OtherSquawk Box on Buffett Watch.
Becky QuickBecky, live at Berkshire Hathaway special shareholders meeting in Omaha.
OtherAnd before Warren Buffett makes his case for Burlington Northern Mega Deal, he's talking to Squawk Box. Plus, what does Kraft's largest shareholder think about the Cadbury deal? The bank tax plan, results from financial giants, and much more. Buffett, breaking news, earning central. Take it to the bank. Squackbox begins right now. Welcome back to Squawk here on CNBC, First in Business Worldwide. I'm Carl Kintania, along with Joe Kernan and Becky, who is in Omaha this morning.
OtherWe're waiting for results from Wells Fargo, Morgan Stanley.
Becky QuickBecky, quite an interview with Sokol. You get such broad sort of economic perspective when you talk to both him and when we talk to Warren Buffett in a few minutes.
Becky QuickThat's right. We've got a lot of things to talk about this morning.
Joe KernenOh, you've got the numbers coming up right now?
Becky QuickNo, we'll do a couple quick top stories before we get to all that. We are waiting for results from Wells Fargo and Morgan Stanley. About an hour ago. of A reported a fourth quarter loss of 60 cents a share. Analysts had been expecting a smaller per share loss of 52. Revenue also falling a bit short, which, as we've said, is becoming sort of a recurring theme among banks in America, this quarter at least, J.P. Morgan and City as well.
Joe KernenFutures, I think we might be hitting, getting Wells Fargo right now. Joe, do you see it?
Joe KernenYes. I will eventually see it. I love doing these things as they happen. Fourth quarter, looking at eight cents. to share for the period. This is, where's Mac, temporarily unavailable. I love when that comes up. 22.7 billion is what we're looking for, is what the revenue number is on Wells. Fargo. Average total loans, 792.4 billion in the period. And fourth quarter net charge-offs of $5.4 billion dollars, $5.4 billion for Wells. Right now we got that stock, but 2844 to 2850, which is we already saw Bank America move into positive territory if they're initially trading down, right? Earlier today, which one was, yeah. Bank of America. Right. Earlier today is now trading positively, even on a weak revenue number, so it's unclear at this point whether there's going to be a problem. Yeah, they did reverse course in the pre-market, but up 0.7%. A point 7%.
Joe KernenBecky, we'll now send it to you in Omaha.
Becky QuickOkay. Yeah, you guys are talking about the Wells Fargo.
[2:43]
Becky Quicknumbers and obviously that's something we're watching very closely because Warren Buffett is the largest, or Berkshire Hathaway, I should say, is the largest owner of Wells Fargo shares. I don't know that he heard enough that he can comment to all this, but we've got plenty to talk about with him today. Berkshire Hathaway, of course, is holding a special shareholders meeting today. This is to talk about the acquisition of Burlington Northern. This meeting today is primarily to vote on a 50 to one split of Berkshire's Class B shares. And this is a historic event because, as you know, Warren Buffett has never wanted to split these shares. before. We're going to be joined by him right now to talk about Berkshire Hathaway and what it's doing today with this vote. Joining us is the chairman and CEO, Warren Buffett, and Mr. Buffett, thank you very much for joining us.
WarrenThanks for having me.
Becky QuickI don't know how much you heard the Wells Fargo numbers that we were just.
WarrenI heard a little bit, yeah.
Becky QuickWhat was your immediate takeaway? And I know all you've heard is I did. I didn't get the earnings at all, but I got the charge office at 5. 4 billion, and that's exactly what I would have expected. And I think they expect them to peak toward the end of 2010. But that number is exactly what I would expect. What other headlines would you like us to pull up? What else would you be interested in hearing about this?
WarrenWell, my guess is that the revenue and all of that is more or less like I'm 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 them having 40 billion of pre-provision income. in 2009 and, you know, they had it and that easily handles 20 billion roughly of losses. They also issued a lot more shares, though, to pay back the government.
Becky QuickWhat'd you think of that?
WarrenI didn't like it. I mean, the government forced them to issue the shares. And the government's got 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.
Becky QuickBut was it the right move by the government or not?
WarrenWell, it was the right move by the government to enter, to show that they were willing to act very
[4:42]
Warrenpromptly and decisively. I mean, 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 this, get us past a financial panic, you know, things would be a lot different today. So the government did the right thing in acting fast. 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 took.
Becky QuickBefore we get to a lot of the other questions, because this brings us to a jumping off point about many things government's doing right now, I want to talk a little bit about why we're here today, and that's for Berkshire Hathaway's special shareholder meeting. This is a very unusual event. The idea of splitting the class B shares 50 for one. Why are you doing this?
WarrenShow you what happens when you get to be 79. Some people are asking if you are completely changing your stance on a lot of different issues. Somebody was saying, is this going to be a mean a dividends coming soon too? 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 than our Class B shares, which were in the $3,000 plus range. The big shareholder would have gotten a different deal than the small shareholder otherwise. And so it was, it was an easy decision, actually.
Becky QuickDo you think this is going to be an easy vote as well?
WarrenYeah, I'm sure of that. I'm like a politician in Chicago. I mean, I've got the votes.
Becky QuickSo 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?
WarrenWell, I don't know. I mean, 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 a, when we get through with this, we could have like 700,000 shareholders or something. of that sort. And we'll have a lot of trading volume. But that's up to S&P.
Becky QuickWould you like to be in?
WarrenWell, I think probably for our shareholders, it's a net plus, yeah.
[6:50]
Joe KernenHey, Warren, the revenue number on Wells was 22.7 and the estimate was, I think, 21. So unlike any of the other banks, I think that's the first one. I mean, I didn't look at U.S. Bank Corp, 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 it seems to be a little bit better. And the stock's now 29. It's almost up a dollar at this point.
WarrenYeah. Well's runs a terrific bank. You know, they, they're very customer-oriented bank. They're almost like thousands of community banks when you get right down. Do 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 their revenue potential that were looking at them. And I agreed with them. But unfortunately, they had the issue. you a lot of shares in conjunction with that stress test. I think, I don't think Wells is ever going to disappoint on revenue. They, they have a lot of customers, and those customers do a lot of business with them.
Joe KernenYeah, we've got so many things to go over. I got Beck, I don't even know where to, I mean, I think of Wells and I think about the bank. I think about the bank tax. Is that a good idea to pay for the GM bailout with the bank tax, Warren?
WarrenNo, I don't understand that. I mean, if it's, if it's some kind of a guilt, tax or something of that sort because banks were among the whole United States that was saved back in 2008. Everybody was taken care of then. And the banks, the banks basically, I mean, somebody like Wells, it's cost them a lot of money to be in the tarp. And it was basically forced upon him. Dick Kovosovic didn't want to take the money, but he really had no choice. So that's cost Wells a lot of money. The government's made a lot of money off Wells. They made a lot of money off Goldman.
[9:07]
WarrenThey made a lot of money off J.P. Morgan. and where they're going to lose, well, at least where it's possible they'll lose money is in the auto company. So if you're going after the people you've saved, you might say the GM stockholders didn't get saved, the GM bondholders didn't get saved. What happened there was that they kept employment. And I'm the last guy to suggest that you should go and put a special tax on auto workers. But if you're really looking for the people that benefited from government losses, you'd have to look there. Or if you look at Fannie and Freddie, I mean, you know, are you going to go and tax the members of Congress who ran Freddie and Fannie. That's what I said. You know, I can't believe you just said. That's exactly what I. You could almost tax any company in business that wasn't going to be able to float any commercial paper. You could tax them too because they were saved too. Absolutely. In September of 2008, Warren, don't give me any ideas. Warren, don't give me any ideas. They will, that'll be next. 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 the bank. decided to say 309 million Americans, and a good job was done. But the banks are the ones that, you know, particularly, you know, I've just named a few, they've 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 and Freddie and Fannie and and perhaps with the auto companies, it just doesn't make any sense to me. What about AIG, though? I mean, Goldman Sachs and a lot of the other banks did make a lot of the other banks did make a lot of money back from AI. Is that a different category? Well, they got they got paid what they were owed, but so did millions of policyholders. I mean, if you look at AIG, primarily throughout subsidiaries, but they had contracts with millions of people who are going on getting paid on their life insurance, getting paid on annuities, getting paid on property and casualty claims, and the government's actions enable those people, enable AIG to live up 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 Sachs, although Goldman was very protected.
[11:09]
WarrenI'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, I'm sorry. I interrupted you. I was going to say AIG, other insurance companies warn 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.
QuestionerYeah, and it's a popular tax to propose now, obviously. I mean, you know, 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 and Fannie, which are that expensive, in which Congress ran. But I just think a tax that's enacted with the idea that it'll, that the headlines will be appealing and that, you know, a certain amount of vengeance will be achieved. that's the greatest form of tax policy in terms of going after a 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.
WarrenYeah, well, banks, maybe if I was running for office today, I'd be chewing out banks too, but basically the government's going to get its money back, overwhelming it for banks. The FDIC, which is funded entirely by banks, is taking care of the failed banks. There were 140 banks that failed last year. And most of them were small community banks, which everybody, you know, they're the hero of things generally. But, 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 effect on that. And like I say, the banks have come through very strongly. But they're not earning, they talk about obscene profits. Well, let's just, J.P. Morgan. you know, their earnings 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 City, I mean, if you want to call their profits obscene, you may be thinking of a different sort of obscenity.
QuestionerWell, at the same time, though, compensation is coming back to the levels that we haven't seen in the past. Compensation at the investment banks. I mean, I don't think that if you look at the...
[13:39]
Warrenat the commercial banks, you will find that their compensation practices are significantly different than a few years back. But I would love to have no compensation at banks because we own some banks and then they're going to the stockholders. I mean, the choice isn't the federal government or bonuses. The choice is the stockholders or bonuses. But people say that the real difference is, should the government be backstopping, not just the safe banks that are doing loans, doing things that need to be done, but also the investment banks at the same time. Should they be in the same house? And should the government be backstopping? investment banks as well, when they can turn around and pay out these high compensations. Yeah, I don't think they, I don't think they should be backstocking. But how do you split them short of doing something like Glass Eagle? Well, if you look at Morgan Stanley and Goldman Sachs, the two big investment banks that are independent, I don't think they should be backstopping. Incidentally, in September of 2008, Goldman went out to raise their own money. I mean, they saw the situation that was developing and they raised $12 billion there. September of 2008, which we participated in. But they felt they needed capital because they didn't know whether the world was going to come to an end or not, and they went out and raised it. They were a participant then in the TARP subsequently, but they were given no choice. 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 of if the commercial bank is with the investment bank? How do you get around backstopping that? If these are so important to our nation and we have to keep them. supported, this notion of too big to fail. Yeah, I think, and I'm not even sure how you draft this into statutes, but I, the banks that got into big trouble, it was management at the top, and a number of those went away. They didn't go away as rich as rich as they were earlier, but I think that's terrible. I mean, and I think if I were on the board of directors of the bank, you'd do this in conjunction with the government, but I think I think you should have something so that if a bank ever has to go to the federal government, not to the FDIC, because that's funded internally, but if they have to go to the federal government to be saved, that the CEO and any CEO of the
[15:49]
Warrenprevious two years before that, and his wife, I mean, they sign something so that they are essentially wiped out. I mean, if an institution that's so important to this country really causes the country great difficulty, I think that the CEO, I want that CEO's equation to be that if this place goes down or needs government help, I'm busted, and I can't put it all in my wife's name, and she's busted too. And then I would have strict penalties for directors probably five times their average compensation or something. I think that would do more to change behavior that kind of behavior that gets us into trouble than anything else you could do.
QuestionerSo you're talking about the guys like Chuck Prince and others who walked away?
WarrenWhen they walk away, I don't want to, I, you know, I, we've got unemployment insurance, you know, when 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, if they want to sign up for the, 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.
QuestionerBut 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?
WarrenI think, well, I would like what I just suggested, but I do think that, that, I think one very large banks that are really, if anything happens to them, have to go to the government. I think they should be reined in on leverage, and I think they should be reined in on some of the kind of activities they can't engage in, yes.
QuestionerWhat do you like that you see in the proposals for financial, financial regulatory reform right now, and what do you think's missing?
WarrenWell, I think the hard part is to restrict leverage. I mean, leverage is what gets people in trouble. But the trouble is you can't measure it by a single ratio. I mean, you can have a lot of leverage on government bonds, and then you can be doing other things where two-to-one 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.
[18:05]
QuestionerYou need a new regulator or the existing regulators? I think I would trust the Fed. 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 his powers.
WarrenYeah, I think that's a mistake. I think that an independent Fed is incredibly important to the economic future of the country.
QuestionerBen Bernanke is looking for this reconfirmation. They say the vote could come as early as this Friday. Should he be reconfirmed?
WarrenIf I could vote twice, I would.
QuestionerYeah.
WarrenNo, he should be, I mean, he did a magnificent job over this period. Now, you know, everybody can do it somewhat better. I mean, we can sit here in an armchair quarterback. But when I look back, particularly September and October of 2008, he took some extraordinary actions that if they hadn't been taken, that willingness to act like that, and maybe even stretch his authority some. But he did what you do. We talked about I being an economic Pearl Harbor. He did what should have been done in response to that Pearl Harbor. And, no, I think he's done a stellar job.
QuestionerWhat happens if he's not reconfirmed? What's at risk?
WarrenWell, just tell me a day ahead of time so I can sell some stocks.
QuestionerYou think there would be a strong sell off in the market?
WarrenOh, I think so, sure. Across the board.
QuestionerYeah, I think it'd be justified. You do?
WarrenYeah, I think it would just, I think it, I think one of the, I think Congress generally is a worry of the American people. you know, and picked it what they've seen over the last 12, 18 months. And if Congress essentially said, we can do this better than a Ben Bernanke, we're going to point. And we think we know, I would get very worried.
QuestionerYou 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?
WarrenIt's those three things plus the economy. No, 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.
[20:25]
WarrenAnd 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 candidates, you know, if Vicki Kennedy had been the Democratic candidate, I don't think there's any question that, you know, she would have won probably three to two or something. But it was a referendum of sorts, sure. It was a big one.
QuestionerYou 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 supporter of the president.
WarrenWell, going back to the American people, I think their expectations. were probably too high on the economy. I mean, you know, and I think, incidentally, to President Obama's credit, he tried to dampen those. Every time I heard him speak, he would say, you know, we didn't get into this in a short period. We're not going to get out in a short period. So he's attempted to do that. But that, but that when it grinds along, you know, people are hurting. A lot of people are hurting. And, and they perhaps unreasonably, I would say, would be unreasonable, but they expected better things by this point. And that wasn't in the cards.
QuestionerYou talk a little bit about what has happened with the economy. Is there anything different the administration could have or should have done?
WarrenIt's, you know, probably, if you're going to spend close 800 billion on a stimulus bill, I think it could have been done in a way that had more immediate impact. But, you know, what we saw with the stimulus bill was the, that was the, that was the, that was that, Is it 8,000 earmarks or something? I mean, that is the sort of thing that's depressing the American public. It's depressing to me. That is Washington, old-style Washington squared. 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.
QuestionerHey, Warren.
WarrenYeah, I did.
QuestionerAsk it in the converse, Warren.
WarrenOkay, that's something that they did do that maybe could have been done differently. But are the things that were done that actually were done that actually actually hurt the economy.
QuestionerWe 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
[22:50]
Joe Kernenthat that is causing corporate managers not to hire and that we're actually lengthening the slowdown. Is that your view too?
WarrenYeah, well, I hear that, Joe. I would say this. At Berkshire, we're down 25,000 maybe or something unemployment from 245,000. Off what base? Off a base. In the last, you know, 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 of it's concentrated in a small area of Georgia. And we will hire people when the orders come in. I get the orders every day, the incoming orders. I look at them. And we want to hire people, but we're not going to hire people just to stand around. So we're not reluctant to hire people in Georgia or at Acme Brick in our brick business, which ran at the worst year in many, many decades. We've got a thousand people, perhaps, from the peak that we're down at the brick business. It's not because we're losing share of market. We're gaining share of market in these cases. But we're not reluctant to hire at Acme Brick or at Shaw Carpet because of what's going on in Washington. We're worried about hiring there because of what's going on in our order book. So if we get orders for brick or we get orders for carpet, we're going to put people back to work tomorrow, but we're not getting orders yet.
QuestionerBut it's 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.
WarrenYou're not going to have people feeling good until jobs come back. I mean, it's 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. Normally you need about $100,000 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 the next two years to come. So unemployment is going to be a tough figure. And that's going to determine the mood of the American people. The mood of the American people is going to be.
QuestionerGo ahead.
Joe KernenWarren, 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
[25:12]
Questionerthrough, when you have the White House, a majority in the House, and a supermajority in the Senate, how in the world do you think we're going to tackle things like Medicare or Social Security?
WarrenWell, that's 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 were expecting a year ago with a new administration that you were going to see a different style of behavior in Congress probably become pretty disillusioned in the last year. Incidentally, over the longer term, it's 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. I mean, until you get jobs. better jobs picture, you're not going to have a happy American public.
QuestionerAs a corn husker, did you, did you not like that, what do they call it, the corn husker husk or whatever it is? I mean, were you embarrassed by that as well?
WarrenI don't think it was, I don't 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 earmark. And, you know, people don't like the idea that, that if you pass, a bill, like the stimulus bill, that various congressmen and senators find, you know, 8,000 or whatever it was items that they want to stick on it. I mean, this Christmas tree approach, and of course, bad behavior begets bad behavior. After a while, even the guys that say, you know, I don't want to do this sort of thing on principle, they feel kind of silly facing their constituents when everybody else is doing it. So there's the other guys doing it, that becomes an argument for it. And it gets to be, you know, it gets to be that Kay Street and lobbyists get terribly important and sticking little special items on bills as they go along. And I think our cornhusker thing was one example of that. But it wasn't the only example. I mean, as I remember, Louisiana, Massachusetts, you know, it... Union. It's not, it's not, what you've seen in the last year has not been encouraging. I'll put it that way.
QuestionerYou know, you mentioned that 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.
[27:34]
QuestionerThat they, 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?
WarrenI don't think it would have made that much difference to me. I, you know, people talk about the stimulus having created a million and a half for, or saving a million and a half. I just, I generally am very skeptical of figures that economists talk around or even sometimes projections of CEOs that they toss around. But we have a lot to work through. And it really goes back to what we talked about almost two years ago, and that this country got very, very leveraged up in a lot of respects. It got leverage, you know, at the individual level and housing and the government levels, every place. And de-leveraging is a painful process. And it takes a long time. And we're not done.
QuestionerWe 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, but what do you think about the bid now?
WarrenI feel poor. Kraft, in my judgment, well, just in the last two weeks, I mean, there's been two things that caused me to feel poor. They sold a very fine pizza business. They said that they got $3.7 billion for it. But because it had practically no tax bases, they really got about $2.5 billion. So they sold a business for $2.5 billion that Nestle is willing to pay $3.7 billion. Now, can nationally run it that much better than Kraft, I doubt it. But that business that was sold for $2.5 billion earned $280 million pre-tax last year. So they sold that at less, right around nine times pre-tax earnings in terms of their own figure. Now, they mentioned paying. 13 times EBDA for Cadbury, but they're paying more than that. For one thing, EBDA is not the same as earnings. Depreciation is a very real expense. But on top of that, they've got a billion-free 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 they're 260 million shares or something like that, that their own directors say is, significantly undervalued. And when they calculate that 13, they're calculating craft at market price, not at what their own directors think the stock is worse. So the actual
[30:14]
Questionermultiple, if you look at the value of the craft stock, is more like 16 or 17, and they sold earnings at nine times. So it's hard to get rich doing that. And I've got very, I've got a lot of doubts about the deal. You are the largest shareholder at 9.9% in the company. You don't get the chance to vote this deal up or down. What do you do?
WarrenThey took that away. 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.
QuestionerThere's another way to vote, Warren, and that's with your feet. Is that what you're telling us you're going to do?
WarrenYeah, walk.
QuestionerThat gets expensive.
WarrenYeah. Well, if I know what's going on, a government, doesn't mean I have to leave the country either, no, Joe.
Joe KernenWarren, Joe and I are jaws are agape at the comments you just made about Kraft. And the stocks down. Watching the bid ask. We had Atman on in the past couple of hours, and we talked about the deal and assumed that because it would appear to be going through pretty well, that it had your tacit consent. That's clearly not the case.
WarrenNo, well, if I had a chance to vote on this, I'd vote no, but I don't have a chance to vote. Now, one of the things particularly interesting for the people that pay attention to corporate guns, 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 all 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 craft stock. Now, after I came out and said craft 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 fair value for these shares. In other words, if the directors thought those shares were significantly undervalued, when they issued
[32:30]
Questionerthat proxy statement, I think they had a duty to tell the shareholders that they felt that way. Otherwise, you know, the shareholders could assume that they were getting fair value for the shares. This is, 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 craft. And you're just saying it's a bad deal. That's not going to cause you to reevaluate your stake in craft down the road if the manager is in the most significant decision she makes goes directly against what you think is the right thing to do?
WarrenWell, I think that, I think Kraft has got a wonderful portfolio businesses, including their pizza business, which Nestle now has, having paid a billion two more for than we received in terms of cash. But I, and I think the products are, I think the products are, you know, I'd love to own Oreo cookies or A1 sauce or whatever it may be personally. But, and I think Irene has done a good job in operation. I like Irene. I mean, I find her. I mean, she's been straightforward with me. We just disagree. She thinks this is a good deal. I think it's a bad deal. I think she is a perfectly decent person. She could be a trustee under my will. I just don't want her making this particular deal.
QuestionerMan, and we called Beckman, the activist investor today. I'll go back into my shell. This may be groundhogs day or something. Who knows? But Warren, you, you, I was talking to crawl off count. I said, 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, you know, smuckers with jiff peanut butter. I understood that one, too, peanut butter and jelly. And then I said that, Warren, I said that your analysis was a little more astute than that than based on what flavors go well together. You talked multiples and all this other stuff and pre-tax and what, but, I mean, it is telling that selling a very good business to be able to do it, you know, it looks like a good idea unless you look closely, right?
WarrenWell, when you look closely, you find the $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 at all, it was very tax inefficient. Now, back when Kraft got rid of post-serials, they did it in a tax-efficient way.
[34:46]
WarrenSo it's not that they don't know how to do it, but they, in this case, they did it in an enormously tax inefficient way. When you have a business with virtually no basis, you know, Procter & Gamble's gone through this, Kraft's gone through, what other people have done it. I mean, there are ways to handle spinoffs that, that avoid kind of, cutting the government in for almost a third ownership of the business. And unfortunately, they headlined the $3.7 billion. I don't think, I've read any place about the fact that they're only getting $2.5 billion. And it was Nestle that pointed out that this business does $2.1 billion of 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 shares given, probably paying in the range of maybe 17 times earnings for Cadbury, I think is a big mistake.
QuestionerWell, wait a second. You said that at this point, you don't have a vote in this. The only way you can vote, as Joe points out, 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?
WarrenI think Kraft is still undervalued. I just don't think it's as undervalued as it was three weeks ago. We just showed a big bid ask, and it looks like the shares are off by more than 2% based. on your comments today. I mean, people are going to think you're off your rock or you're shooting yourself in the foot with these comments. Kraft is, in my view, and probably Bell Ackman's view, too. Kraft is, craft 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 very full price and it's sold a good business. All of those, that hurts the value. Now, how much it's hurt the value? Does it hurt the dollar share, $2, $3 share? But I thought it was worth a lot more. worth a lot more than $27 or $28.
QuestionerHow does the Cadbury valuation measure up with the Rigley Mars valuation, Warren?
WarrenWell, the Rigley Mars valuation was a very high valuation. We were a financing partner in that, and there's no question that the Rigley valuation was a high valuation. But that's a difference, though, as a financing partner then.
[36:58]
WarrenBut that is no reason to pay the same price for something else. I mean, I have investment. bankers come around to me all the time and say, you know, 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. Why does Burlington Northern make sense? If you're issuing, if you're going to be splitting the stock and paying for part of this deal in stock, which you traditionally hate dealing. I hate it. I've written the annual report and I say that, you know, I enjoy issuing shares at Berkshire about as much as I enjoy prepping for a colonoscopy. I mean, this is not my idea of fun. And truthfully, the Burlington shares, shareholders are receiving $100 a share. It's costing us somewhat more than that because I do consider Berkshire is selling it one of the lowest ratios to book value than it has in many years. So we are giving up something that I don't like to give up and which I think is somewhat underpriced. So it's costing us a little more than that. On the other hand, we're getting to put, 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'd had to give any more stock, we wouldn't have done the deal. This is not, I've never said this is a bargain deal for Berkshire. I do think it's a great long-term asset for us to own, and I think it's something where we will get a chance to use cash intelligently over the next century. But it is no bargain deal. I wish I, you know, I wish I could have bought, uh, you know, I wish I would have bought, uh, the pizza business at nine times pre-tax earnings. But one doesn't preclude the other.
QuestionerWow. Does Irene Rosenfeld, you said you've had conversations.
WarrenYeah. She knows exactly how you feel about that.
QuestionerSure, and I know how she feels and it's very cordial and she's a very decent person. And she is saying exactly what she believes. You know, there's no question about that. I'm saying what I believe is you can tell too.
WarrenBut it's a different thing. It's a difference of opinion. And, you know, they may evaluate money. And 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 craft. I've seen that, you know, I've been on 19 boards.
[39:15]
WarrenI've seen it for 50 years. And maybe I'm susceptible to it, too. Maybe when I hear that chucho going on the trade, I get a little carried away myself. Because we did pay right up to the absolute hill for Burlington. No question about it.
QuestionerHave you heard to many of your other companies that you own major stakes. And once they see you kind of taking this activist bent, does that worry your other companies?
WarrenThey probably figure I've got it out of my system now, so they don't have to worry. And they're right. No, no, we feel good about the matter. 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 it.
QuestionerYou 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 for this. And that in turn allowed Kraft to go ahead and make this higher bid without having to ask your permission on stuff.
WarrenIt's worked out that way. I mean, I guess they would have gone up anyway. They would have. I don't know that. Nobody knows. But clearly they want the deal, you know. And I've seen it so many times. If you really want the deal, you know, you'll have all the people that work for you telling you and do it. You know, it's, it's team spirit. It's winning. It really isn't a win. I mean, whenever a company makes a deal, I go to the store and I buy a congratulations card and I buy a sympathy card. And then five years later, I decide which one to send.
QuestionerRight. Let's talk about a couple of your other holdings. There were some news, I think it was yesterday. POSCO, the Korean steel company. Right. Put out a press release and said, Warren Buffett plans to buy, more shares of Pasco in the future. Is that true?
WarrenI think I have to brush up on my Korean a little bit. I said that I like the company a lot. And I said I wished I'd 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. I certainly have no plans to sell in it. But, no, we have no buy orders in.
QuestionerSo that could be lost in translation. I think it was, yeah. was, yeah. Another deal that was a big talk this week was Swiss Re. You're taking on a little over $1.25 billion worth of business for them?
[41:39]
WarrenOver time, that contract will probably result in perhaps $50 billion of premiums. It's the largest, to my knowledge, it's the largest insurance contract ever written. The largest insurance contract ever written. I wouldn't be. I can't prove that. I read the Swiss Re release and it said that they are doing this because they think that they can get more for their money in other arenas. I think their goal is to get more than 14 times. 14% for the investment that they're putting in. What's your reason for why you take it on? I think we'll make money. It's very simple. And now if there's some terrible pandemic, you know, or if there were some incredible terrorist attack that resulted in mortality in the United States, increasing by a dramatic amount, because this is US life business. It's spread all over. I mean, it's not just a few policies at all. policies at all. 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 in the country, then we've got a very decent long-term deal. But they've got their own reasons in terms of the deploying capital in other areas that it can be a good deal for both sides.
QuestionerYou know, we talked with Dave Sokol just before you came on about an hour ago. And 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.
WarrenWell, it was interesting. I heard Richard, I think, a few minutes ago, talk about the housing numbers being, or the housing starts being a bad number, but you want a bad number for a while. The only way you clean up an excess inventory, is to have more demand than supply for a while. We had more supply than demand for many years, for four years in housing. We produced two million housing units a year. We created a million 300,000 households. Result trouble. And the longer you do it, the more overhanging inventory you have, the only way to clean that up. Well, there's one way you can start getting 13-year-olds to start cohabiting and create more households that way, and I'm sure we get a lot of volunteers among 13-year-olds.
[43:56]
WarrenBut if you're going to have normal household formation, formation, you've got to have subnormal housing production to work off the inventory. So the lower the number is temporarily, the better. It's bad for our brick business, it's bad for our insulation, but all kinds of things. It's bad for jobs, and that presents a problem. Well, that's because we created a problem. And we could have a, we could have a cash for clunkers program, you know, on houses. Everybody can, if we would blow up three or four million houses today, the housing shortage would be over, have to go in the right place and wouldn't be your house, wouldn't be my house. But we have to. If you have an inventory overhang, you have to 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.
QuestionerBut are you saying that the administration should not have put in some of these programs to try and ease the pain along the way, like a cash for clunkers, like the mortgage tax deduction that you can get.
WarrenWell, cash for clunkers. I mean, the idea is that if you destroy a bunch of cars, people will need to buy some more cars. You can have cash for cream puffs. I mean, you can bring in your brand new car you bought yesterday and blow it up, you know, destroy it, and then you'd have one more demand for one more car, right? So you can always create demand in something like cars. You know, it's just, you know, to say half the cars in the United States have to be destroyed tomorrow morning. You'd have the biggest car here. car you'd ever seen. So those kind of programs, and we did some of that in the New Deal. I mean, you know, you do it when you, when you force farmland to become fallow for a while. You know, you decrease the output of crops. There's been 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 that program. But overall, the government's done a good job.
QuestionerWarren, we've come back, the market's come back a long way, as you know, and you've commented it.
[46:08]
QuestionerAnd I know you're not a, on any given day, you're not going to say it's, 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 bit of a... a bubble from all of the Fed accommodations and all the things that the extraordinary measures that we've taken. Do you have a feeling for whether this is real and supported?
WarrenWell, I have no feeling at all, you know, as you've said, I don't know where the market's going to be in a day or a week or a month or a 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. And, you know, the market is up quite a bit from March, but, you know, it's down a lot from three or four years ago. And if I were going to buy a farm go and somebody said, well, with great certainty, they said, you know, this is going to be 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 give me a favorable forecast. If I'm going to own a farm for 50 years, I'm going to have a few lousy years in terms of weather, and I'm going to have a few great years and a lot of pretty good years. And the idea that you try to time purchases based on what you think 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, well, it's a time of uncertainty. It was uncertain on September 10th, 2001. People just didn't know it was uncertain. 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. And we try to price. We don't try to time at all. And in pricing, I would rather own equities today. People say all the, people say all the toxic, people say all the problems that we had in March at 666 on the S&P, that nothing's changed. The toxic assets are still somewhere, that we're still over leveraged, that 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. Well, then I would say that they were making a mistake in terms of what they were selling for in March. I mean, you know, if, like I say, if I buy a farm near here, and it turns out to be a terrible year and, you know,
[48:41]
Warrenpests come in and there's no rain and all that sort of thing, you know, am I going to sell it for half the price that 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, you know, and a few bad ones? I, it just, it doesn't make any sense to try and time. things that way. And nobody knows what's going to happen tomorrow ever. The only thing is they get very more, they get very apprehensive about it at certain times, particularly when other people are apprehensive. When people get scared, they get scared as a group. The confidence comes back sort of one at a time. But 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 to be four and a half million homes that are about sold this year. There are 80 million homes roughly in the country, 25 million them 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. They're buying them much more cheaply. They're covering it better with their income. So the liar's loans have just, you know, disappeared to a great extent. So every day those homes are going into better hands. Four and a half million homes will be in better hands, stronger hands, people that can handle the payments better. end of the year than it wasn't at the start of the year. So the system is cleansing itself, but it doesn't do it in a day or a week or a month or even a year.
QuestionerWarren, there are those out there who argue that the economy is being held together in a way with tape and glue, right? With MBS purchases and stimulus measures and cash for clunkers. Bill Dudley of the New York Fed is out this morning, and he says that 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's saying this morning?
WarrenWell, I think we have the conditions in place to take care of any normal shocks. I mean, if you talk about some, you know, major terrorist activity that's carried offers, I mean, there are exogenous factors that could cause problems now just like they could have caused them five years ago or 10 years ago or 20 years ago. And we didn't know them ahead of time.
[50:56]
QuestionerBut if you're talking about a world where there's nothing of a really extraordinary, exogenous nature, I think the chances of a second financial panic are extremely low. You know, Warren, when you talk, people listen and people are watching right now. In fact, Jamie Diamond wrote in. He's watching, and he says he agrees with most of what you're saying. He wrote in when you were talking about Washington. I feel good. Jamie's a very, very smart guy, and he's run a bank the right way. 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, political rhetoric and the back and forth about the enemies on Wall Street, how big of a concern is that?
WarrenWell, they don't like it, obviously, but Washington doesn't like them. I mean, and it's, you know, bankers get pointed at, Whenever there's problems, bankers get pointed to, and there's some things to point to. But I don't think, you know, I don't think that's affecting jobs now. I mean, people say, you know, I don't think anybody's not hiring. If Wells Fargo needs people, they're going to hire people. And if they have five or six more percent more customers this year than last year, they'll need a few more people. They'll need more people in their mortgage department because their mortgage operation has increased its share of market. So businessmen make, they make self-indexam. interested decisions, you know, just like all of us. And they're not going to expand if they don't see demand. And 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 our carpet business will be doing a lot better five years from now. I won't guarantee you about five months from now. I just don't know when it'll change. When it does, we'll be employing more people.
QuestionerAre banks lending money, or is it simply what you're saying, that people aren't looking to take more money out because they don't see the demand?
WarrenYeah, well, there's very, relatively few businesses that need more capital now to support more business. Now, there are certain areas of the economy where that wouldn't be true. But the, you know, the people that need business, that need loans to take care of operating losses, that's a mistake to lend the money in most cases.
[53:17]
WarrenAnd there's all kinds of people that are 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 work. Most of the time, that doesn't work. People wanting money for expansion where they've got profitable businesses, I don't think, are having any trouble getting on it, but there are, you do not want to go around lending money to people who are using it to cover operating losses. And there are plenty of people that want you to do it. The bankers I talk to are dying to get loans. I mean, the last thing they want to do is sit around with money, you know, at Fed Funds Rays or at LIBOR or anything. There is no money in that. So they want loans. They want loans, but they want loans where they're going to get paid back. They took on a lot of loans a few years ago that weren't so good. I do not think there's a general reluctance at all among banks to lend. Short of an extreme act, like a terrorist act, what's your biggest concern when you look out over, let's say, the next year in the economy? Well, that would be my biggest concern. It's going to take time, Becky, though. I mean, you just, you know, next day and next, these things take time. time to work their way 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 we're not doing the kind of business that 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 was that the world was going to de-leverage and the only party that could really leverage up was the U.S. government. Thank God it did. You know, 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, Ben ought to ask for two and 20 because he's got these 5% assets and no cost on the liability side. I mean, he should have negotiated a better deal. But that he had to buy that trillion. I mean, things are getting righted. Balance sheets are cleaned up. I mean, it can take a Goldman Sachs or, you know, they love. The leverage ratios in half, their capital is like it's never been before. So it's getting righted, but, you know, AIG goes through the ringer and all that sort of thing.
[55:36]
WarrenOn the other hand, State Farm does wonderfully, you know, so that the world will go on and it will, we will have a better world five and ten years from now. But five months from now, who knows what it will mean.
QuestionerWell, Warren, there is a school of thought along those lines that you could have stubbornly high unemployment and you could have consumers that are reluctant to spend, but you're you have companies in the sweet spot of the profit cycle where margins are going up and cash levels are high and productivity through the moon and you could have the markets diverge somewhat from the overall economy over the next 12 months, don't you think?
WarrenWell, I think markets frequently will diverge from the 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 do the, or to the, or the, or to the economy generally. I do not, when I, if I'm buying XYZ company, I am not concerned about what 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're going to be in five or ten years, you know, 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, and I don't know anybody else that can't either, but that, you know, maybe they can.
QuestionerYou know, we are just about out of time today, but you've got the sheriff's that are going to be coming in here in just probably about an hour, hour and a half time this morning. This meeting today, you said you think you've got the votes already walked. I think we have the votes, yeah. You feel pretty confident about that. Will the shareholders be asking other questions? What's the...
WarrenNo, 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're going to have so many people who you won't be able to believe it. And we're going to take questions even a half an hour longer than normally. than normally. We're going to go from 930 to 330 even and then, you know, the press the next day and all of that sort of thing. So this is limited today. This vote, you say you have the votes going into it.
[57:38]
QuestionerBurlington Northern shareholders get to vote next month. Right. Are you confident that they'll vote in favor of this?
WarrenYeah. Their vote is tougher because they need, because we own the shares we do already, they need 66 and 2 thirds percent of all shares not owned by Berkshire, not just the ones at the meeting or anything else. So they have a pretty high hurdle.
Questionera pretty high hurdle rate. Now that boat is coming in well, but, but this vote's a lot easier. There's been some legislation proposed in Congress that would regulate more of the railroads. Do you have any concerns about that?
WarrenWell, I think the railroads, like our public utility business, are regulated, should be regulated. On the other hand, it should be what I would call enlightened regulation. I mean, they, the country needs both our utility business and our railroad business to make investments for the future. I mean, you can't wait till five minutes before you need another generation plant or a second rail line. We should earn a decent return on the capital employed in that. 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.
Becky QuickAll right, well, Warren, we want to 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 gentlemen. with your time.
WarrenThanks for having me.
Becky QuickOkay. And gentlemen, we'll send it back to you in the studio. With 700,000 shareholders, Warren, you're going to need a bigger hall, bigger auditorium.
WarrenBigger boat.
Becky QuickYeah, you need a bigger boat.
WarrenBigger boat.
Becky QuickThank you, Becky. Thank you, Warren. Go to the hotel or normal. That's the way to make money. Not a luxury one. Thanks, Warren.