OtherWe are in San Diego, California this afternoon for a conversation with Warren Buffett. He is the man congressional leaders, the administration and the Federal Reserve want to talk and talk to. He is the legendary chairman and CEO of Berkshire Hathaway. Its success has made him the world's richest man. He's admired for his investment results over a long period of time. He is trusted for his common sense and the fact that he's warned over the years in his annual letter to stockholders about some of the things that are contributing to the crisis facing America and the global economy. For all those reasons, we have come to see him in San Diego, where he is attending the Fortune Magazine's Most Powerful Women Summit. Later, he will be interviewed at that conference by the Fortune reporter and longtime friend, Carol Loomis. We come this evening from the studios of our public television affiliate in San Diego, KPBS. I thank my friend Warren Buffett for taking time in a busy schedule to talk to us.
WarrenMy pleasure, Charlie.
OtherLet me talk with the news of today. You have announced an investment of $3 billion in General Electric along the same terms as the Goldman Sachs.
WarrenYeah, almost identical.
OtherWhy GE?
WarrenWell, I got a call this morning from a friend of mine at Goldman Sachs saying they might be interested in such an investment. I'm familiar with the company. I've known the management, the current management, Jack Welch before Jeff Immelt. I've known them for decades, and so I understand their businesses. We do a lot of business with them, and GE is going to spend, I think it's the longest running stock in the Dow Jones Industrial Average. It'll be 100 years from now it'll be around. I hope I'm around then, too. It was an attractive investment, and we've had a lot of money around over the last two years, and we're seeing some things that are attractive now.
OtherAre you looking at other things?
WarrenI look at everything, Charlie. That's my job. I really do. I mean, every day. I'm thinking about everything.
OtherYeah. I know. But cash is said to be king now. I mean, are you sitting on a lot of cash so that this is a time for Berkshire Hathaway and Warren Buffett to look carefully at a lot of opportunities?
WarrenYeah, we want to use cash. The reason we haven't used our cash two years ago, we just didn't find things that we were that attractive. But when people talk about cash being king, it's not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of the times when it
Warrenbuys a fair amount more, and so we use it. There's a time to accumulate and a time to spend.
QuestionerAbsolutely.
WarrenYou want to be greedy when others are fearful, and you want to be fearful when others are greedy. It's that simple. And where are they now? They're pretty fearful. In my adult lifetime, I don't think I've ever seen people as fearful economically as they are right now.
QuestionerAnd why is that, you think?
WarrenWell, it's because they have seen the credit market seize up. They've gotten worried about money market funds, although the latest proposition from government should take care of that. They've seen 8 percent of the bank deposits in the United States get moved very skillfully, I might say, within the last couple of weeks from institutions that they thought were fine a few months ago to other institutions. They are not wrong to be worried.
QuestionerIs it being felt, as people often point out, on Main Street?
WarrenWell, it's being, you know, I read about auto sales today. I mean, if you're an auto dealer, you're feeling it. If you're a furniture retailer like we are, you're feeling it. If you're a jewelry retailer, you're feeling it. I know some of these businesses because we're in them. It's being felt, but it'll be felt big time more if we don't do something about it.
QuestionerWhat's going on? The Senate will vote sometime this evening. Right. Are you satisfied with that rescue plan?
WarrenWell, I don't think it's perfect, but I don't know that I could draw one that's perfect. But I'd rather be approximately right than precisely wrong. And it'd be precisely wrong to turn it down. We need, we have a terrific economy. It's like a great athlete that's had a cardiac arrest, you know, and it's flat on the floor and paramedics have arrived and, you know, they shouldn't argue about whether they put the resuscitation, you know, a quarter of an inch this way or a quarter of an inch that way, or they shouldn't start criticizing the patient because he didn't have blood pressure tests or something like that. They should do what's needed right now. And I think they will. And I think the Congress will do the right thing. I think that they've, you know, they get into certain arguments and they start worrying about assessing blame. And there's a little demagoguery. But in the end, something this important, they'll do the right thing. This isn't, this really isn't economic Pearl Harbor, right? That sounds melodramatic, but I've never used that phrase before.
QuestionerAnd this really is one.But go through why that is true beyond the fact that there's a freeze on credit, beyondthe fact that nobody's making loans, beyond the fact that banks don't lend to backs, beyondthe fact that treasury bills are at a low.
WarrenYeah, when, when 40 billion of treasury bills are sold like they were last week, seven daytreasury bills at a yield of one 20th of 1%, that means the whole country is basicallyat the point virtually, or a lot of the country is at the point of putting their money underthe mattress.I mean, you're only one, one 20th of 1% away from where it's better to put it under themattress.You don't want 300 million Americans putting their money under the mattress.I mean, this economy doesn't work well without the lubrication of, of, of credit and trust.And that's been lost.And it's, it's a, it's a huge problem.What you have is you have the major institutions of the world all wanting to deleverage.They want to take down their assets and liabilities.They want to, what seemed so easy to borrow against a year ago, now it looks like ratpoison to them.So they're trying to deleverage.There is only one institution in the world that can leverage up in a way that's all acountervailing force to that, and it's the United States treasury.
QuestionerAre you approving of what has been taking place along the stages that got us to wherewe are now?Whether it's Bear Stearns or Lehman Brothers or AIG, or Freddie and Fannie, or what you'vedone with Goldman Sachs and the rest?
WarrenYeah, I think that basically the right things have been done, but, but no one saw the, thetsunami coming, you know, fully.And so when Bear Stearns came along, it looked like if you stopped the flood at that point,you know, you didn't have to worry about being downstream from it.And, and I think, I think the Fed did the right thing there.And I really thought that would probably halt runs on other major institutions, butit didn't.We have seen wave after wave.And admittedly, there's been somewhat of an ad hoc response there, but I'd rather havean ad hoc response than no response at all.And I don't think, I don't think the treasury could remotely have gone to Congress threeor four months ago and laid out the scenario of what's happened and been credible and gottenthe necessary tools.I think, I think it took a crisis like this.And asking for the powers, asking for, and the levels it was asking for.No, they wouldn't have gotten.
QuestionerSo I, I think it's been, you know, kind of like a tragic play to this point. But at this point, I think it's clear and will be clear to a majority of the Congress. I think it's clear to the American people that there is only one countervailing force to a world where financial institutions are trying to sell instruments every day and where credit has dried up. And that's the United States treasury. But at the same time, there has been in Congress, men and women will tell you this, a resistance across the country because they think, as you well know, it's a bailout of Wall Street and that they are sitting there in their own economic life. And nobody's coming along to say, we're here to help you. We're from the government.
WarrenYeah. Well, the patient that's on the floor with the cardiac arrest is not Wall Street. It's the American economy. I mean, do you think they understand that yet? Because that's the question of communication. They probably don't.
QuestionerYeah. They, I think they probably don't. And I think at any time you'd couple the term Wall Street with bailout or something like that. You know, I don't like what's going on at Wall Street. I don't like what's going on in the executive compensation, you know, but I don't want to give a lecture to this body that's out there having had the heart attack. I want to get it back functioning. And as a practical matter, I mean, if you were Bear Stearns and you were a shareholder, you know, you lost 90 to 95 percent of your money. Good many lost their jobs. They lost very cushy lives, many of them. If you were Lehman, the same thing happened. If you were at AIG, the shareholders are getting creamed on these things. And those shareholders are not just a bunch of big shots in Wall Street. Those are pension funds and those are investors all over the country. I wouldn't worry too much about that. Justice won't be perfect on it. I mean, you may be very mad at some guy that walked away with a huge golden parachute, but that really isn't the important thing. I mean, if Pearl Harbor came along, you could have said the planning was wrong by the military ahead of time, or maybe this battleship shouldn't have all been in the harbor and all that kind of thing. It doesn't make any difference. I mean, the job is Pearl Harbor. And you better not spend weeks and weeks and weeks trying to assign blame or deciding on a complete plan for fighting the whole war and letting a committee decide where the battleship
Othershould go and all of that.
OtherYou better spring into action with the best people you have.
OtherYou have never seen anything like this in your life.
OtherNo, I haven't.
OtherThere are those who argue that we're headed for a recession, you know, and they look at depression as the great fear.
OtherSure.
OtherIs that a possibility?
WarrenIt's a possibility.
OtherIf this plan doesn't work?
WarrenYeah, it's a possibility.
OtherYeah.
WarrenWe have about 6.1 percent unemployment now. We've been in a recession by any common sense definition, because if you look at the American public, they've got 20 billion, 20 trillion, I should say, worth of residential homes. They've got 20 trillion worth of stocks, very roughly. Those are the two big assets of American families. They're both down dramatically for different families. And 95 percent of the people at least are worse off in terms of their residential wealth plus stock wealth from a year ago or two years ago. That is bleeding into the real economy. I mean, that's bleeding into auto sales and jewelry sales and furniture sales and all that. But that wave is just starting to hit. And if the paralysis we have in the credit markets, if every company continues to feel all we want to do is get our balance sheet down, sell assets, it's just the start of what can happen. Unemployment's going to go up under any circumstances. I mean, the 6.1 is going to go higher. But whether it goes and quits at 7 or whether it quits at 10 or 11 or 12 depends on, among other things, the wisdom of Congress and then the wisdom of in terms of carrying out the plan that Congress authorizes.
OtherWould you say that this plan, which you have argued very strongly the Senate ought to pass and the House ought to pass, is simply the plan that we have?
WarrenAnd I don't have a better idea, but it's essential for the confidence of the nation and the system.
OtherYeah.
WarrenAnd I just worry about whether it's enough. But I think it is. Every day that goes by, I mean, if you don't react to Pearl Harbor for a week or two weeks or three weeks, you are behind in the war that you otherwise would have fought. But it's very important that the determination of the U.S. Congress to do what is needed be made evident this week and by the actions of most of the members. I mean, you're not going to get total assent.
OtherWhat makes you confident that this plan will work?
WarrenI mean, well, I think you've got I don't think you can have a better secretary of the Treasury than Hank Paulson. You know, I mean, he is he is in there at the wrong time, probably shouldn't have taken
Warrenthe job.He's a friend of mine.But he knows markets.He knows he knows he knows how corporations work.He knows money and and he's got the interest of the country at heart.And so you've got you've got the right you've got a wonderful person with Sheila Bair.Most of the viewers have never heard of Sheila Bair.Sheila Bair in the last two weeks has taken eight percent of the deposits in the UnitedStates and seamlessly move those over to sound institutions, which in turn have gotten morecapital into them.It's been a magnificent job.Eight percent of the deposit in the United States, tens of millions of depositors thatnobody's ever heard of.She'll never get a golden parachute or she's done a great job.We've got some great public servants.We have, I think, the right people in there to get the job done and then they need moretools and those more tools might be in addition to what's in this plan.Well, they need plenty of they need plenty of money and they really need plenty of flexibilityto carry out this plan.They also need, in my view, to very much tie it to market prices.I have said, Charlie, that the 700 billion, if they buy mortgage related securities ormortgages themselves at current market prices, they're going to make money over time becausethe United States government has staying power and it has a low cost of borrowing.And if I could take one percent of that 700 billion pot and take the gain or loss fromit and be their partner and and they would buy the stuff at market, I'd make a lot ofmoney.No, it's I mean, you have hedge funds and people like that buying these assets to yield15 or 20 percent.I mean, that's the buyer for these people that are trying to unload them.The U.S. Treasury has got borrowing costs like nobody else has.They can borrow basically unlimited amounts.They can stay there for years and years.These assets will be worth more money over time.So when Merrill Lynch sells a bunch of mortgage related assets at 22 cents on the dollar,like they did a month or so ago, the buyer of those is going to make money and he's goingto make a lot more money if it happens to be an institution like the U.S. government,which has very, very cheap borrowing costs.So you are saying to those taxpayers who are worried about what's going to happen to sevenor eight hundred billion dollars, chances are good that when these securities are purchasedand sold, you'll get a lot of money back.
WarrenI think I think you're all of your money back and maybe something else. I would bet on it. I mean, if I got a chance to take one percent of the deal either way, I would I would make that bet.
WarrenWell, when Berkshire Hathaway's laid out three billion dollars for G.E. today, we didn't spend it. We invested it when the federal government buys the mortgages. They're not spending it. They're investing it now. They're investing it in distressed type assets. But they're buying with distressed prices if they buy them at market. It's the kind of stuff I love to do. I just I just don't have seven hundred billion. Maybe we can go into together with your money and my brains. I mean, there's no telling how far we can go. I'll take the deal, whatever you want to do.
QuestionerThere is this, though, I mean, in terms of alternatives, some people have suggested, for example, that why don't we why isn't America doing what Berkshire Hathaway is doing? Why isn't that a better deal for America?
WarrenI don't I don't think it would be crazy to have a a model or an entity model on the Reconstruction Finance Corp. That goes back to 1932, although it was really implemented in 33 under Jesse Jones. And it invested in mostly banks initially and preferred stock and that sort of thing. So there is there are two things needed in the system. The one that's needed overwhelmingly is liquidity. I mean, when people are trying to do deliveries, there has to be somebody there to buy. And they don't have to buy it at fancy prices, but to buy. And then there's also a capital problem with some of the institutions. We have provided capital here with a couple of institutions recently. The federal government did that in the 30s for the RFC, and I think there could well be a proper role for government in that. But would that have been a better idea today? It wouldn't have been big enough today. And it wouldn't be. In fact, you couldn't have if you'd set up an RFC today and you gave them one hundred billion dollars to invest in the capital, there'd be a very cumbersome type of application process and everything. These assets are getting shoved out day by day and loans are coming to commercial papers, not being renewed. I mean, the commercial paper market, when that dries up, you know, that's just like sucking the blood out of the of the economic body of the United States. And that's happening. So I would say that an RFC like thing might make sense. I probably would do it myself.
QuestionerBut I don't think trying to combine that with what's going through now, I think what's needed now is liquidity. All right. There are those who believe and it has been suggested, you know, that this is the time for Warren Buffett to answer the call of his government and a country that's been very good to him. I mean, what are you prepared to do yourself beyond run Berkshire Hathaway?
WarrenWell, that's my job. But any any time I can be of help to the government in terms of giving advice, I've given a little advice actually. Most of it gets ignored when it really counts. But anyway, the no, I am obviously willing to do that. I'm here tonight talking about this, you know, for that reason, it isn't going to do anything for Berkshire Hathaway.
QuestionerWell, that isn't really true. I mean, anything that enables this economy to run in the manner that it should. I mean, we've got the same plants out there we had two years ago. We've got the houses. We've got people that are more productive than they've ever been in the history of this country. We've got a wonderful economic formula in this country. But right now it is being it's been brought to a halt by by some events that well, it's it's the deleveraging that's going on right now that has caused the credit crisis.
QuestionerI mentioned earlier in this introduction to you, if you read your letters to your stockholders, which you write and Carol Loomis edits every year, and you think of your sister as a person you're talking to.
WarrenThat's right. Two sisters. Yeah. Bertie and Doris.
QuestionerYou have talked about derivatives. Derivatives are in part at the core of this problem.
WarrenYes. AIG would be doing fine today. It was one of the ten largest companies in the United States in terms of market value, over 200 billion, the most respected insurer and everything in the world. If they never heard of the word derivatives, they'd be doing fine, everybody going to work in the morning and they would have no troubles. But they they it was very easy to do because very tempting to write numbers on little pieces of paper. And you can kind of report the profits you want to. And and there's no limit on it. I mean, there's no capital requirements to order anything of the sort. And basically, I said there were possibly financial weapons of mass destruction and they have been. I mean, they destroyed AIG. They may have. They certainly contributed to the destruction of Bear Stearns and Lehman, although Lehman had other problems, too.
WarrenI'm interested in this because people are asking, how did that did people get away withmurder here?Were there people who simply gained the system and took advantage and made huge amounts ofprofit?And we had excesses that inevitably led to where we are today.Well, we had all of that.But I would say the biggest single cause was that we had we had an incredible residentialreal estate bubble.I mean, you can go back to tulip bulbs in Holland 400 years ago, the human human beingsgoing through combinations of fear, greed and all of that sort of thing.Their behavior can lead to bubbles.And it may have had an Internet bubble at one time.And you've had a farm bubble farmland bubble in the Midwest, which resulted in all kindsof tragedy in the early 80s.But we've had a 300 million Americans, their lending institutions, their government, theirmedia all believe that house prices were going to go up consistently.And that got built into a 20 trillion dollar residential home market.Lending was done based on it.And everybody did a lot of foolish things.And where people really behaved in a fraudulent way or something, we'll go back and find theculprits later on.But that really isn't a problem we have.I mean, that's where it came from, though, that we leveraged up.And if you have a 20 percent fall in the value of a 20 trillion dollar asset, that's fourtrillion dollars.And when four trillion dollars lands losses land in the wrong part of this economy, itcan gum up the whole place.And it continues with respect to the housing market.It continues.And some will argue that we have to do something about that in terms of the long term recoveryof the American economy.Well, there's no question we have an excess stock.The good thing is we have household formation in this country.We have a country where I don't know whether it's a million households a year or more,but get formed so we can eat off an inventory.But the inventory is too big.And and house prices just soared beyond beyond reason in many places.And they got financed in silly ways.And people lied about loans, all kinds of excesses entered into it.But that is what that that is the single biggest cause of why we are here.And should wise people have known better?Well, people always should know better.I mean, people, people don't get they don't get smarter about the about things that getas basic as greed and, you know, and you can't stand to see your neighbor getting right.
CharlieYou know, you're smarter than he is. And he's doing these things, you know, and and he's getting rich. And your spouse is getting unhappy with you because you aren't doing pretty soon. You start doing it. And so you get you get what I call the natural progression, the three eyes, the innovators, the imitators and the idiots, you know, and that's what happens. We've been through all three.
QuestionerHave we?
CharlieEverybody just kind of goes along and you look kind of silly if you disagree. I mean, you know, you can have these crazy Internet valuations in the late 1990s, but they prove themselves out in the market. I mean, tomorrow, the next day they were selling for more than they were the day before. And people said, you know, you're crazy if you don't get in on this. So it's very human. Now, with housing, it's something even more dramatic than that, because most people aspire to own their own home. And if you really think that housing prices are going to go up next year and the year after, you feel if I don't buy it this year, I'm going to have to buy it next year. That's not true of an Internet sock, but it's true of a home. And then when somebody makes it very easy for you to do it by saying you don't really have to put up any money or you can lie about your income a little or, you know, we'll give you 100 percent mortgage, you're going to do it because everybody that's done it has been proven right. You have what they call social proof. And you know, you're going to feel like an idiot if you didn't do it next year. The house costs more. It's found money. It's found money.
QuestionerSure.
CharlieAnd so when you look at where we are going, there seems to be two issues that are apparent to me, at least risk and leverage. We just lost sight of risk and leverage.
QuestionerYeah.
CharlieWhat was appropriate. You know, again, because it pays off for a while. I mean, you know, you can use leverage and it's the only way a smart guy can go broke. I mean, it basically is if you owe money, you can't pay tomorrow if you just pay for everything and you do smart things, eventually get very rich. You can do smart things and use leverage. And if you do one wrong thing along the way, it could wipe you out because anything times zero is zero. But it solves reinforcing when the people around you are doing it successfully, you're doing it successfully. And it's a lot like Cinderella at the ball. I mean, you know, at midnight, everything's going to turn to pumpkins and mice.
WarrenRight. But as the evening goes along, I mean, you know, the guys look better all the time. The music sounds better. It's more and more funny. I think, why the hell should I leave at a quarter of 12? You know, I'll leave at two minutes to 12. But the trouble is there are no clocks on the wall and everybody thinks they're going to leave at two minutes.
QuestionerYeah. Sure.
WarrenSo if this plan, you hope it will do what? It will loosen credit. It will stop the slide and the panic. People will have more confidence. Confidence is key. Confidence is key. You're not going to put your money. You're not going to leave your money with me unless you're confident I going to give it back to you. And at this point, when Treasury bills, that seven day Treasury bills at one twentieth of one percent, it's not because people want to earn one twentieth of one percent. It's because they trust the fact the Treasury will give it back to them next week. And I'm sitting with six and a half billion dollars we're going to use to close the Mars Wrigley deal on October 6th. I've got to hand over that six and a half billion on October 6th. Now I have to be very careful about where I leave it in between now and then because they're expecting me to show up. When I lose confidence in other people, all kinds of institutions, and there are plenty of them that I've lost confidence in, you know, then they get, their funds aren't available. They don't have it for the next. I mean, the whole economy just comes to a grinding halt and confidence, confidence in markets and in institutions. It's a lot like oxygen. You know, when you have it, you don't even think about it. I mean, it's indispensable. You can go years without thinking about it when it's gone for five minutes. It's the only thing you think about. I mean, and that's exactly the oxygen has been sucked out of the credit markets and confidence. And and there has to be it's it's got to be given a jump start, basically. And and that's what this that's what I hope it gets done. And if it doesn't work, you turn the spigot. But you don't get it. I have argued with the senators, congressmen I've talked to. You don't want to be too little too late. Now they're being, you know, they're they're being somewhat too late in my view, but I'm glad they're.
QuestionerYeah. You know, but that's OK. I mean, you know, we're going to argue for a few weeks after Pearl Harbor, decide whether it's really the Japanese that attacked or whether we should actually commit a few battleships.
WarrenAnd the the too little part, you know, it could be a mistake. I mean, this has to be done on a little meeting in terms of dramatic steps or the amount of money you're spending. It's whether people think it's too little when you get all through it. I mean, in the end, 700 billion is a lot of money and it will buy a lot of distressed property. And if you buy them at the right price, you may be buying two trillion markup. I mean, two trillion of face value for something. The one thing you don't want to do, it doesn't make any is what the guy paid for it, that you're buying it from or what its carrying value is. You've got to buy in a market. And one way to do that is if some institution wants to sell you a billion dollars worth of mortgages, you know, they might have to sell 100 million in the market and then you'll buy the other 900 million on the same terms. Now, the very act that you're the very fact that this has been authorized or will be authorized, I hope, will firm up the market to some degree. And that's fine. But but you don't want to have artificial prices being paid.
QuestionerWhat do you believe might never be the same?
WarrenOh, I think confidence will come back. I will tell you this. This country is going to be living better 10 years from now than it is now. It'll be living better 20 years from now than it is 10 years from now. The ingredients that made this country, you know, the miracle of the world. I mean, we had a seven for one improvement in the average American standard of living in the 20th century. Now, we had the Great Depression. We had two world wars. We had the flu epidemic. You know, we had oil shock. We had all these terrible things happen. But something about the American system unleashed more and more of the potential of human beings over that 100 years so that we had a seven for one improvement. And there's never been a I mean, you have centuries where you've got a one percent improvement of them in something. So we've got a great system and we've got more productive capacity now than we ever have. The American worker is more productive than he's ever been. We've got more people to do it. We've got all the ingredients for a sensational future. It's just that right now the athletes on the floor, but this is a super athlete. And what's the impact of the athlete being on the floor around the globe?
QuestionerPlenty.
WarrenPlenty. And we're finding that out. And the same things happen to quite an extent around the globe.
QuestionerI mean, the European banks were doing what the American banks were failing now.
WarrenYeah.
QuestionerI mean, they were they were getting the mortgage of some guy in Omaha, you know, securitizeda couple of times.I mean, you had all these you had all these types from Wall Street, you know, and theyhad advanced degrees and they looked very learned.I mean, they came with these they came with these things that said Gamma and Alpha andSigma and all that.And all I can say is beware of geeks, you know, bearing formulas.
WarrenThey've learned that.
QuestionerHave we learned something about decoupling or the American economy in terms of its impact?For example, China, a place where you've had investments and you know, well, yeah,we just made a new one a couple of days ago.What was that?
WarrenAnd a company called BYD that may develop a really good electric car, I hope.Is there is there an operative narrative to the kinds of investments you're makingother than you look at and you buy on value, look at management, you look at a place thatcan absorb the amount of money you want to invest and you look at its prospects and youlook at price.
QuestionerYeah, they have to be pretty good size for us now to have to move the needle.
WarrenBut but we look for fairly large situations.We look for things I can understand.A lot of businesses I don't understand.So some guy may know how to make money in cocoa beans, but I don't.So I just let him have that.But it's got to be something I understand.It's got to be a business with fundamentally good economics.It's got to be a management that I like and trust and admire.And there's got to be a price that makes sense.And lately, the price price makes sense to make a lot more sense now.
QuestionerYeah, now, is it and I'm not worried at all about the investments we make.I mean, this this country, we've got four we've got forty six or seven thousand dollarsof GDP per capita.Now, we've done pretty darn well.We'll do better in the future.I am not worried about the country.I'm just worried about anything that gums up the potential of the country.And right now, it's pretty gummed up.
QuestionerOK, but we do this emergency urgent rescue.Right.Come January, we have a new president.We have a new treasury secretary.We have a new legislature.What's their imperative?What will be the challenge for them?Because they then can take a little bit of a longer term look.Maybe the patient's getting up off the ground and but you want to get him or her moving
WarrenYeah.Well, I think it will get moving faster once.I mean, once you get it off the ground, once credit flows it now, I don't the recessionis going to get worse.I mean, I don't want to I don't want to hold out false hopes that that by some magic bulletthat things will turn around in a couple of months because they won't, Charlie.I mean, and it's a big mistake to try and mislead people.They will turn around.I don't know whether it'll be six months or whether it'll be two years.It's more likely two years.I don't know.It is going to be one month or two months.No matter what happens.All I can imagine, six months from now, it's beginning to turn around with the conditionsthat are there.That's sort of the best case.
QuestionerYeah.That's sort of the worst case.Worst case is a long time.
WarrenAnd I will say this is five years or if we don't do the things we should do, it couldbe five.It should do, though, beyond where we are now.What are those things?I would say this.If if it becomes evident that and I understand the latest bill, they're talking about threehundred fifty billion early and then going back and right.But we need to throw the resources at this that are necessary.But like I say, we are not spending the money.I mean, if we if we buy these assets intelligently, the United States Treasury will make money.I mean, it's it's borrowing money at just a few percent a year.And these assets are better than that.OK, but that's a very big if if we.
QuestionerWell, it makes a difference to the treasury secretary.OK, so that's an important question in terms of whether we buy these assets wisely.
WarrenI would say it's more important to the treasury secretary is that who the vice president is.If you want to have a whatever whatever debate here, I'd like I'd like a debate between twopotential treasury secretaries and the vice president might be a good thing for the presidentialcandidate to tell you who it is they're going to be listening to and who might be a potentialtreasury secretary.
QuestionerWell, the presidential candidates will tell you they'll listen to you.I assume they're telling you that.
WarrenWell, no, but I mean, it's not their job to narrow the candidacy field.When all these people call you up, what are they asking you?I mean, I mean, you're hearing from your friends and people in the Fed.You've been through this before, too.I mean, you were that long term capital.A lot of other times.Yeah.You have had to face difficult.
QuestionerI've seen a lot of things happen. So they come to you and they say, you fought wars before war and we'd like to talk to you. But what's the question they're asking? What is it they want to know? And I'm talking about smart people who are charged with fixing it.
WarrenYeah. Well, lately they've been asking, will this work?
QuestionerRight. Yeah. And you're assuring them that if they do it, if they do it, I don't know the next treasury secretary. I would say this. I would. I would. I would.
WarrenThey hate this term in Washington, obviously. But I would. I would. I would hand something pretty close to a blank check to a fellow like Hank Paulson.
QuestionerWould you? Yeah. Well, 700 billion dollars. Go spend it. Yeah. Go invest it. Go invest it. And maybe put a little of your own money up beside it.
WarrenI mean, I might ask Hank to go invest with me. That's right. But no, I think that trying to invest through 535 people is a tough job, you know, and so I would give more latitude. That isn't going to happen. And I, you know, I am.
QuestionerCan you do it with oversight? I mean, that's what the Congress is saying. And oversight is true. Do it with oversight. But don't try to make the decision yourself.
WarrenNo, I think the oversight is great. And I think that oversight ought to be devoted almost entirely to the question, is this being done at market? You know, in other words, you want to make sure that the government isn't investing foolishly, but you don't want to care about which congressional districts it goes to or whether banks get favorable.
QuestionerBut how do we determine whether it's being done wisely? That's a big question.
WarrenYeah. I think you'll have plenty of scrutiny as how money is invested. I mean, just like the RFC, when the RFC operated, people knew which institutions they were buying preferred stock in and it worked very well.
QuestionerBut is this different from the Resolution Trust Company because they're talking about securities, not real estate?
WarrenYeah, well, Resolution Trust Company was set up to liquidate a bunch of assets that the government inherited because the savings and loans went broke. So the savings and loans went broke. The government stepped in, paid off depositors, and now they're left with this mass of assets to sell. We're not talking about selling here. We're talking about buying intelligently. They were selling what they got handed to them by a bunch of savings and loan operators that in many cases had done some very dumb things. But their job was to liquidate it, and they liquidated it.
QuestionerThis is an entirely different proposition. You have said to me before that capitalism is not a perfect system. It may be better than all the other systems, but it's not a perfect system. You've talked about it in terms of some of its failings. People are looking at this now and saying, you know, excesses of capitalism, number one, markets that don't work. And there's some people in certain countries are pointing a finger at us and saying, see, we told you that the markets will not always deliver for you.
WarrenMarkets aren't perfect. People do. As long as you have markets, you'll have excesses. People went crazy with tulip bulbs. They went crazy with the South Sea bubble. They went crazy with internet stocks. They went crazy with uranium stocks back when I was first getting started. I mean, you know, you're not going to change the human animal, and the human animal really doesn't get a lot smarter. Now, you can have institutions that put curbs on that in various ways. But actually with the banks, you know, they have various capital ratios and that sort of thing. But the banks got around them. I mean, they set up sieves and that sort of thing just to get more leverage. People love leverage when it's working. I mean, it's so easy to borrow money from a guy at X and put it out at X plus one. Everything's going up. Yeah. But if you don't get your X plus one back and you still owe the X on the other side, you're in trouble.
QuestionerThere is this too, accounting. You have strong feelings about accounting and mark to market. Tell me where you are on that issue.
WarrenAnd a lot of people disagree with me on this. I believe in mark to market. I think that accounting, in 1974, Charlie, is it 1974, 75, we owned a bunch of common stocks at Berkshire Hathaway. I told our shareholders what the market was, and we used that. I said, I think these things are worth a lot more than market, and I think we're going to make a lot of money out of it. But this is what they're worth today. And I don't think anybody gets hurt by telling the truth on that sort of thing. And I think that once you start saying we're going to peg these things at some price that isn't market, you know, God knows what, you know, what a financial.
QuestionerThe other argument these people make, who argue against you, will say the assets are worth much more than mark to market. And therefore, they're not worth it today. Therefore, we're not seeing a reality.
WarrenWell, but that's that is the reality.
WarrenAnd that's the reality of what they're going to sell them to the treasury for.I hope to get market.You get in a lot of trouble when you start putting fictitious numbers on value on value.I mean, you can explain the fact that these are depressed prices.You know, we think these assets are going to be worth a lot more.And if I think I think that case can be made in certain situations.But I think to just say, you know, we're going to say a dollar of cash is worth two dollarsall of a sudden.I mean, it isn't worth two dollars.It's worth a dollar today.And I think once you start putting phony figures into financial statements, you can get ina lot of trouble.And, you know, we've seen so much of that in the last 20 years.
QuestionerI mean, is it getting worse?
WarrenNo, I don't think it's getting worse.I think what people want to do is get it, make it get worse.But I mean, what would you reform about that in terms of the way the accounting process?
QuestionerI think you keep mark to market.
WarrenThe rules get ungodly complicated.I mean, it's a it's it's a nightmare to administer some of this sort of thing.But I want to tell the shareholders of Berkshire, to the extent we own marketable securitiesor things for which there are markets, even if those markets are I want to tell them whatit's all about.As a matter of fact, I've already written a section in the annual report for next yearexplaining why I think in one case that the figures on our balance sheet as calculatedare wrong.But it's the standard way of doing it.You know, it's holy writ.The SEC wants us to do it that way and we'll do it that way.And then I'll explain why I think it's wrong.And shareholders, they can read it and see whether they agree with my logic or don't.When you look at the prospects for this country, there are other people who argue, you know,that America, as good as it is, lives in a world today and there are books being writtenin which our supremacy, our primacy will now have to be shared.That we may still own as much of the pies we have, but other people own a lot more.That's great.You know, I want our I want our I want our pie to grow all the time.But if some guy's other guy's pie is growing a little faster, that's terrific.It'll be good for us in the long run.And I mean, there are, you know, six six and a half billion people in this world.And it's great for 300 million to keep enjoying more and more prosperity.But I think it's terrific, you know, the remainder do.
WarrenAnd I think if they can learn something from us in terms of our system, and I think they have, they are learning more about how to unleash the potential of their citizenry to turn out more goods and services that their citizens want or that we want. I think that's terrific. And that's, you know, I I think it's much better to live in a world where those around you, particularly when some of them have nuclear bombs, I think it's much better to live in a world where their lives are getting better also.
QuestionerWhen you look at China today and you look at some Asian countries and the amount of American debt they have, how much does that concern you in today's economic circumstances? And are they losing some of their confidence in America? And does that pose a huge problem for us?
WarrenWell, somebody's buying these Treasury bills at one twentieth of one percent. I mean, we have been consuming about $2 billion a day of goods and services beyond what we're producing. In other words, the rest of the world sends us about $2 billion a day net of something. We got to send them something in return, don't we? So we send them little pieces of paper. Now, it'd be nice if they stuck them all under a mattress, but they got to buy something with them. Sometimes they buy our Treasury notes. Sometimes they set up sovereign wealth funds. They can do all kinds of things. They can buy our companies there. As long as we consume more than we produce and we trade away little pieces of the country daily, they're going to own something. Now, on the other hand, they can't run from American assets. I mean, every day, the rest of the world's going to have about $2 billion more of American assets than we have as long as they sell us these goods. Because we're borrowing $2 billion a day.
QuestionerYeah, and they want to sell us these goods.
WarrenYeah, but you don't believe that's good. I mean, you believe that an increasing current accounts deficit is bad.
QuestionerI think it's bad. And it reflects America's consumption ideas rather than its saving ideas. But how does that change?
WarrenWell, I laid out kind of a Rube Goldberg plan a few years ago, which I don't like myself, except I like it better than the alternative, which is what we're doing. But we've actually been pretty good on exports. I mean, we are exporting 12% of our GDP now, roughly. That was 5% many years ago, but much smaller GDP. So the rest of the world really likes our stuff pretty well. It's just we buy so damn much of what they produce.
WarrenAnd I think that should be something addressed by the administration.I don't think it's the most pressing problem now at all.We are trading away a little bit of our country all the time for this excess consumption thatwe have over what we produce.That is not good.I think it's terrible over time.But our country's productive capacity grows enough so we actually can do that and we'llstill be better off.We just won't be as well off as if we hadn't done it.What's all this going to do to the price of the dollar?It could be very tough.Inflation could be a very, is a likely consequence out of what's going on now.Right now, we are in effect making a, to some extent, making a choice between future inflationand getting off the floor.And we're likely to have more inflation in the future as a consequence of the thingswe do to fight the present situation.Senator Obama, who you support, talks about another stimulus program.Is that essential at this time?I think the biggest thing we need now is to unclog the credit markets.We may need another stimulus.If we do, it should go to the lower and middle income people.The truth is, I've never had it so good in terms of taxes.I am paying the lowest tax rate that I've ever paid in my life.Now that's crazy.And if you look at the Forbes 400, they are paying a lower rate, counting payroll taxes,than their secretary or whomever around their office, I mean, on average.And so I think that actually people in my situation should be paying more tax.I think the rest of the country should be paying less than the 95% that Obama talksabout or maybe even a little higher than that.I think that a stimulus plan should really be geared to the people.You've got, what, 24 million households, one-fifth of the households in the United States.You have earning $21,000 a year or less on average of close to three people in thosehouseholds.Two and a half people, actually, probably.Just imagine living on $21,000 a year, Charlie, $22,000 a year.You have 20% of the population doing that.So they don't have to worry about guys like me.I would push purchasing power.You push out $1,000 a person to those people, it's going to get spent.And it needs to be spent.They need it.And it should come to some extent from guys like me.But what about the capital gains tax?Well, the capital gains tax is 15% now.So I sit there in my office and I make a lot of money by capital gains and I pay 15% and
WarrenI pay no payroll tax on it.The woman that comes in to take the wastebasket away, she's paying 15.3 or whatever it is,just payroll tax alone.I mean, it is, I've never had it so good.But so therefore the capital gains tax should be changed to 18, 20, 25, 30.I think it's terrible for people, in effect, to say that income from investment shouldbe taxed at a much lower rate than income from labor.I mean, I just think that you're going to, we're going to spend $3.1 trillion or somethinglike that this year.We're only going to raise about $2.6 trillion or something.You're going to raise it from somebody, you know.Now, who are you going to get it from?Are you going to get it from me and you or are you going to get it from the people thatdrive the taxi that brings me here or whatever it may be?I mean, you've got to get it from somebody.And you know, everybody's against paying taxes themselves.I feel the same.Everybody feels that way.If you want a government that's going to do the things we ask our government to do, you'vegot to get it from somebody.And over the years, the last, particularly the last six or eight years, they've takenless and less from a guy like me.Now, you know, everybody likes to talk about how the top 1% pays this percent of the income.But the income tax is, we'll say, $1.3 trillion.The payroll taxes are over $900 billion.That $900 billion, that doesn't come from me.I mean, I pay it on the first $100,000 or something like that.But that comes from the people in my office.And they are paying $900 billion.Nobody ever talks about that when they talk about how the 1% is paying.They love to tell how I'm suffering, you know, because 1%, we're paying 25% of the total.We're not paying 25% of the total taxes on individuals.We're paying maybe 25% of the income tax.But the payroll tax is over a third of the receipts of the federal government.They don't take that from me on capital gains.They don't take that from me on dividends.They take that from the woman who comes in and takes the wastebaskets home.
QuestionerYou mentioned inflation, possibilities of inflation.Are you there for, do you have a position on what interest rates, what the Fed shoulddo about interest rates?
WarrenWell, I think that's almost, the time being, that's just, just put it, yeah, just put thataside and we'll get to that after the patient's up and walking.It's interesting, though.I mean, we are, you know, what's going to happen, things we're doing are going to have
QuestionerBut you see interest rates at, you know, very low levels and including the long rates. When we watch this, I mean, when you and I having this conversation today, the Senate votes tonight, House may vote, people I talked to today believe it's going to pass, whatever happened that changed minds and either in the combination of what they did with the plan and tweaking the plan or B, some people got so scared by the failure of the vote last time that it brought home the danger of not doing anything right. How will we measure the progress, whether this is working or not? What's going to be an issue?
WarrenYeah, it's going to be tough because the economy is going to be getting worse for a while. And it'll get, it might fall off a cliff if this doesn't pass, but nobody will ever know that if it does. And so what they will not see immediate reaction. I mean, we'll be pounding on a guy's chest, you know, on the floor and, you know, he's not going to just jump up all of a sudden. So it makes it tough. I mean, it's tough to be in a legislature, you know, and vote for something. And then people say, well, you voted all this money and, you know, it's all getting spent. It doesn't get spent. It's getting invested, but it's all getting spent. Nothing's happening. You know, how could you have done that? You haven't done anything for me. I mean, you go through all of that and that's going to be tough. And it takes what it really takes is leadership that knows what it's all about and can explain what it's all about. And that hasn't been missing, though, leadership that can explain what it's all about. I mean, the reason you're here and the reason I want to have a kind of fireside chat with you. It is that somehow it hadn't gotten through the idea.
QuestionerWhat? Go ahead.
WarrenWhen the president of the United States goes out at eight o'clock in the morning and then his own party votes against him two to one in the house, you know that somehow a message isn't getting out. No, it takes real leadership. I mean, Roosevelt didn't you know, when he came in, he didn't print any money or that way. He actually may have done a little bit of that. But he he it wasn't like, you know, you've got the greatest economics professor in the world or anything else. But he did restore confidence and they and they did a lot of things. And you needed it. You needed to jumpstart the economy. It took a long time. I mean, the world did not change, you know, in 1933 or four.
QuestionerBut we put in things like the FDIC.I think the FDIC was one of the great inventions of the American.Well, they had to tweak that in terms of this bill.Did they not?
WarrenYeah, there were.And they're going the right direction.
QuestionerYeah.Roosevelt also said the only thing we have to fear is fear itself, which is clearly thefear that exists in the country.Tell me when you worried the most of all the things that you have seen over the last threeweeks, say, I mean, how long in the last month?When did you say, my God, I never knew it could get to this point?
WarrenWell, I don't get that afraid in a sense, because I really do have faith in both.I know the country works extremely well.You know what?When it isn't clogged up.And I know that Congress will do the right thing.But I was when I when I watched the House vote the other day, I wasn't afraid becauseI I still felt something would pass.But we are going through a very, very tough period.And I did not think I would see the day when, you know, an AIG would would not be able tohave its checks clear.I mean, if AIG had failed, would Goldman Sachs had been exposed and at risk?Everybody would have been exposed, Charlie.Everybody.
QuestionerSo why was even their question of not rescuing AIG at that time?
WarrenI think with people that understood that they're probably well, they were hoping the privatesector would do it.I mean, that's the same way I would behave if I were if I were the Treasury secretaryor the Fed.You know, I would try to scare the hell out of the private sector and say, you bettersave this because you're going down with the ship.So you guys save it.And I'd wait as long as I could.But if they didn't save it, I'd come in.
QuestionerWell, did that, in fact, happen during this crisis in which the secretary of the Treasurysaid you better save this or we're all going down?
WarrenI think certainly you better put up some cash right now.I think that they hope the private sector would would come in and the private sectortried to come in until they saw the size of the problem.I mean, there were people on that weekend that thought they had a solution.And then the hole kept getting bigger and bigger.And all of a sudden it became apparent that 20 billion wouldn't do it and 30 billion wouldn'tdo it.And 40 billion wouldn't do it.So it got beyond anybody's ability to certainly to do it in a short period of time.There was not enough capital available from the government.It's an unknown situation.
WarrenYou have a derivative book called AIG Financial Products.You know, nobody's ever heard of it, except it was a it was it was a terrific profit center.You know, you could manufacture earnings out of do all these things.And I will guarantee you that the top management and I'm not knocking them for this.I don't think I could have done it.They couldn't get their mind around.I bought a company called General Reinsurance in 1998 that had a similar but much smalleroperation had twenty three thousand contracts in it.And I got to get rid of I got to get out of this.It cost me four hundred and some million dollars in benign in a benign situation.But when this was not a benign situation, if AIG had tried to unwind the derivativebooks, I don't know, it would have hit every institution in the world.And there was no private capital to come in and do that.Not big enough.Not big enough.Not even Berkshire Hathaway.
QuestionerNo, not even Berkshire Hathaway.
WarrenI mean, if I thought five or 10 billion would have bought me a good deal and I could havedone it, I'd have done it.10 billion was within.I'm not bashful.10 billion was within reach.But 85 billion might not have been.And the Fed structured that thing very, very well.I mean, they have put themselves in a position where they they are very likely to get theirmoney back.Maybe more.They participate 80 percent.I mean, they drove tough terms.I mean, I want to hire the guy that made that deal.He fit in well at Berkshire.
QuestionerYes.A lot of people looking at you and Goldman Sachs and GE saying, I want to hire the guythat made that deal for you.Tim Geithner did a better job.
WarrenSo we come down to the close of this conversation and you have been warning us about certainkinds of things.I hear from this conversation, too.This plan is essential now.Otherwise, we're in a very, very difficult place.And each week we go back beyond not doing something.We get deeper and it becomes more irreversible.And yeah, whoever said, you know, how's the prevention is worth a pound of cure underunderstated.And and, you know, a pound of a pound of cure that's delayed another six months, you needa ton of cure later on.I mean, it it would be crazy not to do this.It will not produce dramatic results, though, in the economy.That's what people have to understand.You're going to see unemployment go up.You're going to see lousy earnings in many businesses and they're going to see people
Warrenunemployed. You're going to see more people unemployed. But the difference, Charlie, if we if we bottom this thing out at seven percent unemployed versus nine percent, that's three million people. That's three million people that if we do it wrong, you know, lose their jobs unnecessarily in my view. I mean, yeah, you know, I've never been unemployed. I've never been very fully employed here. But just think of what it's like, you know, to go home with a mortgage payment, you know, and kids and everything else. My dad had that happen to him in the early 30s. But, you know, you don't want to create three million people more unnecessarily. But I don't think you can. That's the depression. It really is. And you can't you can't help some increase from this point. I don't want to. I don't want any viewer to go away. Think there's a magic wand exists in Congress. So they're going to see some more bad news. But if we do this, we're doing the right thing. And if the system will work over time, there's no we've got a wonderful. OK, but that's I'm going to come to that in the end. Is it hot? Do we need to do anything about the system and beyond the emergency of the moment? The urgency of the moment will come January about the system. Lots of talk about regulation, as you know, and finding the right balance. Lots of talk about whether government involvement is an idea we need more of rather than less of rethinking sort of what President Reagan brought to for once we get the athlete back, we can tell him to change his diet a little bit or exercise a little more. We can do all of that sort of thing. And, you know, if I got a good ideas out of that or I think they're good ideas, I'll be glad to contribute them. But the system will probably overdo some other things. I mean, the nature of democracy is such that when there's this there'll be this revulsion, obviously, toward that's never going to happen again. So we'll we'll we'll probably attack it in various ways that don't make sense. But that's what Congress is for. And that's what that's what advisers are for. And I'm all for getting the best minds. You can get to work on that kind of thing. Like I said, I don't think it'll be done perfectly. Maybe we'll end up with a little bit better system at the end. We had a pretty good system over time. But when it when we went crazy and we did go crazy on residential real estate, it set things in motion that just the dominoes started toppling.
OtherThank you for coming.
WarrenThank you. Pleasure to see you.
OtherEnjoyed it. Warren Buffett, we're in San Diego. My thanks to the people at KPBS here, a conversation here about the crisis that we all face and hearing from a man that a lot of people want to hear from. And I'm pleased that we were able to join with him here. Thank you for joining us. See you next time.