After watching Warren Buffett on CNBC this morning, the one thought we kept coming back to was: he sounds cranky!
Sure, he has his folksy stammer.
But he seems upset at the government (over Wells Fargo’s forced recap), upset at Kraft (over Cadbury) and upset at bank CEOs, who have made the financial industry the enemy of regulators.
And while others put on a happy face about the rebounding economy, Buffett sternly insisted that he’s not getting the order flow to justify hiring.
Bonus: How Warren Buffett Really Makes His Investment Decisions
Warren Buffett’s Secrets To Success
Here’s the full transcript, courtesy of CNBC:
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BECKY QUICK: I DON’T KNOW HOW MUCH YOU HEARD OF THE WELLS FARGO (EARNINGS) NUMBERS THAT WE WERE JUST —
WARREN BUFFETT: I HEARD A LITTLE BIT.
QUICK: WHAT WAS YOUR IMMEDIATE TAKEAWAY, AND I KNOW ALL YOU HEARD IS —
BUFFETT: I DIDN’T GET THE EARNINGS AT ALL. BUT I GOT THE CHARGE-OFFS AT 5.4 BILLION. THAT’S EXACTLY WHAT I WOULD HAVE EXPECTED. I THINK THEY EXPECT THEM TO PEAK TOWARD THE END OF 2010, BUT THAT NUMBER IS EXACTLY WHAT I WOULD EXPECT.
QUICK: WHAT OTHER HEADLINES WOULD YOU LIKE US TO PULL UP? WHAT ELSE WOULD YOU BE INTERESTED IN HEARING ABOUT?
BUFFETT: WELL, MY GUESS IS THAT THE REVENUE AND ALL OF THAT IS MORE OR LESS LIKE I EXPECTED. I MEAN, WELLS, RIGHT STRAIGHT THROUGH THIS PERIOD HAS DONE PRETTY MUCH EXACTLY WHAT THEY SAID THEY WOULD DO AND THEY’VE MADE MONEY CONSISTENTLY THROUGH IT. THEY’VE RUN INTO MUCH LARGER LOSSES THAN ANYBODY ANTICIPATED THREE OR FOUR YEARS AGO BUT THEY CAN HANDLE THEM VERY EASILY. LAST YEAR WE TALKED ABOUT ‘EM HAVING 40 BILLION OF PRE-PROVISION INCOME IN 2009, AND YOU KNOW, THEY HAD IT, AND THAT EASILY HANDLES 20 BILLION, ROUGHLY, OF LOSSES.
QUICK: THEY ALSO ISSUED A LOT MORE SHARES THOUGH, TO PAY BACK THE GOVERNMENT. WHAT DID YOU THINK OF THAT?
BUFFETT: I DIDN’T LIKE IT. (LAUGHS.) NO, I MEAN, THE GOVERNMENT FORCED THEM TO ISSUE THE SHARES. THE GOVERNMENT’S DONE A LOT OF GOOD THINGS FOR THE ECONOMY AND NET I’M A BENEFICIARY AND BERKSHIRE HATHAWAY IS A BENEFICIARY OF THE THINGS OVERALL THEY’VE DONE. BUT THEY COST US REAL MONEY AT WELLS FARGO.
QUICK: BUT WAS IT THE RIGHT MOVE BY THE GOVERNMENT OR NOT?
BUFFETT: WELL, IT WAS THE RIGHT MOVE BY THE GOVERNMENT TO ENTER – TO SHOW THAT THEY WERE WILLING TO ACT VERY PROMPTLY AND DECISIVELY. THE KEY ACTIONS BY THE GOVERNMENT ACTUALLY WERE IN SEPTEMBER AND OCTOBER OF 2008. AT THAT POINT, IF THE GOVERNMENT HAD SHOWED ANY HESITATION ABOUT STEPPING IN AND DOING WHATEVER IT TOOK TO GET US PAST A FINANCIAL PANIC, YOU KNOW, THINGS WOULD BE A LOT DIFFERENT TODAY. SO THE GOVERNMENT DID THE RIGHT THING IN ACTING – THEY DIDN’T HAVE TO DO THIS A, ACTION A OR ACTION B OR ACTION C PERFECTLY. WHAT THEY DID HAVE TO SHOW IS THAT IT WAS NOT GOING TO BE A HERBERT HOOVER TYPE SITUATION AND THAT THEY WERE GOING TO JUMP IN AND DO WHATEVER IT TOOK.
QUICK: BEFORE WE GET TO A LOT OF THE OTHER QUESTIONS, BECAUSE THIS BRINGS US TO A JUMPING OFF POINT ABOUT MANY THINGS THE GOVERNMENT IS DOING RIGHT NOW. I WANT TO TALK A LITTLE BIT ABOUT WHY WE’RE HERE TODAY. AND THAT’S FOR BERKSHIRE HATHAWAY’S SPECIAL SHAREHOLDERS MEETING. THIS IS A VERY UNUSUAL EVENT. THE IDEA OF SPLITTING THE CLASS B SHARES 50-FOR-1. WHY ARE YOU DOING THIS?
BUFFETT: IT SHOWS YOU WHAT HAPPENS WHEN YOU GET TO BE 79. (LAUGHS.)
QUICK: SOME PEOPLE ARE ASKING IF YOU ARE COMPLETELY CHANGING YOUR STANCE ON A LOT OF DIFFERENT ISSUES.
BUFFETT: NO.
QUICK: SOME PEOPLE ARE SAYING, ‘IS THIS GOING TO MEAN A DIVIDEND’S COMING SOON, TOO?’
BUFFETT: NO, I DON’T THINK IT MEANS THAT. IT MADE SENSE IN TERMS OF THE BURLINGTON NORTHERN ACQUISITION, BECAUSE OTHERWISE – WE WANTED TO GIVE A STOCK AND CASH OPTION TO THEIR SHAREHOLDERS AND TO REALLY EFFECTIVELY GIVE IT TO THE SMALLER SHAREHOLDER WE HAD TO HAVE SOMETHING WITH A LOWER DENOMINATION IN OUR CLASS B SHARES WHICH WERE IN THE THREE-THOUSAND DOLLAR-PLUS RANGE. THE BIG SHAREHOLDER WOULD HAVE GOTTEN A DIFFERENT DEAL THAN THE SMALL SHAREHOLDER OTHERWISE. SO IT WAS AN EASY DECISION, ACTUALLY.
QUICK: DO YOU THINK THIS IS GOING TO BE AN EASY VOTE AS WELL?
BUFFETT: YEAH, I’M SURE OF THAT. (LAUGHS.) I’M LIKE A POLITICIAN IN CHICAGO. I’VE GOT THE VOTES. (LAUGHS.)
QUICK: SO YOU’RE GOING INTO THIS TODAY KNOWING YOU HAVE THE VOTES. THERE ARE SOME PEOPLE WHO SAY, HEY, THIS COULD MEAN THAT BERKSHIRE HATHAWAY COULD NOW BECOME A MEMBER OF THE S&P 500. WHAT DO YOU THINK OF THAT?
BUFFETT: WELL, I DON’T KNOW. I’VE NEVER TALKED TO S&P ABOUT IT. I DO KNOW THAT WE’RE PROBABLY FOUR TIMES AS LARGE IN MARKET CAP AS ANY COMPANY THAT ISN’T IN IT. AND WE WILL HAVE – WHEN WE GET THROUGH WITH THIS WE COULD HAVE LIKE 700,000 SHAREHOLDERS OR SOMETHING OF THAT SORT. WE’LL HAVE A LOT OF TRADING VOLUME. BUT THAT’S UP TO S&P.
QUICK: WOULD YOU LIKE TO BE IN?
BUFFETT: WELL, I THINK PROBABLY FOR OUR SHAREHOLDERS IT’S A NET PLUS, YEAH.
QUICK: I KNOW JOE’S GOT SOME OF THOSE NUMBERS THAT YOU WERE ASKING ABOUT FOR WELLS FARGO. JOE?
JOE KERNEN: BERKSHIRE COULD BE A DOW COMPONENT. I DON’T – DON’T STOP AT THE S&P. WE’LL GET RID OF ALCOA OR SOMETHING, AH, I KNOW – THAT WOULD BE GREAT. HEY WARREN, THE REVENUE NUMBER ON WELLS WAS 22.7 AND THE ESTIMATE WAS I THINK 21.9. SO UNLIKE ANY OF THE OTHER BANKS, I THINK THAT’S THE FIRST ONE, I MEAN I DIDN’T LOOK AT US BANCORP, BUT THE MAJOR ONES THAT WE REPORTED ON, THIS IS THE FIRST ONE THAT’S BEAT ON THE REVENUE AND IT WAS ALSO A PROFIT OF EIGHT CENTS WITH THE TARP REPAYMENT, EVEN THOUGH THE STREET WAS LOOKING FOR A LOSS OF A PENNY. SO, SEEMS TO BE A LITTLE BIT BETTER AND THE STOCK IS NOW 29, IT’S ALMOST UP A DOLLAR AT THIS POINT.
BUFFETT: WELLS RUNS A TERRIFIC BANK. THEY’RE A VERY CUSTOMER-ORIENTED BANK. THEY’RE ALMOST LIKE THOUSANDS OF COMMUNITY BANKS WHEN YOU GET RIGHT DOWN TO IT. THEY HAVE A LOT OF SERVICES THEY SELL FOR EACH CUSTOMER. SO THEIR REVENUES ARE GOING TO COME THROUGH. AND ACTUALLY WHEN THE STRESS TEST WAS DONE IN THE SPRING OF LAST YEAR, THAT’S WHERE THE PEOPLE EVALUATING THEM WERE WAY OFF, WAS ON THE REVENUE NUMBER. WELLS DID NOT DISAGREE WITH THEM ON THE POSSIBLE LOSSES NUMBER, BUT THEY FELT THAT THE PEOPLE JUST DIDN’T UNDERSTAND THE REVENUE POTENTIAL, THAT WERE LOOKING AT THEM, AND I AGREED WITH THEM. BUT UNFORTUNATELY THEY HAD TO ISSUE A LOT OF SHARES IN CONJUNCTION WITH THAT STRESS TEST. I DON’T THINK WELLS WAS EVER GOING TO DISAPPOINT ON REVENUE. THEY HAVE A LOT OF CUSTOMERS AND THOSE CUSTOMERS DO A LOT OF BUSINESS WITH THEM.
KERNEN: WE’VE GOT SO MANY THINGS TO GO OVER, I’VE GOT – I DON’T EVEN KNOW WHERE – I THINK OF WELLS AND I THINK ABOUT THE BANK TAX. IS THAT A GOOD IDEA TO PAY FOR THE GM BAILOUT WITH A BANK TAX, WARREN?
BUFFETT: NO, I DON’T UNDERSTAND THAT. IF IT’S SOME KIND OF A GUILT TAX OR SOMETHING OF THAT SORT BECAUSE BANKS WERE AMONG THE WHOLE UNITED STATES THAT WERE SAVED BACK IN 2008, EVERYBODY WAS TAKEN CARE OF THEN. AND THE BANKS, BASICALLY, SOMEBODY LIKE WELLS, IT’S COST THEM A LOT OF MONEY TO BE IN THE TARP AND IT WAS BASICALLY FORCED UPON THEM. (THEY) DIDN’T WANT TO TAKE THE MONEY, BUT REALLY HAD NO CHOICE. SO THAT’S COST WELLS A LOT OF MONEY. THE GOVERNMENT’S MADE A LOT OF MONEY OFF WELLS. THEY’VE MADE A LOT OF MONEY OFF GOLDMAN. THEY’VE MADE A LOT OF MONEY OFF J.P. MORGAN. AND WHERE THEY’RE GOING TO LOSE MONEY, AT LEAST WHERE ITS POSSIBLE THEY’LL LOSE MONEY, IS IN THE AUTO COMPANIES. SO IF YOU’RE GOING AFTER THE PEOPLE YOU SAVED, YOU MIGHT SAY GM SHAREHOLDERS DIDN’T GET SAVED, THE GM BONDHOLDERS DIDN’T GET SAVED. WHAT HAPPENED THERE IS THEY KEPT EMPLOYMENT. I’M THE LAST GUY TO SUGGEST THAT YOU SHOULD GO AND PUT A SPECIAL TAX ON AUTOWORKERS. (LAUGHS.) IF YOU’RE REALLY LOOKING FOR THE PEOPLE WHO BENEFITED FROM GOVERNMENT LOSSES, YOU’D HAVE TO LOOK THERE. OR IF YOU LOOK AT FANNIE OR FREDDIE. ARE YOU GOING TO GO AND TAX THE MEMBERS OF CONGRESS WHO RAN FREDDIE AND FANNIE —
KERNEN: THAT’S WHAT I SAID! I CAN’T BELIEVE YOU JUST SAID THAT. THAT’S EXACTLY WHAT I – YOU COULD ALMOST TAX ANY COMPANY THAT WAS IN BUSINESS THAT WASN’T GOING TO BE ABLE TO FLOAT ANY COMMERCIAL PAPER, YOU COULD TAX THEM TOO. BECAUSE THEY WERE SAVED – –
BUFFETT: ABSOLUTELY. IN SEPTEMBER OF 2008 —
KERNEN: DON’T GIVE THEM ANY IDEAS! WARREN, DON’T GIVE THEM ANY IDEAS! THEY WILL, THAT’LL BE NEXT.
BUFFETT: (LAUGHS.) NO, WHAT WAS DONE IN THE FALL OF 2008 WAS DESIGNED TO SAVE THE AMERICAN ECONOMY. IT WASN’T DESIGNED TO SAVE THE BANKS, IT WASN’T DESIGNED TO SAVE ME. IT WAS DESIGNED TO 309 MILLION AMERICANS AND A GOOD JOB WAS DONE. BUT THE BANKS ARE THE ONES, YOU KNOW, PARTICULARLY I JUST NAMED A FEW, THEY PAID IT BACK WITH HUGE INTEREST. THE GOVERNMENT’S MADE A LOT OF MONEY ON THAT. AND TO SAY THAT THEY SHOULD BE PAYING FOR THE FACT THAT THE GOVERNMENT LOST A LOT, OR MAY LOSE A LOT OF MONEY IN FREDDIE AND FANNIE AND PERHAPS WITH THE AUTO COMPANIES, IT JUST DOESN’T MAKE ANY SENSE TO ME.
QUICK: WHAT ABOUT AIG, THOUGH? GOLDMAN SACHS AND A LOT OF THE OTHER BANKS DID MAKE A LOT OF MONEY BACK FROM AIG. IS THAT A DIFFERENT CATEGORY?
BUFFETT: WELL, THEY GOT PAID WHAT THEY WERE OWED, BUT SO DID MILLIONS OF POLICY HOLDERS. I MEAN, IF YOU LOOK AT AIG, AIG, PRIMARILY THROUGH ITS SUBSIDIARIES, BUT THEY HAD CONTRACTS WITH MILLIONS OF PEOPLE WHO WERE COUNTING ON GETTING PAID ON THEIR LIFE INSURANCE, GETTING PAID ON ANNUITIES, GETTING PAID ON PROPERTY AND CASUALTY CLAIMS. AND THE GOVERNMENT’S ACTIONS ENABLED AIG TO LIVE UP TO MILLIONS OF CONTRACTS. AND IT MAKES THEM MAD THAT THEY LIVED UP TO A GOOD CONTRACT WITH GOLDMAN SACHS, ALTHOUGH GOLDMAN WAS VERY PROTECTED. BUT I’M JUST NOT SURE WHY – GOLDMAN PAID, I THINK, A BILLION-ONE FOR THE WARRANTS TO BUY THEM BACK. THEY ARE NOT THE PROBLEM. THE BANKS HAVE GENERALLY DONE A PRETTY GOOD JOB.
CARL QUINTANILLA: AIG, OTHER INSURANCE COMPANIES, WARREN, LIKELY TO FALL UNDER THAT TAXING CATEGORY, PEOPLE WORRY THAT THE REAL FEAR IS NOT JUST THE FEEL-GOOD MEASURE THAT THE TAX WILL TAKE BUT THE DISTRACTION IT WILL CREATE IN DEALING WITH FINANCIAL REFORM IN A REAL WAY IN THIS COUNTRY.
BUFFETT: YEAH, AND IT’S A POPULAR TAX TO PROPOSE NOW, OBVIOUSLY. THE AMERICAN PEOPLE LOVE THE IDEA OF GOLDMAN OR AIG OR ANYBODY LIKE THAT, THOSE ARE BAD NAMES. THEY DON’T THINK SO MUCH ABOUT FREDDIE OR FANNIE WHICH ARE THAT EXPENSIVE AND WHICH CONGRESS RAN. BUT I JUST THINK A TAX THAT’S ENACTED WITH THE IDEA THAT THE HEADLINES WILL BE APPEALING AND THAT A CERTAIN AMOUNT OF VENGEANCE WILL BE ACHIEVED, I DON’T THINK THAT’S THE GREATEST FORM OF TAX POLICY.
QUICK: WHAT ABOUT IN TERMS OF GOING AFTER THE DEBATE WITH MASSACHUSETTS THE PRESIDENT WENT UP AND ACTUALLY CAMPAIGNED FOR COAKLEY AND STARTED SAYING THINGS ABOUT THE BANKS ABOUT HOW BROWN IS FOR THE WALL STREET BANKS AND SHE’S NOT
BUFFETT: YEAH WELL BANKS MAYBE IF I WAS RUNNING FOR OFFICE TODAY I WOULD BE CHEWING OUT BNAKS TO BUT BASICALLY THE GOVERNMENTS IS GOING TO GET ITS MONEY BACK OVERWHELMINGLY FROM BANKS THE FDIC WHICH IS FUNDED ENTIRELY BY BANKS IS TAKING CARE OF THE FAILED BANKS THERE WERE 140 BANKS THAT FAILED LAST YEAR MOST OF THEM WERE SMALL COMMUNITY BANKS AND THEY ARE THE HEROES OF THINGS GENERALLY AND IN THE END THAT’S BEEN TAKEN CARE OF BY THE FDIC AND THE FDIC IS FUNDED BY THE BANKS THE BANKS ARE CLEANING UP THEIR OWN MESS IN AFFECT ON THAT AND THINGS WILL COME THROUGH VERY STRONGLY THEY TALK ABOUT OBSCENE PROFITS LETS TALK ABOUT JP MORGAN THEIR EARNING ON EQUITY WERE LESS THAN THE AVERAGE OF THE LAST 10 YEARS LAST YEAR YOU TAKE WELLS FARGO THEIR EARNINGS ON EQUITY WERE LESS THAN THE AVERAGE OF THE LAST 10 YEARS B OF A AND CITI IF YOU WANT TO CALL THEIR PROFITS OBSCENE YOU MIGHT BE THINKING OF A DIFFERENT SORT OF OBSCENITY
QUICK: AT THE SAME TIME THOUGH COMPENSATION IS COMING BACK TO LEVELS WE HAVEN’T SEEN IN THE PAST
BUFFETT: COMPENSATION AT THE INVESTMENT BANKS I DON’T THINK THAT IF YOU LOOK AT THE COMMERCIAL BANKS THEIR COMPENSATION PRACTICES ARE SIGNIFICANTLY DIFFERENT FROM A FEW YEARS BACK I WOULD LOVE TO HAVE NO COMPENSATION FOR BANKS CAUSE WE OWN SOME BANKS AND THEN IT WOULD ALL GO TO STOCKHOLDERS THE CHOICE ISN’T THE FEDERAL GOVERNMENT OR BONUSES THE CHOICE IS THE STOCKHOLDERS OR BONUSES
QUICK: PEOPLE SAY THAT THE REAL DIFFERENCE IS SHOULD THE GOVERNEMNT BE BACKSTOPPING NOT JUST THE SAFE BANKS THAT ARE DOING LOANS AND DOING THINGS THAT NEED TO BE DONE BUT THE INVESTMENT BANKS AT THE SAME SHOULD THEY BE IN THE SAME HOUSE AND SHOULD THE GOVERNMENT BE BACKSTOPPING THE INVESTMENT BANKS AS WELL WHEN THEY CAN TURN AROUND AND PAY OUT THESE HIGH COMPENSATIONS
BUFFETT: I DON’T THINK THEY SHOULD BE BACKSTOPPING
QUICK: BUT HOW DO YOU SPLIT THEM SHORT OF DOING SOMETHING LIKE GLASS STEIGEL
BUFFETT: IF YOU LOOK AT MORGAN STANLEY AND GOLDMAN SACHS THE TWO BIG INVESTMENT BANKS INDEPENDENTLY I DON’T THINK THEY SHOULD BE BACKSTOPPING THEM INCIDENTLY IN SEPTEMBER 2008 GOLDMAN WENT OUT TO RAISE THEIR OWN MONEY THEY SAW THE SITUATION WAS DEVELOPING AND WENT OUT AND RAISED 12 BILLION THERE IN LATE SEPTEMBER IN 2008 WHICH WE PARTICIPATED IN BUT THEY FELT THEY NEEDED CAPITAL BECAUSE THEY DIDN’T KNOW IF THE WORLD WAS COMING TO AN END OR NOT AND THEY WENT OUT AND RAISED IT THEY WERE A PARTICIPATE IN THE TARP SUBSEQUENTLY BUT THEY WERE GIVEN NO CHOICE
QUICK: I DON’T WANT TO PUT WORDS IN YOUR MOUTH THOUGH WHEN YOU SAY THE GOVERNMENT SHOULDN’T BE BACKSTOPPING THOSE INVESTMENT BANKS HOW DO YOU GET AROUND THIS IDEA THAT IF THIS COMMERCIAL IS WITH THE INVESTMENT BANK HOW DO YOU GET AROUND BACKSTOPPING THAT IF THESE ARE SO IMPORTANT TO OUR COUNTRY AND WE HAVE TO KEEP THEM SUPPORTED THE NOTION OF TOO BIG TO FAIL
BUFFETT: I THINK AND I AM NOT SURE HOW YOU DRAFT THIS INTO STATUTES THE BANKS THAT GOT INTO BIG TROUBLE IT WAS MANAGEMENT AT THE TOP AND A NUMBER OF THOSE WENT AWAY RICH NOT AS RICH AS THEY WERE BEFORE I THINK THAT IS TERRIBLE I THINK IF I WERE ON THE BOARD OF DIRECTORS ON A BANK AND YOU DO THIS IN CONJUNCTION WITH THE GOVERNMENT BUT I THINK YOU SHOULD HAVE SOMETHING SO THAT IF A BANK EVER HAS TO GO TO THE FEDERAL GOVERNMENT NOT THE FDIC CAUSE THAT’S KIND OF INTERNAL BUT IF THEY HAVE TO GO TO THE FEDERAL GOVERNMENT TO BE SAVED THAT THE CEO AND ANY CEO OF THE PREVIOUS TWO YEARS BEFORE THAT AND HIS WIFE THEY SIGN SOMETHING SO THAT THEY ARE ESSENTIALLY WIPED OUT IF AN INSTITUTION THAT IS SO IMPORTANT TO THIS COUNTRY REALLY CAUSES THE COUNTRY GREAT DIFFICULTY I THINK THE CEO I WANT THAT CEOS EQUATION TO BE THAT IF THIS PLACE GOES DOWN OR NEEDS GOVERNMENT HELP I AM BUSTED AND I CAN’T PUT IT ALL IN MY WIFES NAME AND SHE IS BUSTED TOO AND THEN I WOULD HAVE STRICT PENALTIES TO THE DIRECTORS PROBABLY FIVE TIMES THEIR AVERAGE COMPENSATION OR SOMETHING LIKE THAT I THINK THAT WOULD DO MORE TO CHANGE BEHAVIOR THE KIND OF BEHAVIOR THAT GETS YOU IN TROUBLE THAN ANYTHING ELSE YOU CAN DO
QUICK: SO YOURE TALKING ABOUT LIKE CHUCK PRINCE AND OTHERS WHO WALKED AWAY?
BUFFETT: YEAH. WHEN THEY WALK AWAY, YOU KNOW, WE’VE GOT UNEMPLOYMENT INSURANCE, YOU KNOW.MILLIONS OF PEOPLE ARE ON IT NOW.AND CERTAINLY ANYBODY THAT CAUSES THAT KIND OF TROUBLE — AND I WOULD HAVE IT EXTEND FOR TWO YEARS AFTER THEY LEFT OR SOMETHING OF THE SORT.AND LIKE I SAY, I WOULD JUST, AS A MEMBER OF THE BOARD OF SOME SUPER-LARGE INSTITUTION LIKE THAT, I WOULD JUST SAY THAT THAT’S PART OF TAKING THE DEAL. IF YOU CAN’T KEEP THIS PLACE AWAY FROM NEEDING THE FEDERAL GOVERNMENT FOR HELP, YOU’RE GOING TO BE BROKE.
QUICK: BUT BACK TO THIS IDEA — AND I’M SORRY TO KEEP HARPING ON THIS — BUT BACK TO THIS IDEA OF THE INVESTMENT BANKS TEAMED UP WITH THE REGULAR BORING BANK SIDE OF THINGS, SHOULD THERE BE A SPLIT THERE THAT’S FORCED BY CONGRESS, OR DO YOU THINK THIS IDEA OF ATTACHING IT TO THE CEOs AND DIRECTORS WOULD HANDLE THAT PROBLEM?
BUFFETT: I THINK — WELL, I WOULD LIKE WHAT I JUST SUGGESTED. BUT I DO THINK THAT — I THINK WHEN VERY LARGE BANKS THAT ARE REALLY, IF ANYTHING HAPPENS TO THEM, I THINK THEY SHOULD BE REINED IN ON LEVERAGE, AND I THINK THEY SHOULD BE REINED IN ON SOME OF THE ACTIVITIES THEY CAN ENGAGE IN, YES.
QUICK: WHAT DO YOU LIKE YOU SEE IN PROPOSALS FROM FINANCIAL REGULATORY REFORM RIGHT NOW, AND WHAT DO YOU THINK’S MISSING?
BUFFETT: I THINK THE HARD PART IS TO RESTRICT LEVERAGE. I MEAN, LEVERAGE IS WHAT GETS PEOPLE IN TROUBLE. THE TROUBLE IS YOU CAN’T MEASUREIT BY A SINGLE RATIO. I MEAN, YOU CAN HAVE A LOT OF LEVERAGE-OWNED GOVERNMENT BONDS AND YOU CAN BE DOING OTHER THINGS WHERE A 2-1 LEVERAGE IS TOO STRONG. I THINK YOU DO NEED A REGULATOR THAT CAN DRAW UP SOME KIND OF SENSIBLE REGULATIONS AS TO DIFFERENT KINDS OF INSTRUMENTS.AND MAYBE PROHIBIT SOME IN TERMS OF THE ACTIVITIES OF COMMERCIAL BANKS.
QUICK: YOU NEED A NEW REGULATOR OR THE EXISTING REGULATOR?
BUFFETT: I WOULD TRUST THE FED.
QUICK: YOU WOULD TRUST THE FEDERAL RESERVE? BUT THERE ARE A LOT OF MOVEMENTS IN CONGRESS RIGHT NOW, BOTH FROM THE RIGHT AND THE LEFT, TO GO AFTER THE FEDERAL RESERVE AND STRIP SOME OF ITS POWER.
BUFFETT: I THINK THAT’S A MISTAKE. I THINK THAT AN INDEPENDENT FED IS INCREDIBLY IMPORTANT TO THE ECONOMIC FUTURE OF THE COUNTRY.
QUICK: BEN BERNANKE IS LOOKING FOR THIS RECONFIRMATION. THEY SAY A VOTE COULD COME AS EARLY AS THIS FRIDAY. SHOULD HE BE RECONFIRMED?
BUFFETT: IF I COULD VOTE TWICE, I WOULD.HE SHOULD BE — HE DID A MAGNIFICENT JOB OVER THIS PERIOD. EVERYBODY CAN DO IT SOMEONE BETTER. WE CAN SIT HERE AND ARMCHAIR QUARTERBACK HIM. BUT WHEN I LOOK BACK AT PARTICULARLY SEPTEMBER AND OCTOBER OF 2008, HE TOOK SOME EXTRAORDINARY ACTIONS THAT IF THEY HADN’T BEEN TAKEN, WILLINGNESS TO ACT LIKE THAT AND EVEN STRETCH HIS AUTHORITY SOME, BUT HE DID WHAT YOU DO — WE TALKED ABOUT IT BEING AN
ECONOMIC PEARL HARBOR — HE DID WHAT SHOULD HAVE BEEN DONE IN RESPONSE TO THAT PEARL HARBOR. NO, I THINK HE’S DONE A STELLAR JOB.
QUICK: WHAT HAPPENS IF HE’S NOT RECONFIRMED? WHAT’S AT RISK?
BUFFETT: WELL, JUST TELL ME A DAY AHEAD OF TIME SO I CAN SELL SOMESTOCKS.
QUICK: YOU THINK THERE WOULD BE A STRONG SELLOFF IN THE MARKET?
BUFFETT: OH, I THINK SO.SURE.
QUICK: ACROSS THE BOARD.
BUFFETT: YEAH, I THINK IT WOULD BE JUSTIFIED.
QUICK: YOU DO?
BUFFETT: YEAH. I THINK ONE OF THE — I THINK CONGRESS GENERALLY IS A WORRY OF THE AMERICAN PEOPLE, PARTICULARLY WHAT THEY’VE SEEN OVER THE LAST 12, 18 MONTHS. IF CONGRESS ESSENTIALLY SAID WE CAN DO THIS BETTER THAN A BEN BERNANKE, AND WE THINK — I WOULD GET VERY WORRIED.
QUICK: YOU MENTIONED AMERICANS’ FRUSTRATION WITH CONGRESS. DO YOU READ THIS VOTE IN MASSACHUSETTS LAST NIGHT AS SOME SORT OF A REFERENDUM ON THE JOB CONGRESS IS DOING RIGHT NOW? ON THE JOB THE WHITE HOUSE IS DOING RIGHT NOW? ON THE HEALTH CARE REFORM BILL? OR SOMETHING ELSE?
BUFFETT: IT’S THOSE THREE THINGS PLUS THE ECONOMY. I MEAN, IT’S SOME MIX.WHO KNOWS WHAT GOES ON IN SOMEBODY’S MIND WHEN THEY ENTER A BALLOT BOX. SOMEBODY SAID THE WORD MOTIVATION SHOULD NEVER BE USED IN THE SINGULAR BECAUSE YOU GET THESE THINGS ALL MIXED UP IN YOUR MIND. BUT CERTAINLY PEOPLE GENERALLY IN THE COUNTRY DO NOT LIKE THE HEALTH BILL. I MEAN, WHETHER IT’S A GOOD THING OR NOT. BUT THEY DON’T LIKE IT. AND THEY DON’T FEEL GOOD ABOUT CONGRESS. AND THEY FEEL LESS GOOD ABOUT THE ADMINISTRATION THAN THEY DID A YEAR AGO, CLEARLY. AND THEY FEEL LIKE THE ECONOMY IS DRAGGING ON FOR A LONG TIME. SO ALL OF THOSE FACTORS CONVERGED AND PROBABLY TO SOME EXTENT THE PARTICULAR CANDIDATE.
IF VICKI KENNEDY HAD BEEN THE DEMOCRATIC CANDIDATE, I DON’T THINK THERE’S ANY QUESTION, YOU KNOW, SHE WOULD HAVE WON PROBABLY 3-2 OR SOMETHING.IT WAS A REFERENDUM OF SORTS, SURE. IT WAS A BIG ONE.
QUICK: YOU SAY AMERICAN PEOPLE ARE LESS HAPPY WITH THE ADMINISTRATION, THEY’RE FRUSTRATED WITH CONGRESS.THEY DON’T LIKE THE HEALTH CARE BILL.WHAT ABOUT YOU? YOU’RE A BIG SUPPORT EITHER OF THE PRESIDENT.
BUFFETT: GOING BACK TO THE AMERICAN PEOPLE, I THINK THEIR EXPECTATIONS WERE PROBABLY TOO HIGH ON THE ECONOMY.AND I THINK INCIDENTALLY TO PRESIDENT OBAMA’S CREDIT, HE TRIED TO DAMPEN THOSE. EVERY TIME I HEARD HIM SPEAK, HE’D SAY WE DIDN’T GET INTO THIS IN A SHORT PERIOD, WE WON’T GET OUT IN A SHORT PERIOD. HE’S ATTEMPTED TO DO THAT. BUT WHEN IT GRINDS ALONG, YOU KNOW, PEOPLE ARE HURTING. A LOT OF PEOPLE ARE HURTING. AND THEY PERHAPS UNREASONABLY, I WOULD SAY IT WOULD BE UNREASONABLE, BUT THEY EXPECTED BETTER THINGS BY THIS POINT. AND THAT WASN’T IN THE CARDS.
QUICK: YOU TALK A LITTLE BIT ABOUT WHAT HAS HAPPENED WITH THE ECONOMY.IS THERE ANYTHING DIFFERENT THE ADMINISTRATION COULD HAVE OR SHOULD HAVE DONE?
BUFFETT: YOU KNOW, PROBABLY. IF YOU’RE GOING TO SPEND CLOSE TO $800 BILLION ON A STIMULUS BILL, IT COULD HAVE BEEN DONE IN A WAY THAT HAD MORE IMMEDIATE IMPACT. YOU KNOW, WHAT WE SAW WITH THE STIMULUS BILL, WAS IT 8,000 EARMARKS OR SOMETHING.THAT IS THE SORT OF THING THAT’SDEPRESSING TO THE AMERICAN PUBLIC.IT‘S DEPRESSING TO ME.THAT IS WASHINGTON — OLD-STYLE WASHINGTON SQUARE. AND SO I THINK IN A SENSE, EVEN, ON THE STIMULUS BILL, SOME OF THE BENEFITS OF THE STIMULUS WERE LOST BY THE FACT THAT IT WAS WASHINGTON AS USUAL.
KERNEN: HEY, WARREN —
QUICK: JOE, YOU GOT A QUESTION AS WELL?
QUICK: JOE DID YOU HAVE A QUESTION?
KERNEN: YEAH I DID. I ASK IT IN THE CONVERSE WARREN, OK, THATS SOMETHING THEY DID DO THAT MAYBE COULD HAVE BEEN DONE DIFFERENTLY, BUT ARE THERE THINGS THAT WERE DONE THAT ACTUALLY HURT THE ECONOMY? WE HEAR IT ALL THE TIME ABOUT THE UNCERTAINTY OF A LOT OF THE PENDING LEGISLATION, TAX POLICY, CAP AND TRADE, HEALTH CARE, DOWN THE LINE. THERE ARE PEOPLE THAT SAY THAT IS CAUSING CORPORATE MANAGERS NOT TO HIRE AND THAT WE ARE ACTUALLY LENGTHENING THE SLOW DOWN. IS THAT YOUR VIEW TOO?
BUFFETT: YEAH, WELL I HEAR THAT JOE BUT I WOULD SAY THIS, AT BERKSHIRE WE ARE DOWN 25,000 OR SOMETHING IN EMPLOYMENT FROM 245,000
QUICK: ON WHAT BASE?
BUFFETT: OF A BASE IN THE LAST YEAR OR YEAR AND A HALF. TAKE OUR CARPET BUSINESS, OUR CARPET BUSINESS IS DOWN 6,500 PEOPLE AND THAT’S CONCENTRATED IN A FAIRLY SMALL, NOT ALL OF IT, BUT A LOT IF IT IS CONCENTRATED IN A SMALL AREA OF GEORGIA. AND WE WILL HIRE PEOPLE WHEN THE ORDERS COME IN. I GET THE ORDERS EVERYDAY, THE INCOMING ORDERS, I LOOK A THEM, AND WE WANT TO HIRE PEOPLE, BUT WE ARE NOT GOING TO HIRE PEOPLE JUST TO STAND AROUND SO WE ARE NOT RELUCTANT TO HIRE PEOPLE IN GEORGIA OR IN ACME BRICK, OUR BRICK BUSINESS WHICH RAN UP THE WORST YEAR IN MANY, MANY DECADES. WE’VE GOT A THOUSAND PEOPLE PERHAPS FROM THE PEAK THAT WE ARE DOWN AT THE BRICK BUSINESS. IT’S NOT BECAUSE WE ARE LOSING SHARE MARKET, WE ARE GAINING SHARE MARKET IN THESE CASES, BUT WE ARE NOT RELUCTANT TO HIRE AT ACME BRICK OR SHAW CARPET BECAUSE OF WHATS GOING ON IN WASHINGTON, WE ARE WORRIED ABOUT HIRING BECAUSE OF WHAT IS GOING ON IN OUR ORDER BOOK. SO IF WE GET ORDERS FOR BRICK OR WE GET ORDERS FOR CARPET WE ARE GOING TO PUT PEOPLE BACK TO WORK TOMORROW, BUT WE ARE NOT GETTING ORDERS YET.
KERNEN: BUT ITS POSSIBLE TO BITE OFF MORE THAN YOU CAN CHEW AND MAYBE A LOT OF AMERICANS WOULD HAVE BEEN CONTENT WITH ECONOMY SECURITY, THE ECONOMY AND SECURITY, MAYBE THAT WOULD HAVE BEEN ENOUGH.
BUFFETT: IT — YOU ARE NOT GOING TO HAVE PEOPLE FEELING GOOD UNTIL JOBS COME BACK. ITS THAT SIMPLE AND JOBS HAVEN’T COME BACK AND ONE OF THE PROBLEMS WE HAVE IS THAT WE HAVE THESE PEOPLE WHO ARE DROPPING OUT OF THE WORKFORCE AND NORMALLY WE NEED ABOUT A HUNDRED THOUSAND A MONTH IN JOBS JUST TO STAY EVEN IN TERMS OF UNEMPLOYMENT. WE’VE HAD PEOPLE DROPPING OUT OF THE WORKFORCE, BUT THOSE PEOPLE MAY VERY WELL COME BACK IN IN ADDITION TO THE NORMAL GAIN IN A YEAR OR TWO, NEXT TWO YEARS TO COME SON UNEMPLOYMENT IS GONG TO BE A TOUGH FIGURE AND THATS GOING TO DETERMINE THE MOOD OF THE AMERICAN PEOPLE
QUINTANILLA: WARREN, JOE TALKS ABOUT ECONOMY SECURITY AND THOSE ARE REALLY OUR SHORT TERM CONCERNS BUT YOU’VE TALKED A LOT ABOUT THE LONGER TERM STRUCTURAL ISSUES THE GOVERNMENT NEEDS TO ADDRESS AND WHEN YOU CAN’T GET HEALTH CARE REFORM THROUGH WHEN YOU HAVE THE WHITE HOUSE A MAJORITY IN THE HOUSE AND A SUPER MAJORITY IN THE SENATE HOW IN THE WORLD DO YOU THINK WE ARE GOING TO TACKLE THINGS LIKE MEDICARE AND SOCIAL SECURITY?
BUFFETT: THATS ONE OF THE THINGS THAT BOTHERS THE AMERICAN PEOPLE IS WHEN THEY SEE HOW GOVERNMENT HAS FUNCTIONED, NOT JUST IN THE LAST YEAR, BUT PRIOR THERE TOO, BUT I THINK PEOPLE WHO ARE EXPECTING A YEAR AGO WITH A NEW ADMINISTRATION THAT YOU WERE GOING TO SEE A DIFFERENT STYLE OF BEHAVIOR IN CONGRESS PROBABLY HAVE BECOME PRETTY DISILLUSIONED IN THE LAST YEAR. INDECENTLY OVER THE LONGER TERM ITS GOING TO WORK EXTRAORDINARILY WELL, I MEAN WE HAVE NOT COME CLOSE TO FULFILLING THE POTENTIAL OF THIS COUNTRY OR OUR PEOPLE BUT WE ARE GOING THROUGH A ROUGH PATCH NOW AND IT TIES IN VERY DIRECTLY WITH WHAT YOU SAID IN TERMS OF JOBS AND UNTIL YOU GET A BETTER JOBS PICTURE YOU ARE NOT GOING TO HAVE A HAPPY AMERICAN PUBLIC.
KERNEN: AS A CORNHUSKER DID YOU NOT LIKE THAT, WHAT DID THEY CALL IT, THE CORNHUSKER HUSK OR WHATEVER IT IS? WERE YOU EMBARRASSED BY THAT AS WELL?
BUFFETT: I DONT THINK IT WAS THAT POPULAR OUT HERE. I THINK THE WHOLE IDEA IF YOU LOOK AT THAT THAT WAS A YOU CAN CALL THAT A SPECIAL FORM OF AN EAR MARK AND YOU KNOW, PEOPLE DONT LIKE THE IDEA THAT IF YOU PASS A BILL LIKE THE STIMULUS BILL THAT VARIOUS CONGRESSMAN AND SENATORS FIND CONGRESSMEN AND SENATORS FIND 8,000 ITEMS THAT THEY WANT TO STICK ON IT. THIS CHRISTMAS TREE APPROACH — AND, OF COURSE, BAD BEHAVIOR BEGETS BAD BEHAVIOR. AFTER A WHILE EVEN THE GUYS WHO SAY I DON’T WANT TO DO THIS SORT OF THING ON PRINCIPAL THEY FEEL SILLY FACING THEIR CONSTITUENTS WHEN EVERYBODY ELSE IS DOING IT. IF THE OTHER GUY’S DOING IT, THAT BECOMES AN ARGUMENT FOR IT. AND IT GETS TO BE, YOU KNOW, IT GETS TO BE THE K STREET AND LOBBYISTS GET TO BE TERRIBLY IMPORTANT IN STICKING SPECIAL ITEMS IN THE BILL AS THEY GO ALONG. I THINK OUR CORNHUSKER THING WAS ONE EXAMPLE OF THAT.
BUT IT WASN’T THE ONLY EXAMPLE. AS I REMEMBER, LOUISIANA, MASSACHUSETTS, YOU KNOW —
KERNEN: UNION.
BUFFETT: IT’S NOT — WHAT YOU’VE SEEN IN THE LAST YEAR HAS NOT BEEN ENCOURAGING, I’LL PUT IT THAT WAY.
QUICK: YOU KNOW, YOU MENTIONED THERE’S MORE OF THE ADMINISTRATION MAYBE COULD HAVE DONE EVEN THOUGH THE AMERICAN PEOPLE HAD EXPECTATIONS THAT ARE OUT OF WHACK. PAUL KRUGMAN WROTE THIS WEEK IN “THE NEW YORK TIMES,” THAT ALL OF THESE BAD THINGS HAPPENED AND, YOU KNOW, THE FAILURE OF THE DEMOCRATIC CANDIDATE IN MASSACHUSETTS, IT’S ALL BECAUSE THEY DIDN’T SPEND MORE ON THE STIMULUS. IS THAT SOMETHING YOU AGREE WITH?
BUFFETT: I DON’T THINK IT WOULD HAVE MADE THAT MUCH DIFFERENCE. YOU KNOW, PEOPLE TALK ABOUT THE STIMULUS HAVING CREATED 1.5 MILLION OR SAVING 1.5 MILLION. I GENERALLY AM VERY SKEPTICAL OF FIGURES THAT ECONOMISTS TALK AROUND OR EVEN SOMETIMES PROJECTIONS OF CEOs THAT THEY TOSS AROUND. WE HAVE A LOT TO WORK THROUGH. IT REALLY GOES BACK TO WHAT WE TALKED ABOUT ALMOST TWO YEARS AGO IN THAT THIS COUNTRY GOT VERY, VERY LEVERAGED UP IN A LOT OF RESPECTS. YOU KNOW, AT THE INDIVIDUAL LEVEL AND HOUSING AND THE GOVERNMENT LEVELS, EVERY PLACE. AND DELEVERAGING IS A PAINFUL PROJECT — PROCESS. IT TAKES A LONG TIME. AND WE’RE NOT DONE.
QUICK: WE HAVEN’T EVEN GOTTEN A CHANCE TO TALK ABOUT ONE OF THE ISSUES THAT PEOPLE HAVE REALLY BEEN WAITING TO HEAR FROM YOU ON. KRAFT YESTERDAY RAISING ITS BID FOR CADBURY. AND CADBURY ACCEPTING THAT RAISED OFFER. YOU VOTED NO WHEN THEY ASKED YOU IF THEY COULD BE ISSUING MORE SHARES. WHAT DO YOU THINK ABOUT THE BID NOW?
BUFFETT: I FEEL POORER. KRAFT, IN MY JUDGMENT, WELL, JUST IN THE LAST TWO WEEKS, THERE HAVE BEEN TWO THINGS THAT CAUSED ME TO FEEL POOR. THEY SOLD A VERY FINE PIZZA BUSINESS. AND THEY SAID THAT THEY GOT $3.7 BILLION FOR IT. BUT BECAUSE IT HAD PRACTICALLY NO TAX BASIS, THEY REALLY GOT ABOUT $2.5 BILLION. SO THEY SOLD THE BUSINESS FOR $2.5 BILLION, AND NESTLE IS
WILLING TO PAY $3.7 BILLION. CAN NESTLE RUN IT THAT MUCH BETTER THAN KRAFT? I DOUBT IT. THAT BUSINESS THAT WAS SOLD FOR $2.5 BILLION EARNED $280 MILLION PRETAX LAST YEAR. SO THEY SOLD THAT AT RIGHT AROUND NINE TIMES PRETAX EARNINGS IN TERMS OF THEIR OWN FIGURE. NOW, THEY MENTIONED PAYING 13 TIMES EBITDA FOR CADBURY. FOR ONE THING, EBITDA IS NOT THE SAME AS EARNINGS. DEPRECIATION IS A VERY REAL EXPENSE. BUT ON TOP OF THAT, THEY GOT THE $1.3 BILLION THEY’RE GOING TO SPEND IN TERMS OF VARIOUS REARRANGEMENTS OF CADBURY. THEY’VE GOT $390 MILLION OF DEAL EXPENSES. THEY ARE USING THEIR OWN STOCK WHICH ARE 260 MILLION SHARES OR SOMETHING LIKE THAT. THAT THEIR OWN DIRECTORS SAY IS SIGNIFICANTLY UNDERVALUED. WHEN THEY CALCULATE THAT 13, THEY’RE CALCULATING KRAFT AT MARKET PRICE. NOT AT WHAT THEIR OWN DIRECTORS THINK THE STOCK IS WORTH. SO THE ACTUAL MULTIPLE, IF YOU LOOK AT THE VALUE OF THE KRAFT STOCK, IT’S MORE LIKE 16 OR 17. AND THEY SOLD EARNINGS AT NINE TIMES. SO, YOU KNOW, IT’S HARD TO GET RICH DOING THAT. I’VE GOT A LOT OF DOUBTS ABOUT THE DEAL.
QUICK: YOU ARE THE LARGEST SHAREHOLDER AT 9.9% OF THE COMPANY. YOU DON’T GET THE CHANCE TO VOTE THIS DEAL UP OR DOWN. WHAT DO YOU DO?
BUFFETT: THEY TOOK THAT AWAY.
QUICK: YEAH.
BUFFETT: THEY NEEDED THE VOTE ORIGINALLY. BUT IF THEY GET A CONSENSUAL ARRANGEMENT SORT OF THING WITH CADBURY, AND THAT MAY BE — YOU KNOW, IF THEY PAID UP ENOUGH, THEY WERE GOING TO GET IT. SO WHO KNOWS WHETHER THE LAST 20 PENCE OR SOMETHING, WHAT IT DID WAS ELIMINATE MY CHANCE TO VOTE ON IT.
KERNEN: THERE’S ANOTHER WAY TO VOTE, WARREN, AND THAT’S WITH YOUR FEET. IS THAT WHAT YOU’RE TELLING US TO DO?
BUFFETT: THAT GETS EXPENSIVE. IF I DON’T LIKE WHAT’S GOING ON IN GOVERNMENT DOESN’T MEAN I HAVE TO LEAVE THE COUNTRY EITHER.
KERNEN: I KNOW, BUT I CAN’T BELIEVE —
QUINTANILLA: WARREN JOE AND I OUR JAWS ARE AGAPE AT THE COMMENTS YOU JUST MADE ABOUT KRAFT WE’RE WATCHING
KERNEN: THE STOCKS DOWN
QUINTANILLA: WE HAD ACKMAN ON IN THE PAST COUPLE OF HOURS AND WE TALKED ABOUT THE DEAL AND ASSUMED BECAUSE IT WOULD APPEAR TO BE GOING THROUGH PRETTY WELL, THAT IT HAD YOUR TACIT CONSENT.THAT’S CLEARLY NOT THE CASE.
BUFFETT: NO. IF I HAD A CHANCE TO VOTE ON IT,I’D VOTE NO, BUT I DON’T HAVE A CHANCE. ONE OF THE THINGS PARTICULARLY INTERESTING FOR THE PEOPLE THAT PAY ATTENTION TO CORPORATE GOVERNANCE, KRAFT ISSUED A 78-PAGE PROXY STATEMENT CLOSE TO A MONTH AGO. AND THE SOLE ISSUE WAS THE ISSUANCE OF 370 MILLION SHARES OF KRAFT STOCK. THAT WAS THE ONLY THING TO BE VOTED ON. AND IN 78 PAGES, THEY TOLD YOU ABOUT A DEAL THAT WASN’T GOING TO HAPPEN, AND THEY TOLD YOU A LOT OF OTHER THINGS ABOUT HOW THE DIRECTORS RECOMMENDED THIS AND EVERYTHING ELSE. THERE’S ONE THING THAT THEY DIDN’T TELL YOU.THEY DIDN’T TELL YOU WHAT THE DIRECTORS — HOW THE DIRECTORS FELT ABOUT THE VALUE OF KRAFT STOCK. NOW, AFTER I CAME OUT AND SAID KRAFT STOCK WAS SIGNIFICANTLY UNDERVALUED, THE DIRECTORS IMMEDIATELY CAME OUT AND SAID THEY THOUGHT IT WAS SIGNIFICANTLY UNDERVALUED, TOO. WHAT POINT COULD POSSIBLY BE MORE IMPORTANT WHEN ASKING SHAREHOLDERS TO VOTE ON ISSUING 370 MILLION SHARES IS THE DIRECTOR’S VIEWS ON WHETHER THEY WERE GOING TO GET FAIRER VALUE FOR THESE SHARES? IN OTHER WORDS, IF THE DIRECTORS THOUGHT THOSE SHARES WERE SIGNIFICANTLY UNDERVALUED, WHEN THEY ISSUED THAT PROXY STATEMENT, I THINK THEY HAD THE DUTY TO TELL SHAREHOLDERS THAT THEY FELT THAT WAY. OTHERWISE, YOU KNOW, THE SHAREHOLDERS COULD ASSUME THAT THEY WERE GETTING FAIRER VALUE FOR THE SHARES.
KERNEN: WARREN, I KNOW AT MANAGEMENT,YOU GO INTO A COMPANY AND YOU TALK ABOUT YOU’RE COMFORTABLE WITH MANAGEMENT, YOU LOVE THE COMPANY’S BUSINESS, THINGS LIKE THAT. THIS IS THE HALLMARK OF IRENE ROSENFELD’S STEWARDSHIP OF KRAFT.YOU’RE JUST SAYING IT’S A BAD DEAL. IS THAT NOT GOING TO CAUSE YOU TO REEVALUATE YOUR STAKE IN KRAFT DOWN THE ROAD IF THE MANAGER, IN THE MOST SIGNIFICANT DECISION SHE MAKES, GOES DIRECTLY AGAINST WHAT YOU THINK IS THE RIGHT THING TO DO?
BUFFETT: WELL, I THINK — I THINK KRAFT HAS GOT A WONDERFUL PORTFOLIO OF BUSINESSES INCLUDING THEIR PIZZA BUSINESS WHICH NESTLE NOW HAS, HAVING PAID $1.2 BILLION MORE FOR IT THAN WE RECEIVED IN TERMS OF CASH. I THINK THE PRODUCTS — YOU KNOW, I’D LOVE TO OWN OREO COOKIES OR A-1 SAUCE OR WHATEVER IT MAY BE PERSONALLY. AND I THINK IRENE HAS DONE A GOOD JOB IN OPERATIONS. I LIKE IRENE. I MEAN, SHE’S BEEN STRAIGHTFORWARD WITH ME. WE JUST DISAGREE.SHE THINKS IT’S A GOOD DEAL. I THINK IT’S A BAD DEAL. I THINK SHE’S A DECENT PERSON. SHE COULD BE A TRUSTEE UNDER MY WILL.I JUST DON’T WANT HER MAKING THIS PARTICULAR DEAL.
QUICK: WE CALLED ACKMAN THE ACTIVISTINVESTOR TODAY. HELLO.
BUFFETT: I’LL GO BACK INTO MY SHELL.THIS MAY BE GROUNDHOG DAY OR SOMETHING. WHO KNOWS?
KERNEN: I TOLD YOU ABOUT THAT PIZZA DEAL, BUT WITH ME IT WAS, KRAFT MAKES CHEESE. PIZZA HAS CHEESE. THEN THERE’S CHOCOLATE.AND IT JUST DIDN’T SEEM TO BE THIS, YOU KNOW, SMUCKER’S WITH JIF PEANUT BUTTER I UNDERSTOOD THAT ONE, PEANUT BUTTER AND JELLY.
QUINTANILLA: I SAID YOUR ANALYSIS WAS A LITTLE MORE ASTUTE THAN BASED ON WHAT FLAVORS GO WELL TOGETHER.
KERNEN: YOU TALK MULTIPLES AND ALL THIS OTHER STUFF AND PRETAX. BUT, I MEAN, IT IS TELLING THAT SELLING A VERY GOOD BUSINESS TO BE ABLE TO DO IT, YOU KNOW, LOOKS LIKE A GOOD IDEA UNLESS YOU LOOK CLOSELY, RIGHT?
BUFFETT: WELL, WHEN YOU LOOK CLOSELY, YOU FIND $3.7 BILLION BECOMES $2.5 BILLION.AND IT WAS AN ENORMOUSLY TAX INEFFICIENT WAY TO GET RID OF IT. IF YOU WANTED TO SELL IT, IT WAS TAX INEFFICIENT. BACK WHEN KRAFT GOT RID OF POST CEREALS, THEY DID IT IN A TAX-EFFICIENT WAY. IT’S NOT THAT THEY DON’T KNOW HOW TO DO IT, BUT IN THIS CASE, THEY DID IT IN AN ENORMOUSLY TAX-INEFFICIENT WAY.WHEN YOU HAVE A BUSINESS WITH VIRTUALLY NO BASIS, PROCTER & GAMBLE’S GONE THROUGH THIS, KRAFT, OTHER PEOPLE.THERE ARE WAYS TO HANDLE SPINOFFS THAT AVOID CUTTING THE GOVERNMENT IN FOR ALMOST ONE-THIRD OWNERSHIP OF THE BUSINESS. AND UNFORTUNATELY THEY HEADLINED THE $3.7 BILLION. I DON’T THINK I’VE READ ANYPLACEABOUT THE FACT THAT THEY’RE ONLY GETTING $2.5 BILLION. AND IT WAS NESTLE THAT POINTED OUT THAT THIS BUSINESS DOES $2.1 BILLION IN SALES AND MAKES $280 MILLION. AND GIVING UP $280 MILLION OF EARNINGS IN A BUSINESS THAT’S BEEN GROWING OVER THE YEARS FOR $2.5 BILLION OF CASH, I THINK, IS A BIG MISTAKE AND I THINK IT’S A BIGGER MISTAKE WHEN YOU’RE PAYING — PROBABLY COUNTING ALL OF THE COSTS INVOLVED INCLUDING THE UNDERVALUATION OF THE KRAFT SHARED GIVEN, YOU’RE PROBABLY PAYINGIN THE RANGE OF MAYBE 17 TIMES EARNINGS FOR CADBURY I THINK IS A BIG MISTAKE.
QUICK: YOU SAID AT THIS POINT YOU DON’T HAVE A VOTE IN THIS. THE ONLY WAY YOU CAN VOTE IS WITH YOUR FEET TO SELL THE SHARES.YOU SAID THAT GETS EXPENSIVE. DOES THAT MEAN YOU’RE STAYING IN THIS DESPITE THE FACT THAT YOU HATE THE DEAL?
IBUFFETT: THINK KRAFT IS STILL UNDERVALUED.I JUST DON’T THINK IT’S AS UNDERVALUED AS THREE WEEKS AGO.
QUICK: WE SHOWED A BID/ASK THE SHARES ARE OFF BY MORE THAN 2%, BASED ON YOUR COMMENTS TODAY, PEOPLE WILL THINK YOU’RE OFF YOUR ROCKER. YOU’RE SHOOTING YOURSELF IN THE FOOT.
BUFFETT: NO, KRAFT IS, IN MY VIEW, AND PROBABLY BILL ACKMAN’S VIEW, KRAFT WAS SIGNIFICANTLY UNDERVALUED.IT‘S JUST LESS UNDERVALUED BECAUSE IT’S ISSUING A BUNCH OF STOCK AT A CHEAP PRICE, AND IT’S PAYING A FULL PRICE AND IT’S SOLD A GOOD BUSINESS. THAT HURTS THE VALUE.NOW, HOW MUCH IT’S HURT THE VALUE?DOES IT HURT AT THE $2, $3 A SHARE?I THOUGHT IT WAS WORTH A LOT MORE THAN $27 OR $28.
KERNEN: HOW DOES THE CADBURY VALUATION MEASURE UP WITH THE WRIGLEY MARS VALUATION, WARREN?
BUFFETT: WELL, THE WRIGLEY MARS VALUATION WAS A VERY HIGH VALUATION. WE WERE A FINANCING PARTNER IN THAT.THERE’S NO QUESTION THAT THE WRIGLEY VALUATION WAS A HIGH VALUATION. MARS —
KERNEN: THAT’S THE DIFFERENCE, THOUGH, AS A FINANCING PARTNER.
BUFFETT: BUT THAT IS NO REASON — THAT IS NO REASON TO PAY THE SAME PRICE FOR SOMETHING ELSE.I MEAN, I HAVE INVESTMENT BANKERS COME AROUND ME ALL THE TIME AND SAY THIS THING SOLD AT 14 TIMES EARNINGS AND THEREFORE YOU COULD PAY 13.I SAY, YOU KNOW, WE SET OUR OWN STANDARDS FOR WHAT MAKES SENSE.
QUICK: WHY DOES BURLINGTON NORTHERN MAKE SENSE? IF YOU’RE GOING TO BE SPLITTING THE STOCK AND PAYING FOR PART OFTHE DEAL IN STOCK WHICH YOU TRADITIONALLY HATE DOING.
BUFFETT: I HATE IT. I’VE WRITTEN THE ANNUAL REPORT AND I SAY THAT I ENJOY ISSUING SHARES AT BERKSHIRE ABOUT AS MUCH AS I ENJOY PREPPING FOR A COLONOSCOPY. THIS IS NOT MY IDEA OF FUN. AND TRUTHFULLY, BURLINGTON SHARES — SHAREHOLDERS ARE RECEIVING $100 A SHARE. IT’S COSTING US SOMEWHAT MORE THAN THAT BECAUSE I DO CONSIDER BERKSHIRE AT SELLING LOWER RATIOS TO BOOK VALUE THAN IT HAS IN MANY YEARS. WE ARE GIVING UP SOMETHING THAT I DON’T LIKE TO GIVE UP IN WHICH I THINK IS SOMEWHAT UNDERPRICED.SO IT’S COSTING US A LITTLE MORE. ON THE OTHER HAND, WE ALREADY OWN 22.6% WHICH WE BOUGHT FOR CASH. WE GAVE THE MINIMUM AMOUNT OF STOCK WE CAN DO IN THIS. WE’RE GETTING $22 BILLION DEPLOYED IN CASH THAT I LIKE OVERALL. BUT IT WAS A VERY, VERY CLOSE THING.IF WE HAD TO GIVE ANY MORE STOCK, WE WOULDN’T HAVE DONE THEDEAL. I’VE NEVER SAID THIS IS A BARGAIN DEAL. I THINK IT’S A GREAT LONG-TERMASSET FOR US TO OWN. AND I THINK IT’S SOMETHING WHEREWE’LL GET A CHANCE TO USE CASH INTELLIGENTLY OVER THE NEXT CENTURY.BUT IT IS NO BARGAIN DEAL. I WISH I WOULD HAVE BOUGHT THE PIZZA BUSINESS AT NINE TIMES PRETAX EARNINGS.BUT ONE DOESN’T PRECLUDE THE OTHER.
QUICK: WOW! DOES IRENE ROSENFELD — YOU SAIDYOU’VE HAD CONVERSATIONS WITH HER. SHE KNOWS EXACTLY HOW YOU FEEL?
BUFFETT: SURE, I KNOW HOW SHE FEELS. IT’S VERY CORDIAL. SHE’S A VERY DECENT PERSON.AND SHE IS SAYING EXACTLY WHAT SHE BELIEVES.THERE’S NO QUESTION ABOUT THAT. I’M SAYING WHAT I BELIEVE, AS YOU CAN TELL, TOO. IT’S A DIFFERENCE OF OPINION. YOU KNOW, THEY MAY EVALUATE MONEY. OF COURSE, YOU GET INVESTMENT BANKERS IN THE PICTURE. EVERYBODY BASICALLY THERE’S A DEAL MOMENTUM THAT GETS CREATED IN ANY TRANSACTION.THAT’S NOT UNIQUE TO KRAFT.I’VE SEEN THAT — I’VE BEEN ON 19 BOARDS.I’VE SEEN IT FOR 50 YEARS.MAYBE I’M SUSCEPTIBLE TO IT, TOO. MAYBE WHEN I HEAR THAT CHOO CHOO, I GET CARRIED AWAY MYSELF. WE DID PAY RIGHT UP TO THE ABSOLUTE HILT FOR BURLINGTON, NO QUESTION.
QUICK: HAVE YOU HEARD FROM ANY OF YOU OTHER COMPANIES YOU OWN MAJORSTAKES IN, ONCE THEY SEE YOU TAKING THIS ACTIVIST BENT, DOES THAT WORRY THEM?
BUFFETT: THEY FIGURE I’VE GOTTEN IT OUT OF MY SYSTEM SO THEY DON’T HAVE TO WORRY, AND THEY’RE RIGHT.NO, WE FEEL GOOD — I FEEL GOOD ABOUT IRENE AS AN OPERATOR. SHE WILL DO AS GOOD A JOB WITH THIS AS CAN BE DONE. IT’S JUST WHAT WAS PAID FOR.
QUICK: YOU RECOGNIZE THE IRONY THAT WHEN YOU CAME OUT AND VOTED NO AGAINST THE ISSUANCE OF STOCK FOR KRAFT SO THAT THEY COULD GO AHEAD WITH THIS DEAL, YOU DROVE UP KRAFT’S SHARE VALUE. PEOPLE THOUGHT, OKAY.THEY’RE NOT GOING TO OVERPAY FORTHIS.AND THAT, IN TURN, ALLOWED KRAFT TO GO AHEAD AND MAKE THIS HIGHERBID WITHOUT HAVING TO ASK YOUR PERMISSION ON STUFF.
BUFFETT: IT’S WORKED OUT THAT WAY.I MEAN, I GUESS THEY WOULD HAVE GONE UP ANYWAY.
QUICK: THEY WOULD HAVE.
BUFFETT: I DON’T KNOW THAT AND NOBODY KNOWS. CLEARLY, THEY WANT THE DEAL, YOU KNOW. I’VE SEEN THIS SO MANY TIMES. IF YOU REALLY WANT THE DEAL, YOU KNOW, YOU’LL HAVE ALL THE PEOPLE THAT WORK FOR YOU TELLING YOU TODO — YOU KNOW, IT’S TEAM SPIRIT.IT‘S WINNING.IT REALLY ISN’T A WIN. WHENEVER A COMPANY MAKES A DEAL, I GO TO THE STORE AND I BUY A CONGRATULATIONS CARD AND I BUY ASYMPATHY CARD. AND THEN FIVE YEARS LATER I DECIDE WHICH ONE TO SEND.
QUICK: LET’S TALK ABOUT A COUPLE OF YEAR OTHER HOLDINGS.THERE WAS SOME NEWS, I THINK IT WAS YESTERDAY, COSCO, THE KOREAN STEEL COMPANY, BUT OUT A PRESS RELEASE AND SAID WARREN BUFFETT PLANS TO BUY MORE SHARESIN THE FUTURE.IS THAT TRUE?
BUFFETT: I THINK I HAVE TO BRUSH UP ON MY KOREAN A LITTLE BIT. I SAID THAT I LIKE THE COMPANY A LOT.I SAID I WISHED I HAD BOUGHT MORE WHEN IT WAS A LOT CHEAPER WITHIN THE PAST YEAR.IT GOT WAY DOWN IN TERMS OF PRICE.IT‘S A WONDERFUL COMPANY, BUT I DON’T HAVE PLANS TO BUY MORE. IF IT WENT DOWN SIGNIFICANTLY, I MIGHT VERY WELL BUY MORE.CERTAINLY I HAVE NO PLANS TO SELL ANY. BUT NO, WE HAVE NO BUY ORDERS IN.
QUICK: SO THAT COULD BE LOST IN TRANSLATION?
BUFFETT: I THINK IT WAS, YEAH.
QUICK: ANOTHER DEAL THAT WAS A BIG TALK THIS WEEK WAS SWISSRE.YOUR TAKING ON A LITTLE OVER $1.25 BILLION WORTH OF BUSINESS FOR THEM?
BUFFETT: OVER TIME, THAT CONTRACT WILLPROBABLY RESULT IN PERHAPS $50 BILLION OF PREMIUMS. IT’S THE LARGEST — TO MY KNOWLEDGE, IT’S THE LARGEST INSURANCE CONTRACT EVER WRITTEN.
QUICKl THE LARGEST INSURANCE CONTRACT EVER WRITTEN.
BUFFETT: I WOULDN’T BE SURPRISED. I CAN’T PROVE THAT.
QUICK: I READ THE SWISS RELEASE, AND IT SAID THAT THEY ARE DOING THIS BECAUSE THEY THINK THAT THEY CANGET MORE FOR THEIR MONEY IN OTHER ARENAS. I THINK THEIR GOAL IS TO GET MORE THAN 14 TIMES. RIGHT, 14%.14% FOR THE INVESTMENT THEY’RE PUTTING IN.WHAT’S YOUR REASON FOR WHY YOU TAKE IT ON?
BUFFETTl I THINK WE’LL MAKE MONEY.IT‘S VERY SIMPLE.NOW, IF THERE’S SOMETHING TERRIBLE, PANDEMIC OR IF THERE WERE SOME INCREDIBLE TERRORIST ATTACK THAT RESULTED IN MORTALITY IN THE UNITED STATES, INCREASING BY A DRAMATIC AMOUNT BECAUSE THIS IS U.S. LIFE BUSINESS, IT’S SPREAD ALL OVER. IT’S NOT JUST A FEW POLICIES. IT’S MILLIONS OF POLICIES.PROBABLY HUNDREDS OF THOUSANDS, CERTAINLY. BUT ANYTHING THAT WOULD CHANGE THE MORTALITY RATE OF THE UNITED STATES DRAMATICALLY UPWARD FOR ANY SUSTAINED PERIOD WOULD BE BAD FOR US ON THIS. BUT IF MORTALITY IS MORE OR LESS NORMAL, AND PARTICULARLY IF THERE’S SOME IMPROVEMENT DUE TO MEDICINE OVER THE YEARS AND SO ON SO THAT MORTALITY IMPROVES INTHE COUNTRY, THEN WE’VE GOT A DECENT, LONG-TERM REAL.BUT THEY’VE GOT THEIR OWN REASONS IN DEPLOYING CAPITAL IN OTHER AREAS. IT CAN BE A GOOD DEAL FOR BOTH SIDES.
QUICK: WE TALKED WITH DAVE SOKOL BEFORE YOU CAME ON ABOUT AN HOURAGO. HE WAS TALKING A LITTLE BIT ABOUT WHAT HE SEES IN THE HOUSING MARKET. OBVIOUSLY, BERKSHIRE HAS A PRETTY GOOD FEEL FROM A NUMBER OF ITS DIFFERENT BUSINESSES ON WHERE THINGS ARE HEADED.
BUFFETT: IT WAS INTERESTING. I HEARD RICH A FEW MINUTES AGO TALK ABOUT THE HOUSING NUMBERS — HOUSING STARTS BEING A BAD NUMBER. YOU WANT A BAD NUMBER FOR A WHILE.THE ONLY WAY YOU CLEAN UP AN EXCESS INVENTORY IS TO HAVE MOREDEMAND THAN SUPPLY.WE HAD MORE SUPPLY THAN DEMAND FOR THREE OR FOUR YEARS IN HOUSING. WE PRODUCED 2 MILLION HOUSING UNITS A YEAR.WE CREATED 1.3 MILLION HOUSEHOLDS.RESULT, TROUBLE. AND THE LONGER YOU DO IT, THE MORE OVERHANG IN INVENTORY YOU HAVE. THE ONLY WAY TO CLEAN IT UP, ONEWAY, YOU CAN START GETTING 13-YEAR-OLDS TO START CO-HABITING AND CREATE MORE HOUSEHOLDS THAT WAY.I’M SURE WE’D GET A LOT OF VOLUNTEERS AMONG 13-YEAR-OLDS. BUT IF YOU’RE GOING TO HAVE NORMAL HOUSEHOLD FORMATION, YOU’VE GOT TO HAVE SUBNORMAL HOUSING PRODUCTION TO WORK OFF THE INVENTORY. THE LOWER THE NUMBER IS TEMPORARILY, THE BETTER.IT‘S BAD FOR OUR BRICK BUSINESS.IT‘S BAD FOR OUR CARPET, IT’S BAD FOR OUR INSULATION BUSINESS,ALL KINDS OF THINGS.
QUICK: IT’S BAD FOR JOBS AND THAT PRESENTS A PROBLEM FOR THE ADMINISTRATION.
BUFFETT: WE CREATED THE PROBLEM WE COULD HAVE A CASH FOR CLUNKERS PROGRAM ON HOUSES. IF WE WOULD BLOW UP 3 OR 4 MILLION HOUSES TODAY THE HOUSING SHORTAGE WOULD BE OVER, IT WOULD BE IN THE RIGHT PLACE.IT WOULDN’T BE MY HOUSE OR YOUR HOUSE.BUT IF YOU HAVE AN INVENTORY OVERHANG, YOU HAVE TO HAVE DEMAND BE GREATER THAN SUPPLY FOR A SIGNIFICANT PERIOD OF TIME TO WORK IT OUT. AND WE’RE WELL ON THE WAY TO THAT. A LOT OF THE HOUSING PROBLEM IS BEHIND US. THE COMMERCIAL REAL ESTATE PROBLEM IS NOT BEHIND US. BUT THE HOUSING IS.
QUICK: BUT ARE YOU SAYING THAT THE ADMINISTRATION SHOULD NOT HAVE PUT IN SOME OF THESE PROGRAMS TOTRY AND EASE THE PAIN ALONG THE WAY? LIKE A CASH FOR CLUNKERS, LIKE THE MORTGAGE TAX DEDUCTION THAT YOU CAN GET?
BUFFETT: WELL, CASH FOR CLUNKERS, THE IDEA IS IF YOU DESTROY A BUNCH OF CARS, PEOPLE WILL NEED TO BUYMORE CARS.YOU COULD HAVE CASH FOR CREAM PUFFS. BRING IN YOUR BRAND-NEW CAR YOU BOUGHT YESTERDAY AND BLOW IT UP,DESTROY IT, AND THEN YOU’D HAVE DEMAND FOR ONE MORE CAR. YOU CAN ALWAYS CREATE DEMAND IN SOMETHING LIKE CARS, YOU KNOW, JUST SAY HALF THE CARS IN THE UNITED STATES HAVE TO BE DESTROYED TOMORROW MORNING. YOU’D HAVE THE BIGGEST CAR DEAL YOU’VE EVER SEEN.SO THOSE KIND OF PROGRAMS — ANDWE DID SOME OF THAT IN THE NEW DEAL.YOU DO IT WHEN YOU FORCE FARMLAND TO BECOME FALLOW FOR A WHILE.YOU DECREASE THE OUTPUT OF CROPS. ALL KINDS OF WAYS OF INTERFERING WITH, YOU KNOW, WITH CHANGING THE SUPPLY/DEMAND SITUATION. BUT OVERALL, I THINK PARTICULARLY IF YOU GO BACK TO THE FALL OF 2008, OVERALL, OUR GOVERNMENT HAS WARDED OFF SOMETHING THAT WOULD HAVE BEEN VERY, VERY, VERY MUCH WORSE. I MEAN, I GIVE THE GOVERNMENT CREDIT OVERALL.I CAN KNOCK THIS PROGRAM OR THATPROGRAM.BUT OVERALL, THE GOVERNMENT’S DONE A GOOD JOB.
KERNEN: WARREN, WE’VE COME BACK — THE MARKET’S COME BACK A LONG WAY, AS YOU KNOW.AND YOU’VE COMMENTED.AND I KNOW ON ANY GIVEN DAY YOU’RE NOT GOING TO SAY WHETHER IT’S EXPENSIVE OR CHEAP OR WHATEVER. BUT HAVE WE FIXED ENOUGH OF WHAT GOT US INTO THE MESS TO WARRANT BEING BACK AT 10,700, OR IS THIS A BIT OF A BUBBLE FROM ALL OF THE FED ACCOMMODATIONS AND IN ALL THE THINGS THAT THE EXTRAORDINARY MEASURES WE’VE TAKEN.DO YOU HAVE A FEELING FOR WHETHER THIS IS REAL AND SUPPORTED?
BUFFETT: WELL, I HAVE NO FEELING AT ALL, YOU KNOW, AS YOU’VE SAID, IDON’T KNOW WHERE THE MARKET’S GOING TO BE IN A DAY, WEEK, MONTH OR YEAR. I DO KNOW THAT IF I HAD A CHOICE BETWEEN HOLDING CASH OR 30-YEAR BONDS OR OWNING EQUITIES, I WOULDN’T HESITATE FOR A SECOND TO OWN EQUITIES. YOU KNOW, THE MARKET IS UP QUITE A BIT FROM MARCH. BUT IT’S DOWN A LOT FROM THREE OR FOUR YEARS AGO.AND IF I WERE GOING TO BUY A FARM, JOE, AND SOMEBODY SAID, WELL, WITH GREAT CERTAINTY, THEY SAID, YOU KNOW, THIS IS GOING TOBE A TERRIBLE YEAR IN TERMS OF WEATHER, I WOULDN’T SAY, WELL, I’LL ONLY PAY $1,100 AN ACRE, BUT I’LL PAY $1,500 AN ACRE IF YOU’LL GIVE ME A FOVERABLE FORECAST IF I AM GOING TO OWN A FARM FOR 50 YEARS I AM GOING TO HAVE A FEW LOUSY YEARS IN TERMS OF WEATHER I’LL HAVE A FEW GOOD YEARS AND A LOT OF PRETTY GOOD YEARS.AND THE IDEA THAT YOU TRY TO TIME PURCHASES BASED ON WHAT YOUTHINK BUSINESS IS GOING TO DO IN THE NEXT YEAR OR TWO, I THINK THAT’S THE GREATEST MISTAKE THAT INVESTORS MAKE BECAUSE IT’S ALWAYS UNCERTAIN.PEOPLE SAY IT’S A TIME OF UNCERTAINTY. IT WAS UNCERTAIN ON SEPTEMBER 10th, 2001, PEOPLE JUST DIDN’T KNOW IT.IT‘S UNCERTAIN EVERY SINGLE DAY. SO TAKE UNCERTAINTY AS PART OF BEING INVOLVED IN INVESTMENT AT ALL.BUT UNCERTAINTY CAN BE YOUR FRIEND.I MEAN, WHEN PEOPLE ARE SCARED, THEY PAY LESS FOR THINGS.WE TRY TO PRICE. WE DON’T TRY TO TIME AT ALL. AND PRICING, I WOULD RATHER OWN EQUITIES TODAY —
KERNEN: PEOPLE SAY ALL THE TOXICS — PEOPLE SAY ALL THE PROBLEMS THA WE HAD IN MARCH AT 666 ON THE S&P THAT NOTHING’S CHANGED.TOXIC ASSETS ARE STILL SOMEWHERE WE’RE STILL OVERLEVERAGED.YOU HEAR THAT ALL THE TIME.THAT NOTHING’S CHANGED, AND HERE WE ARE 70% HIGHER THAN WHERE WE WERE.THEY SAY IT’S JUST NOT SUPPORTABLE.
BUFFETT: WELL, I WOULD SAY THEY’RE MAKING A MISTAKE IN TERMS WHAT THEY WERE SELLING FOR IN MARCH.I MEAN, YOU KNOW, IF, LIKE I SAY, IF I BUY A FARM NEAR HERE, YOU KNOW, AND IT TURNS OUT TO BE A TERRIBLE YEAR AND PESTS COME IN AND THERE’S NO RAIN AND ALL THAT SORT OF THING, AM I GOING TO SELL IT FOR HALF THE PRICE IT WAS SELLING FOR A YEAR EARLIER WHEN I KNOW OVER THE NEXT 100 YEARS THERE’S GOING TO BE 90 YEARS THAT ARE PRETTY GOOD AND AFEW BAD ONES, IT DOESN’T MAKE ANY SENSE TO TRY AND TIME THINGSTHAT WAY.NOBODY KNOWS WHAT’S GOING TO HAPPEN TOMORROW, EVER. THE ONLY THING IS THEY GET VERY APPREHENSIVE ABOUT IT AT CERTAIN TIMES, PARTICULARLY WHEN OTHER PEOPLE ARE APPREHENSIVE. WHEN PEOPLE GET SCARED, THEY GETSCARED AS A GROUP.THE CONFIDENCE COMES BACK SORT OF ONE AT A TIME. THERE HAS BEEN A LOT OF THINGS THAT HAVE BEEN CLEANED UP IN THE ECONOMY IN THE LAST 18 MONTHS.A LOT OF THE TOXIC ASSETS ARE IN BETTER SHAPE. THERE ARE GOING TORE 4.5 MILLIONHOMES OR THEREABOUTS SOLD IN YEAR. THEREYEAR.THERE ARE 80 MILLION HOMES ROUGHLY IN THE COUNTRY.25 MILLION DON’T EVEN HAVE A MORTGAGE.OF THE 4.5 MILLION HOMES THAT ARE SOLD THE PEOPLE THAT ARE BUYING THOSE ARE PUTTING DOWN REASONABLE DOWN PAYMENTS IN MANY CASES, BUYING MUCH MORE CHEAPLY, COVERING IT BETTER WITH THEIR INCOME, SO THE LIARS’ LOANS HAVE JUST DISAPPEARED TO A GREAT EXTENT, SO EVERY DAY THOSE HOMES ARE GOING INTO BETTER HANDS. 4.5 MILLION HOMES WILL BE IN BETTER, STRONGER HANDS, PEOPLE THAT CAN HANDLE PAYMENTS BETTER AT THE END OF THE YEAR THAN THE START OF THE YEAR, SO THE SYSTEM IS CLEANSING ITSELF BUT IT DOESN’T DO IT IN A DAY, A WEEK, A MONTH, OR EVEN A YEAR.
QUINTANILLA: WARREN, THERE ARE THOSE OUT THERE WHO ARGUE THAT THE ECONOMYIS BEING HELD TOGETHER IN A WAY WITH TAPE AND GLUE.RIGHT? WITH NBS PURCHASES AND STIMULUS MEASURES AND CASH FOR CLUNKERS. BILL DUDLEY OF THE NEW YORK FED IS OUT THIS MORNING AND HE SAYS THE PROSPECT OF ANOTHER FINANCIAL COLLAPSE, IN HIS WORDS, SORT OF A REITERATION OF WHAT HE SAID BEFORE, IS EXTREMELY REMOTE. DO WE HAVE THE CUSHION TO WITHSTAND ANOTHER BIG SHOCK OR WOULD YOU SIDE WITH WHAT DUDLEY IS SAYING THIS MORNING?
BUFFETT: WELL, I THINK WE HAVE THE CONDITIONS IN PLACE TO TAKE CAREOF ANY NORMAL SHOCKS.IF YOU TALK ABOUT SOME, YOU KNOW, MAJOR TERRORIST ACTIVITY THAT IS CARRIED OFF OR SOMETHING, I MEAN, THERE ARE EXOGENOUS FACTORS THAT COULD CAUSE PROBLEMS NOW JUST LIKE THEY COULD HAVE FIVE OR TEN OR 20 YEARS AGO. AND WE DIDN’T KNOW THEM AHEAD OFTIME BUT IF YOU’RE TALKING ABOUTA WORLD WHERE THERE IS NOTHING OF AN EXTRAORDINARY NATURE I THINK THE CHANCES OF A SECOND FINANCIAL PANIC ARE EXTREMELY LOW.
QUICK: WARREN, WHEN YOU TALK, PEOPLELISTEN AND PEOPLE ARE WATCHING RIGHT NOW.IN FACT, JAMIE DIMON WROTE IN.HE IS WATCHING.HE SAYS HE AGREES WITH MOST OF WHAT YOU’RE SAYING.HE WROTE IN WHEN YOU WERE TALKING ABOUT WASHINGTON.
BUFFETT: I FEEL GOOD.JAMIE IS A VERY SMART GUY AND HEHAS RUN A BANK THE RIGHT WAY.
QUICK: WELL, WHEN YOU START TALKING ABOUT SOME OF THESE ISSUES, DO YOU TALK TO OTHER CEOs ESPECIALLY WHO ARE INVOLVED IN THE FINANCIAL INSTITUTIONS? WHAT’S THEIR TAKE ON WHAT’S HAPPENING IN WASHINGTON AND HOW MUCH OF THIS, I GUESS, POLITICALRHETORIC AND THE BACK AND FORTH ABOUT THE ENEMIES ON WALL STREET, HOW BIG OF A CONCERN IS THAT?
BUFFETT: WELL, THEY DON’T LIKE IT, OBVIOUSLY. BUT WASHINGTON DOESN’T LIKE THEM– IMEAN, IT’S, YOU KNOW, BANKERS GET POINTED AT, WHENEVER THERE ARE PROBLEMS BANKERS GET POINTED AT AND THERE ARE SOME THINGS TO POINT TO BUT I DON’T THINK, YOU KNOW, THAT’S AFFECTING JOBS NOW. I MEAN, PEOPLE SAY, YOU KNOW, I DON’T THINK ANYBODY IS NOT HIRING.IF WELLS FARGO NEEDS PEOPLE THEY’RE GOING TO HIRE PEOPLE.YOU KNOW. IF THEY HAVE FIVE OR SIX MORE PERCENT CUSTOMERS THIS YEAR THANLAST YEAR THEY’LL NEED MORE PEOPLE.THEY’LL NEED MORE PEOPLE IN THEIR MORTGAGE DEPARTMENT BECAUSE IT’S INCREASED THEIR SHARE OF MARKET. BUSINESSMEN MAKE SELF-INTERESTED DECISIONS, YOU KNOW, JUST LIKE ALL OF US, AND THEY’RE NOT GOING TO EXPAND IF THEY DON’T SEE DEMAND.ON THE OTHER HAND IF THE ORDERS COME IN, AND THEY WILL AT SOME POINT, I MEAN, I WILL GUARANTEE YOU THAT OUR BRICK BUSINESS AND CARPET BUSINESS WILL BE DOING A LOT BETTER FIVE YEARS FROM NOW. I WON’T GUARANTEE FIVE MONTHS FROM NOW.I DON’T KNOW WHEN IT WILL CHANGE.WHEN IT DOES WE’LL BE EMPLOYING MORE PEOPLE.
QUICK: ARE BANKS LENDING MONEY OR IS IT SIMPLY WHAT YOU’RE SAYING PEOPLE AREN’T LOOKING TO TAKE MORE MONEY OUT BECAUSE THEY DON’T SEE THE DEMAND?
BUFFETT: YEAH, WELL, THERE ARE RELATIVELY FEW BUSINESSES THAT NEED MORE CAPITAL NOW TO SUPPORTMORE BUSINESS.NOW, THERE CERTAINLY IS AN ECONOMY WHERE THAT WOULDN’T BE TRUE, BUT THE PEOPLE THAT NEED BUSINESS, THAT NEED LOANS TO TAKE CARE OF OPERATING LOSSES ARE — THAT’S A MISTAKE TO LEND THEM MONEY IN MOST CASES AND THERE’S ALL KINDS OF PEOPLE THATARE HAVING FINANCIAL TROUBLES THAT WOULD LIKE TO BORROW MONEY TO GET THEIR WAY OUT OF FINANCIAL TROUBLES.MOST OF THE TIME THAT DOESN’T WORK. THERE ARE TIMES WHEN IT DOES BUT MOST OF THE TIME IT DOESN’T. PEOPLE WANTING MONEY FOR EXPANSION, WHERE THEY’VE GOT PROFITABLE BUSINESSES, I DON’T THINK ARE HAVING ANY TROUBLE GETTING — BUT THERE ARE — YOU DO NOT WANT TO GO AROUND LENDINGMONEY TO PEOPLE USING IT TO COVER OPERATING LOSSES. AND THERE ARE PLENTY OF PEOPLE THAT WANT YOU TO DO IT.I — THE BANKERS I TALKED TO ARE DYING TO GET LOANS. I MEAN, THE LAST THING THEY WANTTO DO IS SIT AROUND WITH MONEY AT FED FUNDS RATES OR LIBOR. THERE IS NO MONEY IN THAT. THEY WANT LOANS.BUT THEY WANT LOANS WHERE THEY’RE GOING TO GET PAID BACK.THEY TOOK OUT A LOT OF LOANS A FEW YEARS AGO THAT WEREN’T SO GOOD. I DO NOT THINK THERE IS A GENERAL RELUCTANCE AT ALL AMONG BANKS TO LEND.
QUICK: SHORT OF AN EXTREME ACT LIKE A TERRORIST ACT, WHAT’S YOUR BIGGEST CONCERN WHEN YOU LOOK OUT OVER LET’S SAY THE NEXT YEARAND THE ECONOMY?
BUFFETT: WELL, THAT WOULD BE MY BIGGEST — IT’S GOING TO TAKE TIME.YOU KNOW, NEXT DAY — THESE THINGS TAKE THEIR WAY TO WORK THROUGH. I MEAN, PEOPLE DON’T HAVE TO BUY CARPET TOMORROW.THEY DON’T HAVE TO BUY BRICK FROM US TOMORROW.THEY DON’T HAVE TO BUY INSULATION FROM US TOMORROW. NOW WE’RE DOING BUSINESS BUT NOTTHE KIND OF BUSINESS WE WILL BE DOING WHEN THINGS GET BACK TO NORMAL. AND THAT WILL HAPPEN BUT WE ARE WORKING OFF EXCESSES. AND HUGE EXCESSES IN THE LEVERAGING FIELD AND IT WAS THE FIRST THING I TALKED ABOUT WHEN THIS HAPPENED, THAT THE WORLD WAS GOING TO DELEVERAGE AND THE ONLY PARTY THAT COULD REALLY LEVERAGE HELP WAS THE U.S. GOVERNMENT.THANK GOD IT DID.I MEAN, BEN BERNANKE HAS TAKEN ON A TRILLION OF MORTGAGES, YOU KNOW, I MEAN, HE’S GOT A GREAT HEDGE FUND NOW. I MEAN, HE’S GOT THESE 5% ASSETS AND NO COST ON THE LIABILITY SIDE OF IT. HE SHOULD HAVE NEGOTIATED A BETTER DEAL HE HAD TO BUY THAT TRILLION.I MEAN, THINGS YOURE GETTING RIGHTED.BALANCE SHEETS ARE CLEANING UP.YOU CAN TAKE A GOLDMAN SACHS OR, YOU KNOW, THE LEVERAGE RATIO IS IN HALF.THEIR CAPITAL IS LIKE IT’S NEVER BEEN BEFORE. SO IT’S GETTING RIGHTED BUT, YOU KNOW, IT GOES THROUGH THE WRINGER AND STATE FARM DOES WONDERFULLY.THE WORLD WILL GO ON AND WE WILLHAVE A BETTER WORLD FIVE AND TEN YEARS FROM NOW BUT FIVE MONTHS FROM NOW WHO KNOWS WHAT IT’LL BE?
QUINTANILLA: WARREN, THERE IS A — THERE IS A SCHOOL OF THOUGHT ALONG THOSE LINES THAT YOU COULDHAVE STUBBORNLY HIGH UNEMPLOYMENT AND COULD HAVE CONSUMERS RELUCTANT TO SPEND BUT YOU HAVE COMPANIES IN THE SWEET SPOT OF THE PROFIT CYCLE WHERE MARGINS ARE GOING UP AND CASH LEVELS ARE HIGH AND PRODUCTIVITY IS THROUGH THE MOON AND YOU COULD HAVE THE MARKETS DIVERGE SOMEWHAT FROM THE OVERALL ECONOMY OVER THE NEXT 12 MONTHS DON’T YOU THINK?
BUFFETT: WELL, I THINK MARKETS FREQUENTLY WILL DIVERGE FROM TH ECONOMY.THAT’S WHY I THINK IT’S A BIG MISTAKE FOR PEOPLE TO START WHEN THEY THINK ABOUT BUYING A STOCK I THINK IT’S A BIG MISTAKE TO START, TO THINK ABOUT WHAT’S GOING TO HAPPEN IN THE NEXT 12 MONTHS OR THE NEXT SIX MONTHS EITHER TO THE COMPANY OR TO THE — OR TO THE ECONOMY GENERALLY. I DO NOT — IF I’M BUYING XYZ COMPANY I AM NOT CONCERNED ABOUTWHAT THEY’RE GOING TO EARN IN THE NEXT YEAR. THE NEXT YEAR IS GOING TO BE OVER AND THEN PEOPLE ARE GOING TO BE LOOKING AT THE YEAR AFTER THAT. IF I’M RIGHT ABOUT WHERE THEY’REGOING TO BE IN FIVE OR TEN YEARS WE’LL MAKE A LOT OF MONEY BUT I CAN’T TIME STOCKS BASED ON WHAT THEY’RE GOING TO DO THIS QUARTER AND NEXT QUARTER.I DON’T KNOW ANYBODY ELSE THAT CAN BUT MAYBE THEY CAN.
QUICK: YOU KNOW, WE ARE JUST ABOUT OUT OF TIME TODAY BUT YOU’VE GOTTHE SHAREHOLDERS THAT ARE GOING TO BE COMING IN HERE IN JUST ABOUT AN HOUR, HOUR AND A HALF TIME THIS MORNING. THIS MEETING TODAY YOU SAY YOU THINK YOU ALREADY HAVE THE VOTES.
BUFFETT: WE HAVE THE VOTES YEAH.
QUICK: YOU FEEL PRETTY CONFIDENT ABOUT THAT WILL THE SHAREHOLDERS BE ASKING OTHER QUESTIONS?
BUFFETT: NO. THIS MEETING IS JUST ABOUT THE SPLIT BECAUSE WE DIDN’T WANT TO TURN THIS INTO A SECOND ANNUAL MEETING.WE’LL HAVE THE ANNUAL MEETING ON MAY 1st. WE’LL HAVE SO MANY PEOPLE HERE YOU WON’T BE ABLE TO BELIEVE IT AND WE’RE GOING TO TAKE QUESTIONS EVEN A HALF HOUR LONGER THAN NORMAL AND GO FROM 9:30 TO 3:30 EVEN AND THEN, YOU KNOW, THE PRESS THE NEXT DAY ANDALL OF THAT SORT OF THING. SO THIS IS — LIMIT4ED TODAY
QUICK: THIS VOTE, YOU SAY YOU HAVE THE VOTES GOING INTO IT.BURLINGTON NORTHERN SHAREHOLDERSVOTE NEXT MONTH.
BUFFETT: RIGHT. THEIR VOTE IS TOUGHER BECAUSE THEY NEED — BECAUSE WE OWN THE SHARES WE DO ALREADY — THEY NEED 66 2/3% OF ALL SHARES NOT OWNED BY BERKSHIRE, NOT JUST THE ONES AT THE MEETING. SO THEY HAVE A PRETTY HIGH HURDLE RIGHT NOW.BUT THE VOTE IS COMING IN WELL, BUT THIS VOTE IS A LOT EASIER.
QUICK: THERE’S BEEN SOME LEGISLATIONPROPOSED IN CONGRESS THAT WOULD REGULATE MORE OF THE RAILROADS.DO YOU HAVE ANY CONCERNS?
BUFFETT: WELL THE RAILROADS ARE REGULATED, SHOULD BE REGULATED ON THE OTHER HAND IT SHOULD BE WHAT I WOULD CALL ENLIGHTENED REGULATION. THE COUNTRY NEEDS BOTH OUR UTILITY BUSINESS AND OUR RAILROAD BUSINESS TO MAKE INVESTMENTS FOR THE FUTURE.WE SHOULD EARN A DECENT RETURN ON THE CAPITAL EMPLOYED.WE SHOULDN’T EARN A FABULOUS RETURN.WE’RE NOT ENTITLED TO IT BUT WE SHOULD EARN A DECENT RETURN AND I THINK REGULATION OVER TIME WILL PROVIDE THAT AND WE’LL DO OUR SHARE.WE’LL INVEST BILLIONS AND BILLIONS AND BILLIONS TO HAVE OUR FACILITIES PREPARED FOR THE SOCIETY OF TOMORROW.
QUICK: ALL RIGHT.WELL, WARREN, THANK YOU VERY MUCH FOR JOINING US THIS MORNING.WE’LL BE HERE THROUGH THE DAY TALKING A LITTLE BIT MORE ABOUT WHAT HAPPENS AT THE MEETING TODAY BUT, AGAIN, THANK YOU FOR BEING SO GENEROUS WITH YOUR TIME.
BUFFETT: THANKS FOR HAVING ME.
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