUICK: Yeah, before I take it from you. Let’s jump ahead. Guys in the
control room, this may throw you off a little bit. We’re going to go to
number 33. This is from Joey in Brooklyn, New York, and I want to ask
this question because it plays into what you just talked about. He asks,
“Do you think that the inflation of the late 1970s was worse than the
inflation we are about to have? Why or why not?”

Mr. BUFFETT: Well, it–again, it depends on the wisdom of federal
policies. But–because what we do with the money supply and
different–and how we behave later in relation to what we’re creating
now will determine the answer to that. It certainly has the potential of
being worse. We are going–we are fighting a big war, and there–we’re
using–we’re going to use money to fight it. And the whole world is
leveraging down. The only party that can leverage up is the US
government. They have the ability to take on anything because they can
print money as long as people will do business in US dollars. So it
could be–it could be worse. And, you know, in economics there’s no free

QUICK: Right.

Mr. BUFFETT: There still are lunches it’s better to have even if you’re
going to pay later. I mean, it’s better than no lunch if–even if you
have to pay for the lunch. And we are having–we’re–we are going to
attempt to have a lunch; to some extent we’re going to pay for it later.

QUICK: All right. We have more questions from people wondering what all
that inflation means. We’ll get to that in the next hour, and what that
means for the markets and some of their investments. But, meantime,
Carmen from New York writes in, he says, “Do you believe that the
ratings agencies could have single-handedly prevented the current
financial turmoil by refusing to rate the exotic products coming out of
Wall Street that they apparently did not understand?”

Mr. BUFFETT: It would have helped a lot. And–but the rating agencies
were populated by people who believed exactly what you and I did, you
know, all of the people that come to the Nebraska Furniture Mart and the
people that are in Washington and the–you know, when Congress was
urging Fannie and Freddie to expand their activities. Everybody believed
house prices were not–would never take a real tumble. And that got
built into what the rating agencies did as well. But there’s no question
that if somebody there had taken a stand for some reason, they would
have been–they would have been derided for that stand. But if they’d
taken a stand, said, ‘We’re going to assume that house prices can fall
25 or 30 per cent, and therefore we have to rate this stuff all
differently,’ it would have–it would have been–they probably would
have gone to the other rating agencies and got it anyway. People
wouldn’t have accepted it. But they did make a–they made a mistake in
rating them the way that they did.

QUICK: All right. T. Tidwell from Louisville, Kentucky, writes in and
wants to know, “What one thing have you resigned yourself to be a
‘shocking probable truth’ in 2009 that investors would certainly be
surprised about now?”


QUICK: That’s a tough one.

Mr. BUFFETT: I wish I knew. I mean, it was–I’d be acting on it now. No,
I think most people’s expectations about 2009–well, I would say this. I
would say to the extent that–I think we already have the policies in
place, but to the extent they get communicated better it will help. But
the banking system, if properly handled, is not going to–that’s not
going to be the problem for the economy. Fear that the banking system
may be a problem enters into how the economy behaves. But we have a
system that can take care of the banks, and most of the banks are in
pretty good shape.

QUICK: So would the one shocking truth potentially be things wind up
being better than people expect?

Mr. BUFFETT: Well, that…

QUICK: Or you wouldn’t go that far?

Mr. BUFFETT: No, I won’t go that far.

QUICK: OK. All right, we’re going to have much more with Warren Buffett
when we return. We have many more e-mails that we’ve got to get to.
We’ll also be getting this morning’s top stories. And, again, we will
have Warren Buffett’s unique take on them, what’s been happening this
morning, what’s happening with the economy and with the markets. Plus,
the Oracle of Omaha is just getting started on your e-mail questions.
Keep writing in, we’re still going through these. The address, again, is
[email protected] We are live at the Nebraska Furniture Mart. We’ll be
back with more right after this.

QUICK: The front page of the Journal today, Warren, says that some of
the progress we’ve made in the credit markets has been backsliding. It’s
been going away. LIBOR rates have been inching higher once again. Have
you seen that as well in the credit markets?

Mr. BUFFETT: Yeah, I’ve seen that. It’s not like it got a worse of the
situation in September, but when people lose confidence, yeah, I don’t
care whether they’re big shots, you know, running big companies, or big
banks, or whether they’re the guy on the street, they behave exactly the
same way. I mean, this goes back to the human–you know, the “Naked Ape”
type of thing, reaction. The fear or flight stuff comes in and where
they flee is something this government guaranteed. And you’ve seen it,
yeah, and you’ll continue to see it. They have–people have to be
confident. The system doesn’t work without confidence and they
are–they’re not confident now and they are confused and the government
has to speak with real clarity. Government’s done a lot of good things
in terms of the banking system…

QUICK: Mm-hmm.

Mr. BUFFETT: …but frankly when you have changes of administration,
when you have–when you have 535 members of Congress criticising maybe
various policies and maybe taunting even people, the reaction of the
public to that is, you know, ‘I’m going to go to something this
government guaranteed,’ and the world won’t work if that continues to be
the case.

QUICK: Well, let’s get back to that, though. How could the
administration possibly rein in 535 members of Congress, not to mention
it’s a 24-hour news cycle and we put just about anybody and everybody on
to spout their views?

Mr. BUFFETT: Well, I think that the first–you have to recognise that it
is an economic Pearl Harbor. If you don’t believe that, then why should
members of Congress not, you know, why shouldn’t they throw in 8,000
earmarks or do what they’ve been doing? Congress, and I think I said
this six months ago, I mean, they’re a patriotic group of people. I
don’t think maybe they understood fully, some of them, the gravity of
the situation and what is required. What is required is a commander in
chief that is looked at as being the commander in chief in a time of war
and the support that generally he needs and other things that have to be
given up. When we get all this solved and go back to yelling at each
other, you know, and putting in pet projects and doing all that sort of
thing. But for the time being we should put that, as much as we can,
aside and then frankly, nobody but the president now will be believable
to the American people. I mean, you can’t–people have heard–they
don’t–names like Paulson, Geithner, Bernanke, those–that’s just a
muddle to them. The only authoritative voice in the United States who
says, ‘This is what we’re going to do, this is what we’re not going to
do,’ and very specifically, is the president of the United States.


KERNEN: Yeah, I–really quickly on that–on that Merck dividend I want
to–I said they’re going to try. They’re committed to maintaining it.
I’m hearing from work–or from Merck. They’re committed to maintaining
that dividend. So it’s about 6.7 per cent. I want to get back quickly,
Mr. Buffett, we were talking about this article in the Journal. Look at
your Berkshire AAA bonds, look at General Electric, which is still AAA.
Look at those bonds. Look at Goldman Sachs bonds. The thrust of this
piece is that when you’re not sure what the government’s going to do
eventually to fix things, even senior debt holders aren’t sure that
they’d end up with the assets of the firm. How do you expect this to
work itself out? What does the government need to do? You–Mr.–or
President Obama needs to speak for the government obviously, but we’re
not really sure how–you know, what steps are going to be taken in the
financial system.

Mr. BUFFETT: Well, if I’ve got just a minute, I’ll back up a little. In
the 19th century you had at least six huge financial panics. They
were–and they caused in many cases by people losing confidence in
banks. So if somebody lost confidence in a bank in Omaha they got in a
line and as soon as somebody got in the line at the First National there
was a line at the Second National and so on. We learn time after
time–and they called them panics. The reason they called them panics
was because if you went to the bank and couldn’t get your money out you
panicked. And that same situation will continue to exist forever.
People, if they’ve got their money someplace and they get worried about
it they want to get it out fast and if they see other people wanting to
get it out, they want to do the same thing. So along came the 20th
century. We put in the Fed and we thought that would calm down people.
But when the ’30s came along, we recognised that without faith in the
banking system this economy was never going to get well. So we formed
the FDIC. Now, this is an interesting group of pages here. This has 3600
banks that the FDIC has assisted. Three thousand six hundred. There’s
only about 7,000 banks in the United States, another 1400 savings
institutions. No depositor of an insured deposit has ever lost a penny
since 1934. It was a huge factor in making this economy work to be one
of the greatest–well, the greatest economy that’s ever existed.
30-six hundred times the FDIC has come in. In the last year, they
have moved, I think, something close to 8 per cent of the deposits in the
United States. It hasn’t cost the taxpayer one dime, no depositor has
lost one dime. Now, what the American people have to be sure of is that
when organisations as big as the ones that have been in the news, like a

QUICK: Right.

Mr. BUFFETT: …where people know the FDIC can’t come over and move it
to the Second National Bank of Omaha or something overnight, they have
to be sure that all deposits, really, all debt liabilities of Citigroup
are going be met. There’s–and the truth is we’re going to do that.
People say they’re too big to fail, but you really need somebody that’s
totally authoritative who can say, ‘Just forget about the problems of
ever worrying about having your money or actually a debt instrument of a
bank.’ It’s too important that–to be left ambiguous on that subject.
And all of the–the FDIC’s raising more money now. But the FDIC will
take care of banks. They talk about nationalizing banks, they
nationalized for a nanosecond 20 banks this year, roughly 20 last year.
They moved it overnight, it’s all working fine. Nobody loses a dime. And
people have to feel that way about the entire banking system. And if
they don’t, we will have–you’ll have more articles like the one you
talked about in the Journal.

QUICK: Yesterday, Senator Richard Shelby and Senator John McCain both
made comments on the morning news programs and said things to the extent
that they should let some of these banks fail. “Close them down, get
them out of the business. If they’re dead they ought to be buried,”
Shelby was commenting.

Mr. BUFFETT: Here’s 3600. Not all of these got–but overwhelmingly these
did die and get buried. And we have had–we had one over the weekend in
Georgia, I believe. We had about 20 this year, we had 20 last year. The
peak year we had over 500 and the country went on fine because they
didn’t panic about banks. So there’s no question that a bank that’s
going to go broke should be allowed to go broke. You know, the thing you
have to make sure of is that the people that gave their money to that
bank–the shareholders can get wiped out. The shareholders have gotten
wiped out of thousands of banks over the years. That–but…

QUICK: Shelby also said those Citi has also been–has always been a
problem child. Can you do that with a bank the size of Citigroup?

Mr. BUFFETT: Well, Citi is–Citi’s probably going to keep shrinking, but
in the end nobody should be worried about having their money in Citi. On
the other hand, there’s really no moral hazard to that. When your stock
goes from $50 to $1, I don’t think you create way more moral hazard than
when it goes from $50 to zero. I mean, you know, we have a system that
penalizes enormously the shareholders of banks where the management
screw up. But we have to make it very clear, you know, no Fed-speak type
stuff or anything. We have to make it very clear that people are not
going to lose money. That doesn’t say they’re not going to fail. We’re
going–we’re going to have–we’ll have more pages of this stuff as we go
along. It’s the nature. But we provided for it.

QUICK: All right. And when we return, we will have much more from our
viewers who are squawking about this this morning as well. A lot of
questions out there, Warren is listening. Up next, he’s going to be
fielding your e-mail questions live. Write in. The address again is
[email protected]

QUICK: Welcome back to this special edition of SQUAWK BOX. We are live
at the Nebraska Furniture Mart with Warren Buffett and we’ve been
getting thousands and thousands of e-mails from our viewers. Warren,
we’d like to start with one that echoes a theme we heard again and
again. This comes from Terry in San Antonio, Texas, who asks, “Will
everything be all right?”

Mr. BUFFETT: Everything will be all right. We do have the greatest
economic machine that man has ever created, I believe. We started with
four million people back in 1790 and look where we’ve come and it wasn’t
because we were smarter than other people, it wasn’t because our land
was more fertile or we had more minerals or our climate was more
favourable. We had a system that worked. It unleashed the human
potential. Didn’t work every year, we had six panics in the 19th
century, in the 20th century we had the Great Depression and World Wars,
all kinds of things. But we have a system, largely free market, rule of
law, equality of opportunity, all of those things that cause the
potential of humans to get unleashed, and we’re far from done. So I
think your kids will live better than mine, your grandchildren will live
better than your kids. There’s no question about that. But the machine
gets gummed up from time to time and it’s–if you take the bulk of those
centuries, probably 15 years were bad years, but we go forward.

QUICK: Which brings us to another question. A lot of people have been
trying to figure out is this different from what we saw back in the
Great Depression. I’m going to jump ahead to one from Dan from Shohola,
Pennsylvania, who asks a question very pointedly about this. “How is the
market better off today than when we were in the 1929 to 1933 period?”

Mr. BUFFETT: Well, we certainly–it’s different. I mean, there’s a lot
of similarities between all recessions or in this case depressions or
call them panics like they did back in the 19th century, and there’s
always differences. One key similarity is that there was a paralysis of
confidence in banks and–which is silly now because of the FDIC. I mean,
we–but if you went back, my dad, on August 15th, 1931, worked at a bank
and he went there and it was closed and he had no job and he had his
savings–small savings in there. I mean, if you don’t trust where you
have your money, the world stops. And they recognised that, but it was a
little belatedly. They didn’t put in deposit insurance until it was
started in 1934 in the Glass-Steagall Act. We have a system that’s far
better organised to deal with that. The trouble is that a lot of people
don’t believe in the system. It needs to be clarified. Actually, the
head of the New York Fed, Mr. Dudley, on Friday, you can go to their Web
site and read it, he describes it perfectly. But nobody’s going to
listen to Mr. Dudley very much throughout the United States. The people
coming to Furniture Mart today don’t know who he is and they’re not
going to go to his Web site. You really need–you need the president of
the United States enunciating it.

QUICK: Enunciating it. It seems like Barack Obama talks pretty
frequently about what he sees, what he’d like to have happen. What’s
wrong with the message that he’s put out to this point?

Mr. BUFFETT: Well, I don’t think there’s anything wrong with the message
at all and I think he’s–he speak wonderfully, but I think–and I think
there should be–there’s a necessity that Congress takes the attitude
that this is a war and that he is the commander and chief and that–and
that a lot of the normal things that go on in Washington are really
inappropriate in this setting. But I think–I think basically that it
has to be as clear as possibly can be made, and I think only the
president can do it, that no one, and, you know, the FDIC limit is
$250,000, but I think–I think absolutely that no one should be worried
about having their money in a bank in the United States or actually
owning their debt.

QUICK: OK. You talk about how this was an economic Pearl Harbor. Dan
from Spring Lake Heights in New Jersey writes in, he wants to know was
our financial system just hours, days away from collapse?

Mr. BUFFETT: In September, I think it was. If there was a week where 200
billion, as I remember, in the first three days or so poured out of the
money market funds, which had about 3 trillion in them, the money was
just gushing out when Reserve broke the buck. That meant that the
commercial paper market was disappearing. You know, the blood was being
drained from the American economic body and we had some very prompt,
wise, action. Chairman Bernanke, the Fed, I mean, they stepped in and
said the commercial paper market is going to work. That made a huge
difference. People came in and said the money market funds, you know,
you weren’t going to lose money in money market funds. They said the
same thing about money market funds we should now say about the whole
banking system. And actually, we’ve said it in various ways. If you read
that Federal Reserve New York chairman speech, it says it, but it
doesn’t say it the way the American people will get it. The president of
the United States has to say it very clearly that you just don’t have to
worry about that.


KERNEN: Yeah, thanks. Returning for one second, Warren, you know, when
you speak, the wires just start hitting. I’m going to read two of them
to you. One is “Buffett says that the parties need to unite behind
Obama.” Then the next one is, “Dems should–Buffett says that the
Democrats should keep pet projects out of the economic rescue efforts.”
It just seems like it’s nice to say we all need to get along, but we’re
right back where we started. Who’s more at fault here? Is it 50/50?

Mr. BUFFETT: Well…

KERNEN: Did the Dems put too much in or is it just more partisanship
from the Republicans?

Mr. BUFFETT: Well, I have–I have taken a vow not to point fingers at
anybody. I have taken a few–I have taken a few swipes in the past. I
will just say that patriotic Democrats, patriotic Americans will realise
that this is a war and if they didn’t realise it immediately, I can
understand it. It’s not–it’s not as dramatic as a physical war where
the news comes over and you know you’re under attack. But it is–it is
virtually as serious and I think that once the degree of that
seriousness becomes apparent to both parties, I think they will–I think
overwhelmingly they will behave well. But that does mean that the
Democrats have to behave just as well as the–you can’t ask the
Republicans to cooperate in the spirit of this and then at the same time
try and steamroll them on a whole bunch of other things. You ought to
agree that this is the job to get done and when we get done, that
doesn’t mean you don’t do anything else in government. But in terms of
the contentious things, just let them wait until we get the economy
working. Because if we don’t get the economy working…


Mr. BUFFETT: …just forget about the other things.

KERNEN: There’s the rub. There’s the rub, though, Warren. You know,
there’s where we need details on what is absolutely essential and what
isn’t. And that’s where the contentiousness comes in, unfortunately.
We–can you just go down…

Mr. BUFFETT: Well…

KERNEN: Can you go down the list of things and say we need this, we
don’t need this, we need this, we don’t need this, we need this and then
we can send it to…

Mr. BUFFETT: Right.

KERNEN: We can send it to Washington so I can say Warren Buffett says

Mr. BUFFETT: We need clarity on the financial system, on exact–on what
will be done. And bank–incidentally, regulators hate that. When I ran
Salomon, I told everybody, don’t ever say we’re too big to fail. I mean,
it’s like waving about 12 red flags in front of a bull to say that to a
regulator. He doesn’t want to be told he doesn’t have any choice. So
it’s a–it’s a phrase they hate to use. I can understand that. But the
answer is, the American banking system, overall, is too big to fail and
you have to apply that. And incidentally, we have quasi-banks that have
very large liabilities and where they would impact the system
dramatically if left alone. It may be unfortunate we have them, it may
be that we need corrective legislation so it doesn’t come up again, but
we have to deal with the situation we have now. And frankly, that was
recognised in AIG. I mean, everybody hates, you know, what they had to
do in that, but the problems they would’ve had if they just said, ‘Well,
this isn’t a bank and the hell with them, they made their mistakes,’
that’s crazy. We have to deal with all large quasi-financial
institutions as well as all of the banks and people can’t be worried
about them and we can’t have a contagion like we almost had in
September. I mean, the world did come almost to a stop in September.

QUICK: One person wrote in and this e-mail is one we had prepared for
later, but somebody asked about Glass-Steagall. Should it be brought

Mr. BUFFETT: Well, I think there–you need legislation. I mean, whether
it’s exactly Glass-Steagall. Glass-Steagall brought in the FDIC. It was
a wonderful thing. We need banks to get back to banking. I mean, we have
learned that handing these people, you know, exotic instruments and all
kinds of ability to do things off balance sheet and this desire to
improve your earnings a little every quarter, you can’t run a financial
institution and show nice, smooth growth and earnings. One way or
another, you’re going to cheat. And there was a lot of that that went on
and we need–we need banks to get back to banking. But we need to get
through this situation. We should not be giving lectures to people. And
incidentally, the one thing that’s very important now is banks–and this
may come as a surprise to you. Banking has never been better in one
sense. I mean, the banks are getting their money very cheaply, deposits
are coming in, spreads have never been wider, all the new business
they’re doing is terrific. They will earn their way out of it, in most
cases, overwhelming number of cases. And they should not be spooked by
the idea they’re going to have to issue tons of stock at some very low
price under the circumstances where the very actions of–that that may
be coming keep pushing down the price. So that’s spooking, you know,
people in the banking business. But the banks can earn their way out of
this. I mean, the average cost of funds for Wells Fargo, for example,
the fourth quarter last year, was 1.44 per cent. I can earn money with
money at 1.44 per cent. I mean, it’s cheap. It’s abundant and the spreads
are terrific.

QUICK: But Warren, you say that as a way of reassuring shareholders,
people who should be looking at the financial system, people who are
worried about it. But how do you say that without stoking populist
anger, that the banks are making money hand over fist? Why should we
keep helping them out?

Mr. BUFFETT: Yeah. Well, the ship builders made money during World War
II. I mean, you know, I–nobody went around saying Henry Kaiser’s making
too much money because he’s turning out all these ships, or
Curtiss-Wright’s making too much money because they’re turning out
plane. They did put in excess profits taxes and all that thing. That was
fine. But the focus was on what do we need to do? And if that’s kept in
mind and Joe asked me about these comments, I am–I am going to take no
shots at anybody. It just isn’t important. The important thing is we do
the right thing going forward.

QUICK: All right. Let’s hold that thought, and Joe, we’ll be back in
just a moment with more.

KERNEN: All right, good.


KERNEN: Thanks, Beck. We’re going to have more on Merck Schering-Plough
merger. We’ll get a price check on Merck. We now have an indication,
it’s a little bit lower. Schering-Plough, of course, higher. But you get
to watch us ask guest questions every morning. Today, it’s your turn.
Ask Warren.

KERNEN: Good morning, and welcome back to SQUAWK BOX here on CNBC. I’m
Joe Kernen along with Becky Quick, who is not in studio. She’s in Omaha
this morning for a very special edition of SQUAWK BOX. She’s with
legendary investor Warren Buffett, and he’s actually answering your
e-mails. How often do you get to do this, Beck?

QUICK: Yeah, not often enough. We do have thousands of e-mails that have
been coming in, Warren, so we’re going to ask you some of these e-mails
just right off the bat. There have been a lot of concerns about what’s
happened with the stock market. We’ve also heard about some major scams,
and that has shaken people’s confidence. One investor wrote in–his name
is Bruce, he’s from Cincinnati, Ohio–and he says, “How do we know that
you are not another Bernie Madoff?”

Mr. BUFFETT: Well, that’s a good question. I would say this. I–it is a
problem with investment advisers. I mean, it–there are going to be a
certain number of crooks in the world. And sometimes they’re
smooth-talking, and the best ones are the ones that kind of don’t look
like crooks. So I would say I’m saving up for my big score, if I’m doing
it, because I’ve been doing this for a long, long time. I haven’t run
off yet, you know, to South America. But it is a problem who you put
your trust in.

QUICK: Yeah. And on a serious note, there are people who look at the
stock market and wonder how do they know the whole thing’s not a Ponzi

Mr. BUFFETT: Well, the whole thing’s not a Ponzi scheme.

QUICK: What–how do they know who to trust?

Mr. BUFFETT: We’re talking about, you know–we’re talking about American
businesses that employ, just the ones on the stock market, tens and tens
and tens of millions of people. They’re real companies. Nebraska
Furniture Mart will do 400 million in business this year. Owning–you’ve
got a choice in this world. You can own some real estate directly, you
can own a farm directly, you can own apartment house, you can have your
money in a savings account, you can have your money in government bonds,
you can have it in American business. American business has been a very,
very good place overall. People have made mistakes on individual stocks.
But in the 20th century, the Dow went from 66 to 11,000, you know, 400.
And we had all kinds of problems during that period. Business works
overall. It doesn’t work every day or every week or every month, and
sometimes it really gets gummed up. And then you need government
invention sometimes to get the machines back working smoothly. But the
machine works.

KERNEN: Warren…

Mr. BUFFETT: And equities, over time, are the way to do it.

KERNEN: Warren, do you think that–you made a couple of points just now,
and one, I think, is that you can’t catch–regulations can’t necessarily
catch every one of these guys. And I just thought it was funny, because
you said that the guy would be very smooth-talking and he won’t look
like a crook. And I was looking at you, thinking, ‘Wow, you’re very
smooth and you don’t look like’–and I was thinking, ‘Wow, he said’–but
no, you see what I’m saying? You can’t use–you can’t use regulations…


KERNEN: …necessarily. And do you worry that in this environment that,
once again, we’re going to overshoot?

Mr. BUFFETT: Well, I think that’s–we’re going to overshoot in some
ways. But we need–we need to shoot anyway.


Mr. BUFFETT: And, you know, and my partner Charlie Munger says we will
get conned some day by a guy that goes to work on the bus and carries a
little lunch sack. We’ll never–the guy with the suede shoes and all
that will not take us. But crooks do come in different–in different
forms and, you know, you’re protected with CPIC if you’ve got your
securities with a brokerage firm, up to an extent. I think that for the
duration you ought to be–I think you ought to be protected for all
deposits at all banks. I mean, I just think that’s a move to take, just
like we needed to do it for $2500 in 1934. We can’t have people worried
basically about banks. And we–and–but, you know, overwhelmingly people
are honest, but you should guard against the one that’s–that isn’t. I
mean, you should–you should–you should have your own possession of
your own security. I mean, that’s one good way to do it.

KERNEN: Mm-hmm.

Mr. BUFFETT: I still–I still have a safety deposit box with my
securities in it. There’s only one or two securities, just a few
securities in it. But we’ll always have crooks.

QUICK: You know, Warren, right now the Dow is sitting just above 6600,
6626. Five months ago you wrote an opinion piece for The New York Times
where you told people–or least the headline said, “Buy American. I Am.”

Mr. BUFFETT: Yeah.

QUICK: People now look at that and think, OK, market’s come down
significantly since then. Do you wish that you’d held off on writing
that op-ed?

(Graphic on screen)

The New York Times

The financial world is a mess, both in the United States and abroad. Its
problems, moreover, have been leaking into the general economy, and the
leaks are now turning into a gusher. In the near term, unemployment will
rise, business activity will falter and headlines will continue to be
scary. So… I’ve been buying American stocks.

Mr. BUFFETT: Well, I wish I could pick the bottom, but I didn’t write
the headline.

QUICK: Yeah.

Mr. BUFFETT: I’m responsible for everything but the headlines. And
within the body of that article I said things are–I started off saying
things are a mess and they’re going to get worse in the economy and all
of that. But I did say–and I said I can’t predict the stock market. I
don’t know the bottom. I mean, if I knew the bottom, you know, I
wouldn’t have to look up 10-Ks and do all that stuff, I’d just buy the
S&P 500 at the bottoms . So I have no idea what the stock market’s going
to do tomorrow or next week or next month or next year. And I actually
said it twice in the article, and the editor said, ‘You’re not supposed
to say things twice.’ I said, ‘I want to say this twice.’ But what I did
say, and I’d say it absolutely today, is that you will–over a10-year
period you will do considerably better owning a group of equities and
don’t–not just one stock, but a group of equities than you will either
owning short-term Treasuries and rolling them, in which case you get
virtually nothing, or owning a 10-year Treasury that gets a few per cent.

(Graphic on screen)

The New York Times

A simple rule dictates my buying: Be fearful when others are greedy, and
be greedy when others are fearful. Let me be clear on one point: I can’t
predict the short-term movements of the stock market. I haven’t the
faintest idea as to whether stocks will be higher or lower a month–or a
year–from now. What is likely, however, is that the market will move
higher, perhaps substantially so, well before either sentiment or the
economy turns up. So if you wait for the robins, spring will be over.

Warren Buffett Op-Ed Oct. 17, 2008

Mr. BUFFETT: I mean, equities will do better than that. I don’t know
whether they’ll do better than that over a year. And I didn’t know then,
and that’s been proven. But that’s not my game. And, overall, equities
are going to do far better than US government bonds at these prices. The
US government bond is guaranteed to lose purchasing power. I mean,
it–there’s no way we follow the policies we’re following without money
becoming worth less over time. That’s been true of governments every
place, you know, forever. So I stand by the article; I just wish I’d run
it a few months later.

QUICK: Well, they’re–a very smart person asked me, they said you knew
that the economy was going to get worse.

Mr. BUFFETT: Sure.

QUICK: So why did you make the major investments you made in a General
Electric, in a Goldman Sachs at the time that you did instead of
waiting? Why buy then?

Mr. BUFFETT: Well, both–in those cases, I got 10 per cent preferred that
I don’t think I could get now. So, I mean, actually–I don’t think
Goldman would issue me a 10 per cent preferred now. Although they–if
they did and there were warrants attached, the warrants would be
cheaper. But that was a time when both of those companies wanted money
immediately and we could structure a preferred that was attractive. But
the fact that business is going to get worse does not mean you should
wait to buy stocks. I mean, if…

KERNEN: But, Warren, I…

Mr. BUFFETT: It doesn’t–it doesn’t–go ahead, Joe. I’m sorry.

KERNEN: I was thinking about, you know, you did and that was the
attractiveness, I guess, the 10 per cent yield. But I think a lot of your
long-term–your long-term holdings–for example, American Express you
can now pick up almost for single digits.

Mr. BUFFETT: Right.

KERNEN: Wells Fargo, one of your favourites, is single digits, 8.60.
Goldman Sachs, you liked it, you said it’s going to be around; GE, you
like it, you say it’s going to be–I can’t remember, maybe 100 years or
it’s going to be a great company. That’s at $7. It would seem to me that
maybe by the end of this quarter we’re going to hear that you were
buying a lot of these things.

Mr. BUFFETT: Well, I’m glad you know, Joe, because…

KERNEN: But if you liked them–if you like these things and you’ve held
American Express for $50 or whatever for a long time, that would give us
a lot of confidence if you saw it at 10 and decided I’m going to–I’m
going to buy a lot more here and just lower my average price.

Mr. BUFFETT: Yeah. American Express is a special case, Joe, because it’s
a–it has become a bank holding company. And if you own over–we own
over 10 per cent of American Express. If you own over 10 per cent of
it–if you own over 9.9 something per cent of a bank holding company, you
need the permission, I believe, of the Federal Reserve to buy another
share. So they–they’re becoming a bank holding company I believe. As I
understand the law, it precludes us buying another share of that because
we are at that percentage already.

(Graphic on screen)

Berkshire Hathaway Investment

As of 12/31/08

Am. Express     151,610,700 shares

Coca-Cola Co. 200,000,000 shares

ConocoPhillips   84,896,273 shares

Kraft Foods     130,272,500 shares

Source: Berkshire Hathaway Annual Report


Mr. BUFFETT: But I would–American Express, for example, you know, it’s
very clear that American Express’ losses in 2009 on their receivables
will be, you know, considerably higher than last year. And their
earnings will suffer to some degree accordingly. But that doesn’t mean
that American Express isn’t a hell of a buy at $10. American Express is
going to be around forever. They’ve got the cream of cardholders.
Unfortunately, they have some cardholders that aren’t the cream, too.

KERNEN: But you’re not–you’re not a 10 per cent in GE, I don’t think,

Mr. BUFFETT: No. No, I–and–no. And we–but we bought the preferred of
GE. You know, we–there are things I like to buy, but I also want to be
absolutely sure–I mean, my job is to be sure that Berkshire does not
need the help of anybody in getting through the toughest of times. So we
keep a lot of cash. But I don’t like to keep more cash than’s necessary,
but I regard necessary as always way more than other people regard as
necessary because I always think in terms of worst cases.

QUICK: In the past, you’ve said $10 billion you like to keep around. Is
that still there?

Mr. BUFFETT: Well, $10 billion is an absolute minimum. So if I’m
going–I’m going to say $10 billion is a minimum, I always have to have
quite a bit more than that to be sure that I don’t go below that.
Because we could have a hurricane tomorrow or something of the sort in
our insurance business or, you know, who knows? So I leave–I leave a
cushion above that.

QUICK: Is the cushion bigger than it used to be, or is…


QUICK: …this the same as always?

Mr. BUFFETT: The cushion–what is–what has changed is that we will do
less cat insure–catastrophe insurance business this year than we would
have done in a year when we had way–even way more cash. I look in–you
know, I look, I say to myself if there’s a 9.0 earthquake in Los Angeles
or San Francisco or the Pacific Northwest or something, I want to be
prepared to have a lot of money afterwards. And, you know, it–I have to
err on the side of caution. But that doesn’t mean I go into a cave
either. And when we got the chance to buy, we did the Wrigley deal, we
did GE, we did–we did–we did Goldman, a lot of money went out then. In
fact, when we did the GE deal I actually simultaneously made a deal with
a base price on selling a couple billion dollars’ worth of J&J. I didn’t
want to sell J&J. I mean, I like J&J. But I just, you know, I didn’t–I
didn’t want to–I didn’t want to commit that much money without having a
couple billion coming in at the same time. And that’s my job, though, is
to be–I don’t want–we can’t depend on anybody.

QUICK: There’s a question that came in from Kevin in Tifton, Georgia. He
says, “I keep hearing people like Doug Kass say that your style of buy
and hold investing is dead. Do you think that’s true?”

Mr. BUFFETT: Well, it depends what you buy and hold. It’s–if you buy
the right businesses at the right price–you know, we own 70 businesses.
We own See’s Candy.

QUICK: Right.

Mr. BUFFETT: So we have bought and hold See’s Candy since 1972. It’s a
very good business. Now, does that mean that if it’s stock was quoted
every day I couldn’t have danced in and out with 100 shares or 500
shares? But if you’re in the right business–Coca-Cola, 1886 or
something like that, you know. Per capita’s probably gone up of their
products virtually every year. So, if we own a good business–if some
another guy can buy one stock today, sell another–sell it tomorrow, buy
another stock–if you–he may be able to make more money doing that than
I can do with buy and hold. All I know is if I buy the right businesses,
I’ll do very well.

QUICK: All right. We will have more with Mr. Buffett in just a moment.
But, Joe, I know you have some of the other news of the morning as well.

KERNEN: Yes, Beck.

(Joe Kernen reports on Merck/Schering-Plough merger)

KERNEN: Comments, questions for Warren Buffett, e-mail us here at
[email protected] and we will have more SQUAWK BOX right after the

KERNEN: That’s weird, North Carolina. Welcome back to this special
edition of SQUAWK BOX on CNBC. Becky Quick is in Omaha, Nebraska, this
morning with legendary investor Warren Buffett. Did you know there was
gold in Charlotte, North Carolina, Beck? We are–we are answering


KERNEN: We are answering your e-mails, you can send–I was thinking,
like, Colorado somewhere. All these…

QUICK: Yeah, that’d make more sense.

KERNEN: …the–but Charlotte. Charlotte.

QUICK: Out where Carl is.

KERNEN: Yeah, all right.

QUICK: Yeah.

KERNEN: Anyway, send them to warren at cnbc.com. We have to go
immediately, Becky, so let’s get to some more questions.

QUICK: OK, let’s get to some more questions right now. Joe’s right, we
have had thousands that have been coming in, Warren, so we’d like to get
you back to one from Adam in Springfield, Virginia. He writes and he
wants to know, “If you could take back one investment you’ve made in the
last year, what would it be and why?”

Mr. BUFFETT: Well, there’d be quite a few in terms–well, I mentioned in
the annual report that, you know, I bought ConocoPhillips when oil was
selling well above 100, and I was wrong about oil and therefore that
made me wrong about that stock big time. I bought a couple of–smaller,
but I bought a couple stocks in the–stocks in a couple banks in
Ireland. I did not do my homework sufficiently on that, and I was just
dead wrong. So I make plenty of mistakes. The interesting thing is–and
I’ll make plenty more mistakes, too. That’s part of the game. You just
got to make sure that the right things overcome the wrong ones.

QUICK: We’re trying to focus this hour on your investment strategy. And
Doug Kass of Seabreeze Partners has written in in the past, he’s been
critical of your investment style recently, and he had a question for
you as well. He says, “Mr. Buffett, your long-held investment philosophy
has been importantly based on one, successfully identifying companies
whose business franchises were protected by moats, and two, holding–a
holding period of forever. So do you think the moats of your financial
holdings have been flooded, and in light of a business world that’s now
changing more rapidly than the past, do you plan to alter your holding
period of forever to a lesser period of time?”

Mr. BUFFETT: Yeah, well, I–in terms of our businesses, the ones we buy,
like See’s Candy or those, we really do plan to hold them forever. I
mean, our stocks we plan to hold a very long time. Washington Post stock
we’ve held since 1973, I believe, and Coke’s been long time. But overall
I like to buy them with the idea of owning forever. And the quotes don’t
make much difference. I own three things outside stocks. I own–I own–I
own a quarter of the baseball team here in town. I don’t get a quote on
it every day. I’ve had it 15 years. I own a farm near here, bought it 20
years–I don’t get a quote on it every day. I look to the performance of
the asset. Now, if I looked at the performance of Wells Fargo, we’ll
say, I see that, you know, in a couple years–and management doesn’t
have anything to do with what I’m saying here. I–these are not from
them. But I would expect $40 billion a year pre-provision income. And
under normal conditions I would expect maybe 10 to $12 billion a year of
losses. I mean, you lose money in banking, you just try not to lose too
much. So, you know, you get to very interesting figures. I mean, the
spreads are enormous on what they’re doing. They’re getting the money at
bargain rates. So I–if there were no quote on Wells Fargo and I just
owned it like I own my farm, I would look at the way the business is
developing, and I would say, you know, it’s–‘These are a couple of
tough years for losses in the banking business, but you expect a couple
tough years every now and then.’ And that the earning power is never–is
going to be greater by far than it’s ever been when you get all through
with it. The only worry in that is the government will force you to sell
shares at some terribly low price. And I hope they’re wise enough not to
do that. That would–that’s what–that’s what’s spooking the banking
market to a big extent.

QUICK: You worry about that, too.

Mr. BUFFETT: Yeah, sure.

QUICK: That’s why you’d like some clarity out of Washington on what
they’re planning to do…

Mr. BUFFETT: I–that’s one of the reasons. I particular–I think clarity
is a good thing for the whole country on a–on a lot of–any issue to do
with people’s money, clarity’s important. People want to be clear about
their money. But I would say that if–if we own US Bancorp, which we do,
or Wells Fargo, their prospects three years out have been better than

QUICK: Mm-hmm.

Mr. BUFFETT: And if they weren’t quoted, you know, people would feel
fine owning the business and I think they would say that, you know,
they’re going to lose more–way more money than usual that–maybe this
year and the next year, but they’ve built the provisions and all that
sort of thing. They’re going to come out fine unless they have to issue
a ton more shares.

QUICK: But the back and forth in the administration right now has been
which plan to follow. There’s been a lot of confusion. There was this
idea that the TARP money was going to be used to take the toxic assets
off of their hands.

Mr. BUFFETT: Sure.

QUICK: There was the idea that maybe they should just be buying shares
outright. There’s the idea of nationalization out there. What’s the
right answer?

Mr. BUFFETT: The right answer–the right answer for me is the president
to clarify things as only he can, because you have heard so many
different things. And, you know, they’re doing their best to
communicate, but the person that the people of the United States gave
their trust to not that long ago was Barack Obama. He speaks very well.
He has–he is the commander in chief on this, and it has to be
clarified. Like I say, the head of the New York Fed gave a talk,
explained a lot of it, but nobody’s going to pay that much attention to
what he says. You need the president of the United States to make it
very clear. Because if people aren’t clear, they’re going to be
confused. And if they’re going to be confused, they are going to be
scared stiff. And that has to end.

QUICK: Does that–you make it sound almost like it doesn’t matter what
he says, as long as he picks one of those.

Mr. BUFFETT: Well, it matters…

QUICK: That’s–you’ve got to–you’ve got to be leaning one direction.

Mr. BUFFETT: It matters somewhat. But we know that the Battle of Midway
was the, you know, the important battle, you know, or that, you know, in
terms of when the Philippines fell, all the–I mean, you’ve got
to–you’ve got to assume that you need a commander in chief. They’ll be
intelligent, they’ve got the interests of the country at heart. And then
you can’t expect to agree with them on every point. And if you don’t,
you still get behind the effort.


KERNEN: Hey, Warren, you’re talking about some of the investments maybe
you regret. This wasn’t made last year, but your what was it, a sale of
puts, a long-term bet on the S&P that I think you have to mark at least
a little bit to market once in a while, and it’s up in the billions now.
Do you regret that? Is that going to work out in the future? How long do
you have now, where does the S&P have to end up?

Mr. BUFFETT: Well, the S&P has to end up 15 or 20 years from the time we
did the deals at the price at which we did them. Although, if the S&P
actually ends up, you know, 15 per cent below or so, we still break even
and we’ve had the use of the money for 15 or 20 years. So we’re holding
about $4.8 billion. The first one comes due in the latter part of 2019.
And obviously I would rather put those positions on now than having put
them on a few years ago. But if you–if you gave me the choice of not
having the positions at all, and not being able to put them on or
sticking with the positions we have, I would stick with the positions we
have. I think–I think we will–the odds are good we will make money.
And the thing I know for sure is we’ll hold almost $5 billion for
between 15 and 20 years in conjunction with it.


Mr. BUFFETT: So I like…

KERNEN: Those are derivatives. You don’t like derivatives, but you used
them in that case, right?

Mr. BUFFETT: I–well, we’ve used derivatives for many, many years. I
don’t think derivatives are evil, per se, I think they are dangerous.
I’ve always said they’re dangerous. I said they were financial weapons
of mass destruction. But uranium is dangerous, and I just went through a
nuclear electric plant about two weeks ago. Cars are dangerous.


Mr. BUFFETT: But I mean, every American wants to have one. You know,
the–a lot of things can be dangerous, but generally we regulate how
they’re used. I mean, there was a–there was some guard up there with a
machine gun on me, you know, when I was at the nuclear plant the other
day. So we use lots of things daily that are dangerous, but we generally
pay some attention to how they’re used.


Mr. BUFFETT: We tell the cars how fast they can go.

KERNEN: Yeah, yeah. Good. Well…

QUICK: David–go ahead, Joe.

KERNEN: Well, hopefully, Beck, we’ll have a chance to talk about, you
know, AIG and what we need to do…

QUICK: Mm-hmm.

KERNEN: …because to be able to, you know, to write that many insurance
contracts, Warren, and not put up any collateral, that’s got to be
something that regulators at this point, right? I mean, that is–that’s
why we’re in this mess right now.

Mr. BUFFETT: I wrote–I wrote Congressman Dingell in 1981 about it, when
they–you know, these are–they are dangerous.

QUICK: About AIG, or about derivatives in general?

Mr. BUFFETT: Oh, they were–it was–well, it was actually about trading
the S&P 500 and what–the dangers you get into when you allow people to
leverage up like crazy, which derivatives allow you to do. We put margin
requirements in in the United States after 1929. We said that ’29 was a
terrible crash, it was partly brought on by the stock market and that
was partly brought on by the fact that people were buying stocks with
very little down payments. So the United States Congress said to the
Fed, ‘You regulate this thing.’ That’s been 75 years ago. They still
regulate it, but derivatives enable people entirely to get around margin
regulations. They made them meaningless. And so we leveraged up the
system and we are now feeling the pain and the spread out of the pain to
people who had nothing to do with it from the deleveraging the system.
And it’s massive. So we do need–we need something new.

QUICK: Part of the reason AIG was able to do that was because its high
credit rating at that point.

Mr. BUFFETT: Absolutely. Yeah.

QUICK: You’re not suggesting necessarily they change the rules on how
much people have to put down based on their credit ratings, right?
Because you benefit from your AAA credit rating.

Mr. BUFFETT: Yeah. Although we benefit less these days than before. But
AIG had this AIG financial products. I–when I bought Gen Re, they had
something called GenRe financial products.

QUICK: Right.

Mr. BUFFETT: They had 23,800 contracts. Hell, I, you know, I couldn’t
understand 22,000 of them, probably. I spent–and I know I couldn’t get
my mind around it. You–that–and people recorded profit every–you
know, that section made a profit every year, supposedly, and the guy
that ran it made a lot of money and everything. You know, it probably
would have busted the company if they–if they’d kept it around.
Anything where you use the credit of a great institution to go out and
start doing all kinds of things that–enormous leverage gets you in
trouble. Citigroup could do SIVs because everybody trusted Citigroup,
you know, and nobody knew that, you know, all this stuff was off balance
sheet. It was a way of getting around capital requirements. You have to
watch people that had all big sums of money.

QUICK: OK. Well, we have a lot more to talk about this morning. In fact,
when we return on SQUAWK BOX we will be back inside the mind of one of
the greatest investors of all time. Of course, we’re talking about
Warren Buffett. He is here with us live for the entire program this
morning. He’s answering your e-mails. He’s giving us his thoughts on the
markets. And we will be back with more right after this.

KERNEN: Let’s get back to Becky Quick who’s live in Omaha this morning
with the legendary investor Warren Buffett. Becky:

QUICK: You know, Joe, one of the other big stories of the morning is
what’s been happening with the Big Three in Detroit. A lot of questions
there and President Obama’s car czars are meeting there today to try and
get a handle on whether or not they’re going to be loaning more money to
GM and to Chrysler. There were some comments made over the weekend,
Warren. Senator McCain, again, on the Sunday morning talk shows, talked
a little bit about GM and his opinion was to let GM go bankrupt. This is
a huge question. What would you do if you were in President Obama’s
shoes right now with GM?

Mr. BUFFETT: Can I use a lifeline? Phone a friend…

QUICK: Phone a friend at this point?

Mr. BUFFETT: …that’s a tough one. I mean, that is very tough.

QUICK: Yeah.

Mr. BUFFETT: But you have this situation where we have 250 million cars
and light trucks on the road. Year after year we produce maybe 15
million or something like that because there’s a lifetime to the 250
million, sort of a normal cycle. But we got down last month, you know, a
little over nine million. So you are in a terrible, terrible, terrible
period for the–for the carmakers every place. GM has a lot of–or the
auto industry, the domestic auto industry has a lot of legacy costs.
They did some dumb things in the past because they had a business model
in mind that doesn’t exist anymore. The union bargained for those
things, you know, they feel entitled to them, they made a deal, you
know, and they’ve got hundreds of thousands of retirees dependent on it
and all sorts of things. So you need a new business model somewhat. You
also need a recovery. It isn’t just the business model. And I would say
net I would come down on–if they modify the business model to adapt to
the reality of a 13 million car a year and we’ll do better than that in
the future in some years. If they adapt, have a business model that
works with that I would get them through this period. I would not expect
to have a business model that works at nine million units because it
isn’t going to work at nine million. On the other hand, we are going to
sell 13, 14, 15 million units a year sometime in the future.

QUICK: But you think you can get that business model, one that works
without going into bankruptcy?

Mr. BUFFETT: That’s the tough thing, and that’s the challenge of the
administration, the management and the unions working together. And I
understand–the present managements didn’t get us into this situation.
There’s no use getting mad at, you know, at the people now running the
Big Three. There’s no use getting mad at the union. They bargained for
what they’ve got and, you know, these people, they counted on it. It
won’t work going forward and there have to be modifications made and
people at all levels have to have a stake in that if–they should–they
should try to accomplish it outside of bankruptcy. I mean, the American
people do not need, you know, America’s sort of hometown industry going
into bankruptcy now. But I–they need a–they need a new business plan.
It shouldn’t have to be a business plan that works at nine or 10 or even
11 million units. It has to be a business plan that works at 13 million.
We’ll get back to that. It’s the same thing as in housing, Becky.

QUICK: Mm-hmm.

Mr. BUFFETT: You know, we have a million and a half too many houses
around now, you know. You own–you have household formation over here
creating demand for houses, and you have people building houses. For a
while we were building a million and three-quarters or something like
that and household formation was a million three, and two-thirds of the
people that form houses want to live in their own house so maybe you had
demand for a million, and guess what happened? We had too many houses.
Now we’ve got the housing construction down to 500,000 new permits or
something like that. We’re using up the million and a half units. But we
have to work our way out of it and we have to work our way out of the
car situation.

QUICK: Well, you bring–you bring up the housing situation. And Bob from
Seattle, Washington, wrote in. He’s got a question where he says, “Do
you believe that the American economy of the last 10 to 15 years has
been a house of cards? Won’t the cries for more lending and more
borrowing just rebuild that same house?”

Mr. BUFFETT: It was–it was not a house of cards, but it was an economy
that was benefiting from leverage–leveraging up.

QUICK: Right.

Mr. BUFFETT: And when you leverage up, it’s very pleasant. I mean, you
can build more houses than people are buying, you know, and–or the
natural demand is for and you’ll get people speculating in them and
you’ll get people lying in order to get into houses they can’t afford.
And so the percentage of people besides the American households that
lived in their own house went a little bit and it went up a little bit
because those people really didn’t have the income to do it. Now it has
to go down. But it was not a house of cards at all. I mean, we have an
economy that really works. We’re were in a store where a woman walked
out of Russia, you know, 90 years ago almost and she came to the United
States, saved $500–it took her 16 years to do it–this is the largest
home furnishing store in the United States, it does $400 million. Nobody
walked out of the United States to go to Russia and ended up with a $400
million store with $500. This woman couldn’t read or write, but she
worked within the American system. She gave better–people better deals,
she worked harder than anybody else, she was smart and she built an
enormous success that employs thousands of people. America works, and
America was–has been working the last 10 years, but we just did some
very dumb things in terms of leveraging up.

QUICK: You’re talking about Rose Blumkin who built the Nebraska
Furniture Market.

Mr. BUFFETT: Yeah, market–yeah. Nobody walks out of the United States
to go to Russia.

QUICK: Let’s talk a a little bit about the housing industry itself.
There are people who say this entire crisis started because of the
housing industry.

Mr. BUFFETT: I agree.

QUICK: David Paterson, the governor of New York, wrote an opinion piece
in The Wall Street Journal over the weekend, and he said, “The mortgage
plan that the president has proposed is the right one.” Do you agree
with that?

Mr. BUFFETT: Well, I don’t even know all the details, but I would say
that the administration ought to be willing to listen to very prompt
suggestions on ways to make it a little bit better. But–and I don’t
know that he even needs it, but I’m just saying they ought to be
open-minded about that. But they ought to have a plan. And the idea that
it benefits some people that maybe shouldn’t be benefited, you know, to
me that’s, again, like after Pearl Harbor saying it was the Navy’s fault
so the Army and the Marines and all aren’t going to join in and help,
and the American people shouldn’t do it because the Navy should stew in
their own juice or something like that. We need to get the housing
situation straightened out. Now the biggest–the big problem is we’ve
got about a million and a half too many houses sitting around now. And
the vacancy rate is up a couple percentage points on that and 2 per cent
of 80 million homes is a million six or something like that. We have to
work through that. And we will work through it, but we’ll work through
it–we can’t–we can’t create a lot more households. We can’t tell the
14 year olds to all get married and start having children so we can have
more households. So we got to–got to sort of work with the normal
demographics here. But we will have a million three hundred thousand
households for them. Nine hundred thousand of those will want to move
into their own houses netting everything out and we’ll have some housing
destroyed. So we can sop up the demand. We’re lucky we have population
growth. When Japan gets–got in trouble, they didn’t have population
growth. We have population growth. There’s going to be demand, there’s
going to be more houses in the United State five years from now than
now. There’ll be more in 10 years than five years. So we can sop it up.
But we can’t do it in a week or a month or a year. It just doesn’t
happen. We–and I think that having a mortgage plan somehow gets
payments for those who can make them down to a reasonable percentage of
their income, which is where it should have been in the first place, is
not crazy. I mean, we have an interest in solving that particular
problem. And we shouldn’t finger-point.

QUICK: Does that mean we’re not the next Japan? We’re not talking about
20 years of a stagnant market?

Mr. BUFFETT: Not 20 years at all, no.

QUICK: Are we talking about 10 years? What…

Mr. BUFFETT: Well, it just–it depends. Frankly, the best thing that
could happen–I’m in the brick business, I’m been in the carpet
business, I’m in all these businesses which are getting hurt by the lack
of new construction. But the lack of new construction is an important
ingredient to this. If you’ve got too many houses and you’ve got a
certain growth and demand–if demand is going to grow by X per year, and
if you…(unintelligible)…the next houses you’re going to–you’re
going to improve the situation and we–you got a choice. You can
either–you can either blow up a billion and a half houses or you can
create few houses than natural demand sops up. And I would say that, you
know, you can work your way out of it in a couple of years probably, two
to three years.

QUICK: Two to three years, which is very different than what…

Mr. BUFFETT: Don’t–well, it just depends how many are constructed. We

QUICK: Yeah.

Mr. BUFFETT: …the new housing starts have really gone down. I think
the last figure’s around 500,000 or something like that annual. And that
makes a big difference. That didn’t happen for a while. I mean, it
was–they had to slow down the machine.

QUICK: Joe, I’m sorry, did you want to a question in here?

KERNEN: Yeah, I want to go back to something Warren said quickly, Becky,
and that was that–and we don’t hear this enough–that in the past 10
years, Warren, you said that things basically did work in the economy.
That the free-market economy–we seem to look back now and think that
over the past 10 years that every step we made was a misstep that led to
this crisis where we are right now. And I know you weren’t a big fan of
the Bush tax cuts, but you can’t throw out the baby with the bathwater,
can you, in terms of–maybe there needed to be more regulation, but
overall why are we in this mess right now?

Mr. BUFFETT: Well, we’re–the biggest reason we’re in the mess, you
know, is we did leverage up the country and we essentially made a huge
bet on housing, but that led to all kinds of other instruments. And–but
net over the 10 years a lot of things were–happened that were right and
over the next 10 years a lot of things will happen that are right.
The–this machine is gummed up right now and it’s gummed up by a lack of
confidence and that makes people scared and, I mean, it feeds back and
forth and it’s a vicious cycle.


Mr. BUFFETT: That will be broken–that will be broken. I’ll guarantee
it’ll be broken, Joe. I think it’ll just be broken…

KERNEN: Doesn’t…

Mr. BUFFETT: …sooner if…

KERNEN: Doesn’t the freedom inherent in a free market give you enough
rope to hang yourself a lot of times? And maybe we can look at it that
way? I mean, how do we make sure that greed–greed has been involved
with every bubble that we’ve had over the past 500 years and we’ve had a
lot of them. And if…


KERNEN: …you’re in a free market, you’re going to have enough rope to
hang yourself, no?

Mr. BUFFETT: Yeah. Well, you–yeah, you want me to have enough free rope
to hang myself, you just don’t want me to have enough rope to hang the
whole country. And…

KERNEN: Right.

Mr. BUFFETT: …we’ll always–I mean, failure is part of the American
system. But you don’t want to create conditions where failure
becomes–of such large institutions becomes contagious, produces fear,
all of those sort of things. But that’ll happen occasionally. There’s no
question about it. Free markets overshoot, they do some things that are
wrong. They work better than anything else, but they have to–in certain
arenas they have to be looked at because there are areas where
people–where what you–what you do that’s stupid can be contagious
throughout an economy.


Mr. BUFFETT: You don’t–you don’t–you don’t want–I have no desire to
leave the market system at all. But you do need government and you
particularly need government at a time like this.

KERNEN: Hm. All right. All right, Beck, we go to–I guess it’s stocks to
watch is sponsor, I think. Anyway, we got to–we got to take a break.
Coming up, stocks to watch and maybe the animal orchestra, I don’t know,
maybe not on Buffett day. A merger Monday and more of your e-mails to
the oracle. Squawk Box will be right back

KERNEN: So we’ve got that going for us today, Becky, and we’ve got the

QUICK: That’s right, we do. We also have questions from lots and lots of
viewers so we’d like to get back to some of those e-mails. They’ve been
coming in all morning long. And Warren, I’d like to start with one right
now from Tom in Vero Beach, Florida. His question is, “Given that
Berkshire Hathaway primarily buys stocks, if you felt the Dow was going
to slide to 2,000 would you state your thoughts publicly, or would you
feel an obligation to keep those thoughts private?”

Mr. BUFFETT: I would never have a feeling that the Dow is going to go to
2,000 or 12,000 or 4300 or 20,200. I don’t–I know over time it will go
higher. I mean, American business will be worth more over time. The
dollar will be worth less. They’ll be retained earnings that build up
values. There will be more people in this country and they’ll have more
buying power. Stocks will be worth more over time. I have no idea where
they’ll go in between. For all I know, that farm I bought, you know, 20
years ago, it may have bobbed around 8, you know, $1800 an acre, 1200, I
don’t even know anything about that. I just know that the farm, over
time, will produce 120 bushels of corn, you know, per acre, etc. So I’ve
never tried to predict stock prices.

QUICK: You know, it was interesting. I made a comment earlier that the
Dow was at 6626 and when I did, you made a comment about it, too.

Mr. BUFFETT: Yeah. When it was at 6626, at the start of 19–the last
century, 1900, it was at 66. So it’s gone up 100 for one. And we had the
Great Depression, two world wars, the flu epidemic, the nuclear bomb,
the cold war. I mean, you name it. At least 15 years in that 100 years
looked terrible and five or six of them looked, you know, almost
disastrous. And in the end, this system works extremely well. And–but
it doesn’t work well every day or every week or every month and there
are times when government needs to be a very big factor to make sure it
starts getting back on the tracks. But it will work. I will guarantee
you that the Dow will be a lot higher. I’ll have no idea about the
numbers or anything else, 10 or 20 years from now. I have no idea. You
know, 2,000, 8,000, they’re all numbers.

QUICK: A lot of viewers wrote in and had specific questions about your
investments. David wrote in and says, “You’ve committed financing for
Dow Chemical’s acquisition of Rohm and Haas Company. What are your
thought on the upcoming lawsuit and whether or not the deal should
continue to move forward?”

Mr. BUFFETT: Yeah. Well, I can’t comment on that. The lawsuit will
either happen or it won’t happen. I guess they’re going to decide pretty
soon on that. I mean, any deal that was made last summer, you know, like
they say in golf, every putt makes someone happy. But all of the sellers
are happy and all of the buyers are unhappy. And you know, the deal
would not be at the same terms now and incidentally, we committed to buy
$3 billion worth of preferred. That is not a good commitment. I mean,
it’s good in the sense that we’re going to do it, as I’ve told the CEO
of Dow, I said, you know, our 3 billion will be there if Ben Bernanke
runs off to South America with Paris Hilton. I mean, they’ll have the
money. I mean, but the–was that–is that a smart deal today? No. No.
But conditions have changed and conditions change for Dow and Rohm and
Haas in a huge way. And what looked like a deal that was–they liked at
Dow and that it could be financed reasonably well and the Kuwaitis were
going to enter into a partnership with Dow, all kinds of things. But the
world has changed like nobody ever believed it would and so obviously,
it’s not only, you know, not only not a good deal now, I mean, it may
not be a doable deal now. Our commitment, which was–looked smart at the
time, looks dumb at the present time. But that’s the way the world is.

QUICK: OK. One of the changes in the world has been what we’ve seen in
the treasury markets and K. Hart writes in and says, “If the much talked
about bubble in the Treasury market burst, would money market accounts,
which are exposed to Treasuries, be adversely affected?”

Mr. BUFFETT: No. The–you’ll always–you’ll get your dollar back, it
just won’t buy as much and if we get enough dollars out there and you
can go to a Web site and look at what is happening with M1 and M2, they
don’t talk about it anymore, but the–we are going–we are doing things
that are going to put a lot of inflationary pressure on at some later
date and we’re going to do more things like that and that’s the right
thing to do, actually. I wish we didn’t have to do it, but it’s the
right thing to do and–but in economics, you can never just do one
thing. I mean, if you do something, it has consequences and that’s why
they always say you never get a free lunch. But it’s better to have the
lunch we’re having now even if we pay later than have no lunch at all.

QUICK: All right. Brian from Santa Rosa, California, writes in. He says,
“I’m a 33-year-old lawyer who has never taken a business class in my
life. Nevertheless, am I crazy to think that many, if not most, blue
chip stocks at current valuations represent the opportunity of a

Mr. BUFFETT: Well, I don’t know if I would say the opportunity of a
lifetime, but I would say that most people who buy companies, believe
they’re well capitalised. You don’t want to buy somebody that’s
leveraged to the hilt in this situation because they may not to get to
play out their hand.

QUICK: Mm-hmm.

Mr. BUFFETT: But if you buy a cross section of good equities, generally
well capitalised companies, you’ll make money over 10 or 20 years. I
haven’t the faintest idea where you’ll be in 10 months, but it really
doesn’t make any difference. When I bought that farm, I have not gotten
a quote on it yet. I bought a quarter of interest in the Omaha Royals,
I’ve never got a quote on it. I look at the attendance figures, I look
at see if the billboards have ads on them and all that sort of thing,
but I took to the performance of the Omaha Royals or the farm to
determine whether I made a decent investment. That’s the way people
really ought to look at stocks. They have a hard time doing it because
they get these quotes thrown at them every day. Forget the quotes. Look
at the business.

QUICK: Although right now a lot of people are facing–focusing on those

Mr. BUFFETT: Sure.

QUICK: Richard from New York City writes in. He says, “In the annual
report for 2008, you say that ‘Now our book value far understates
Berkshire’s intrinsic value.'” He wants to know, “would you care to be
more specific how ‘far understates’ should be interpreted?” For example,
do you mean 30 per cent?

Mr. BUFFETT: Do we have a number? Yeah. Well, the answer is I won’t give
you a number, but I will tell you, for example, that here’s See’s Candy
that we bought in 1972 and we paid $25 million for it.

QUICK: Mm-hmm.

Mr. BUFFETT: It’s worth a lot more than 25 million. But in terms of
knowing numbers on different businesses, you know, Geico’s worth far
more than we paid for it, but others aren’t worth far more. On balance,
book value does understate intrinsic value, but I–who knows how much?

QUICK: OK. Harold from Williamsville, New York, writes in. He says, “You
said recently that Treasury Bonds and cash equivalents are going to have
very bad times in the not too distant future. Does that imply that you
like gold and silver and the equities underlying them?”

Mr. BUFFETT: No. It applies I like good businesses.

QUICK: Mm-hmm.

Mr. BUFFETT: You know, if the dollar becomes way–worth way less, we
will sell See’s Candy for more money. I mean, it won’t be more real
dollars, but we–if somebody’s willing to give up 15 minutes of their
labour or half to buy a pound of this or to buy six cans of this, they’ll
do the same thing and it won’t make any difference whether shark’s teeth
are being used for money, basically. So the best–well, the best assets
you can have during inflation is your abilities. I mean, because if
you’re the best doctor in town or the best lawyer in town or the best
broadcaster in town or whatever it may be, you will always command a
certain percentage of the resources of society. So your own talents are
the most important thing. But if you don’t have any talent like I do,
you try to buy into other people’s talents. And you know, this is the
best candy. This is the best soft drink, as far as I’m concerned, and it
will be that way 10 years from now. And whatever the value currency is,
we’ll get our share in that–in terms of that value at that time.

QUICK: You mentioned before when we were talking about the mortgage plan
that it may help some people that it shouldn’t.

Mr. BUFFETT: Of course.

QUICK: But that’s something we need to suck up and understand at this
point. But it does lead to other people who have questions about whether
they’re being penalised for doing the right thing. In fact, Bob and Lani
in Rapid City, South Dakota, write in. They say, “We are conservative
South Dakotans. We are now saving more, but the government wants us to
spend more. Are you ‘short’ or ‘long’ on our strategy to ‘pay all your
personal bills promptly and always live within your means’?”

Mr. BUFFETT: Well, I’ve always followed that myself, so I’m with them
100 per cent on that. But in terms of 100 per cent, I mean, you don’t want
to get behind the eight ball. I mean, if you are, you’ve got to work
your way out, but it’s always better. You know, Ben Franklin wrote that,
you know, hundreds of years ago, the–you know, earn a dollar, spend 99
cents, result happiness, you know. Earn 99 cents, spend a dollar, result
misery. And–but in terms of the inequities, if I were a–had been a
client of Bernie Madoff’s and fortunately I never heard of him, but
let’s say I was a client of Bernie Madoff’s. I’m in the middle of Lake
Michigan with him. We’re in a boat together. Bernie’s at the other end.
I’ve just lost all my net worth. I see this hole spring up at his end of
the boat. Am I supposed to cheer? No. I mean, in the end, you know, I
want to save Bernie, too. I mean, not because I really want to save him,
but I–you know, there is no way to divorce myself from what’s happening
on the other end of the boat. And this thing is covering–going to cover
the whole boat. There’s no question about it. So the people who have
behaved well are going to find themselves taking care, to some extent,
of the people who didn’t behave well.

QUICK: Right.

Mr. BUFFETT: And in Pearl Harbor, the Army, you know, undoubtedly was
not as responsible for those boats being in the harbor there all exposed
to an attack and kind of sleeping through it as the Navy. But does that
mean the Army holds back? No. You’ve got to be in there.

KERNEN: Hey, hey, Warren, Becky’s really, you know, she’s nice and
deferential to you and everything. I just want to let you know that
there are times she gets really mad because she’s been one of the people
that have paid her mortgage and she always points out she’s never bought
new bedroom furniture because she…

QUICK: Oh, stop already.

KERNEN: And you’re in a furniture store! You and Warren are…

Mr. BUFFETT: We’re not going to last–we’ve locked the doors, Joe.

KERNEN: You can…

Mr. BUFFETT: We’ve locked the doors, Joe. She is not getting out of here
until we clean her out.

KERNEN: Becky, tell Warren you’re mad that you’ve done all the right
things and all these other people are going to get bailed out.

QUICK: Oh. I’m not nearly as mad as is as many times you’ve complained
for me. But yes.

Mr. BUFFETT: There’s nothing wrong with being mad, Joe. It’s just you
can’t–there’s times when you’re made about something that you’ve got to
overcome the emotion because…

KERNEN: Give her a deal on a new bedroom set and then we won’t have to
hear it anymore. You’re in a furniture store.

Mr. BUFFETT: We give deals to everybody, even including guys named Joe

KERNEN: All right.

Mr. BUFFETT: We’ll open an account for you.

KERNEN: All right. Thank you.

QUICK: All right. We will have more coming up with Mr. Buffett. In fact,
coming up, we’re going to be talking about fixing the economy and
restoring confidence. We’re going to search for solutions to the one and
only–solutions for all these problems with the one and only Warren
Buffett. Plus, we have more of your e-mail questions for legendary
investors. Squawk Box will be right back.



Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.