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Tuesday, August 26, 2008

SEEKING ALHPA: Buffett Takes Berkshire Hathaway on $4 Billion Spending Spree

By Jason Simpkins

Not even Warren Buffett was immune to the stock market’s rampant first-half gyrations, as Berkshire Hathaway Inc. (BRK.A) notched its worst first half in 18 years, with the shares skidding more than 16%. But only a fool would count out the great Oracle of Omaha, who has spent the past several months restructuring his company’s portfolio and is now ready to come out swinging for the year’s second half.

As Money Morning’s Horacio Marquez noted in his most recent “Buy, Sell, or Hold” feature, Berkshire Hathaway has had a tough start for the year.

The company’s net earnings for the first half were $3.8 billion – a 33% decline from the $5.7 billion reported for the same period last year. But even though the second quarter was weak – especially by Buffett’s standards – it showed marked improvement from the first three months of the year.

Berkshire reported about $1.6 billion in unrealized losses from derivatives in the first quarter. But after warning that derivatives contracts will often “swing wildly,” the company posted $689 million in derivatives gains in the second quarter.

Berkshire’s revenue actually rose 10% to $30.09 billion for the quarter.

But that’s not enough for Buffett, who has set about restructuring his company’s holdings. In the past few months, Berkshire has reduced its investments in Anheuser Busch Cos. (BUD) and Trane Inc., and added positions in NRG Energy Inc. (NRG), Ingersoll-Rand Co. Ltd (IR), and Sanofi-Aventis (SNY).

According to filings with the U.S. Securities Exchange Commission [SEC], Berkshire in June reduced its stake in Anheuser Busch to 13.85 million shares, less than half the 35.56 million shares it held as of March 31. It’s likely the company received a tidy sum for its shares, as earlier that month InBev SA (INBVF.PK) offered $65 a share for the American icon. Buffett admits to bailing on the Bud brand before InBev raised its offer to $70 a share, but AB was trading at close to $62 a share on June 30, much higher than the $47 a share the company was valued at in late March.

Also in March, Berkshire dumped its 10.9 million shares of Trane Inc. That stake was valued at more than $500 million as of March 31.

After unloading in the spring, Buffett treated Berkshire Hathaway to a $4 billion shopping spree over the next several months. By the end of the second quarter, Berkshire’s stake in French drug maker Sanofi Aventis had shot up 317,200 shares to reach 3.9 million. Berkshire also added 5 million shares of Ingersoll-Rand, and announced new holdings in NRG Energy, the second-biggest power producer in Texas. Berkshire had 3.24 million NRG shares as of June 30.

Even more interesting, in a move that highlighted Buffett’s bullishness on railroad stocks, Berkshire doubled its stake in Union Pacific Corp. (UNP), taking its holdings from 4.45 million shares at the end of March to 8.91 million shares as of June 30.

Last year, Buffett and Berkshire rode the rails hard. Buffett made his first move on Burlington Northern Santa Fe Corp. (BNI) last April, acquiring nearly 40 million shares - or close to 11% - of the railroad. He then moved on to snap up 10.5 million shares of Union Pacific Corp., and 6.4 million shares of Norfolk Southern Corp. (NSC).

Later in August, Berkshire went shopping again, loading on an additional 3.3 million shares of Burlington and another 6,000 in September. But Buffett didn’t stop there: He added yet another 10,300 shares of Burlington over the two-week period ending Jan. 22, bringing Berkshire’s total stake in the company to 18.2%.

Berkshire’s second-quarter acquisitions, which were disclosed in a SEC filing last week, are only a fraction of the $3.98 billion Berkshire spent on stocks in the
April-June period. Even if Buffett bought the shares at their highest second-quarter prices, which he almost certainly did not, the total cost would only have been about $260 million. That means more than $3.5 billion went into smaller amounts of unnamed stocks the company was not required to disclose.

Where that money went is anybody’s guess, but Buffett indicated in a recent interview with CNBC that a portion of it went into one of two stocks: Wells Fargo & Co. (WFC) or American Express Co. (AXP).

Wells Fargo stock has plummeted 22% in the past year, while American Express is down more than 37% in that time. However there may be some clues as to which stock Buffett really believes will rebound in some earlier comments he made.

We’ll say at American Express… they are experiencing credit deterioration and they’re experiencing it sort of in all segments,” Buffett said earlier on CNBC’s Squawk Box. “So they’re seeing the rich customers slow down in payments, slow down in purchases.

“And American Express can describe that rather than I,” he added, “but I pay a lot of attention to that sort of thing. And incidentally, it will get cured at some time in the future, but right now the situation is getting worse and I would say that I don’t see any early end to that.”

That assessment doesn’t seem particularly favorable, particularly compared with comments Buffett made with regards to Wells Fargo just a few months ago.

"Wells Fargo stock was down last year,” Buffett said, “I don’t think the intrinsic business value shrunk. In fact, I said I thought it probably increased a touch."

Berkshire already owns considerable stakes in both companies.


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Saturday, August 23, 2008

KANSASCITY.COM: Economic woes will continue, Buffett says

By JOSH FUNK

Buffett
Buffett

OMAHA, Neb. | Billionaire investor Warren Buffett said Friday the economy continued to be in a recession, by his definition, and would continue to be for at least several more months.

During a live appearance on CNBC, Buffett said ripples of the credit crunch were continuing to cause problems in financial businesses and the economy.

Earlier this year, he said a financial crisis reveals which players have been “swimming naked,” because the tide goes out. That picture has worsened along with the crisis.

“We found out that Wall Street has been king of a nudist beach,” said Buffett, who is chairman and chief executive of Berkshire Hathaway Inc., which is based in Omaha.

Buffett said activity at businesses Berkshire owns, especially ones related to housing construction such as Shaw carpet and Acme Brick, continued to slow during the summer.

He is confident the nation will be doing better five years from now, Buffett said, but the economy could be worse five months from now.

Buffett said the economy was in a recession, because most Americans were not doing as well today as before.

Regarding the nation’s credit crunch, Buffett said he thought mortgage giants Fannie Mae and Freddie Mac were too big to fail, but that shareholder equity still could be wiped out.

“They’re looking for help, obviously,” Buffett said. “And the scale of help is such that I don’t think it can come from the private sector.”

Buffett said it was likely more banks would fail, especially in areas where there was a real estate bubble and the banks got heavily involved.

“What we’ll see is failures where the bankers were dumb in what they did,” Buffett said.

Buffett also said Friday he sold nearly two-thirds of Berkshire’s 35.6 million shares of Anheuser-Busch Cos. stock because he had not been sure Belgian brewer InBev SA’s takeover bid of $65 a share would succeed. Anheuser agreed to the $52 billion bid in July.

“In retrospect, I was wrong to partially sell the holdings,” Buffett said, disclosing that he sold the stock for $61 or $62 a share. At the end of June Berkshire still held 13.8 million shares of Anheuser-Busch.


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The Snowball: Warren Buffett and the Business of Life

The Snowball: Warren Buffett and the Business of Life

The Snowball: Warren Buffett and the Business of Life
By Alice Schroeder

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Product Description

Here is THE book recounting the life and times of one of the most respected men in the world, Warren Buffett. The legendary Omaha investor has never written a memoir, but now he has allowed one writer, Alice Schroeder, unprecedented access to explore directly with him and with those closest to him his work, opinions, struggles, triumphs, follies, and wisdom. The result is the personally revealing and complete biography of the man known everywhere as “The Oracle of Omaha.”

Although the media track him constantly, Buffett himself has never told his full life story. His reality is private, especially by celebrity standards. Indeed, while the homespun persona that the public sees is true as far as it goes, it goes only so far. Warren Buffett is an array of paradoxes. He set out to prove that nice guys can finish first. Over the years he treated his investors as partners, acted as their steward, and championed honesty as an investor, CEO, board member, essayist, and speaker. At the same time he became the world’s richest man, all from the modest Omaha headquarters of his company Berkshire Hathaway. None of this fits the term “simple.”

When Alice Schroeder met Warren Buffett she was an insurance industry analyst and a gifted writer known for her keen perception and business acumen. Her writings on finance impressed him, and as she came to know him she realized that while much had been written on the subject of his investing style, no one had moved beyond that to explore his larger philosophy, which is bound up in a complex personality and the details of his life. Out of this came his decision to cooperate with her on the book about himself that he would never write.

Never before has Buffett spent countless hours responding to a writer’s questions, talking, giving complete access to his wife, children, friends, and business associates—opening his files, recalling his childhood. It was an act of courage, as The Snowball makes immensely clear. Being human, his own life, like most lives, has been a mix of strengths and frailties. Yet notable though his wealth may be, Buffett’s legacy will not be his ranking on the scorecard of wealth; it will be his principles and ideas that have enriched people’s lives. This book tells you why Warren Buffett is the most fascinating American success story of our time.

Product Details

  • Amazon Sales Rank: #690 in Books
  • Published on: 2008-09-29
  • Released on: 2008-09-29
  • Original language: English
  • Number of items: 1
  • Binding: Hardcover
  • 976 pages

Editorial Reviews

About the Author


Author Alice Schroeder was a noted insurance industry analyst and writer who was a managing director at Morgan Stanley. She first met Warren Buffett when she published research on Berkshire Hathaway; her grasp of the subject and insight so impressed him that he offered her access to his files and to himself. Their friendship and mutual respect make her ideally positioned to write the The Snowball.

Ms. Schroeder was born in Texas, and she earned an undergraduate degree and her MBA at the University of Texas at Austin before moving east to work in finance. She is a former CPA and lives in Connecticut with her husband.

Buy "The SnowBall"@ Amazon


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WSJ: The Backstory on the Buffett Book

A coming biography on the Oracle of Omaha may not get much support from its subject
By JEFFREY A. TRACHTENBERG
August 23, 2008; Page W1


Buy the book here at Amazon

One of the most anticipated books of the fall is "The Snowball: Warren Buffett and the Business of Life." The title's publisher, Bantam, paid $7.2 million for the North American rights and expects to sell more than 1 million hardcover copies of "The Snowball," which is due out Sept. 29.

Few investors have generated as much sustained public interest as Mr. Buffett, one of the world's richest men, with a fortune estimated as high as $62 billion. R.R. Bowker's Books in Print says there are an estimated 60 titles in print about him, with more than a dozen new ones on tap this year. Now Bantam is about to find out whether there's a limit to Buffetmania.

[Warren Buffett, 2008.]
ABACAUSA/Newscom
Warren Buffett, 2008.

What separates "The Snowball" by Alice Schroeder, was that Mr. Buffett pledged his cooperation to the first-time author. He gave her open access to two large file rooms that included material on his investments, his correspondence and topics of personal interest, she says. She says he provided her with a letter that she was able to show to people she wanted to interview that confirmed he was cooperating with her. The author, who initially met Mr. Buffett in the late 1990s when she was covering Berkshire Hathaway Inc., as an analyst at Paine Webber, estimates she spent 2,000 hours with Mr. Buffett during the project and recorded 300 hours of interviews. Mr. Buffett is chairman of Berkshire Hathaway, an Omaha-based conglomerate with large insurance holdings.

The book's title is based on a comment that Mr. Buffett is said to have once made: "Life is like a snowball. The important thing is finding wet snow and a really long hill."

[Mr. Buffett in 1980]
Time & Life Pictures/Getty Images
Mr. Buffett in 1980

Some publishers estimate Bantam will have to sell 600,000 to 700,000 copies to make a profit. The book's performance may well be affected by how much the 77-year-old investor cooperates in publicizing it and "how much he represents that the book is accurate," says Adrian Zackheim, publisher of the Portfolio business imprint of Pearson PLC's Penguin Group (USA). (Mr. Zackheim gave the manuscript a close look, but ultimately wasn't among the final bidders.)

It's an intriguing issue because Mr. Buffett doesn't currently have plans to promote "The Snowball." In an email, an assistant to Mr. Buffett said the investor is "not doing interviews about the book at this time."

A person familiar with the situation says Mr. Buffett was initially upset about some of the content. The issue has to do with his first marriage. Mr. Buffett's first wife, Susan, left him and moved to San Francisco in 1977. The two, however, never divorced, and with his wife's encouragement, Astrid Menks, a waitress at the French Cafe in Omaha, eventually moved in with Mr. Buffett. She later married him following Susan's death in 2004.

The matter has been discussed publicly in the past, specifically in Roger Lowenstein's 1995 "Buffett: The Making of an American Capitalist," which stated that all three got along well together. Mr. Lowenstein is a former reporter for The Wall Street Journal.

[Mr. Buffett with Bill Gates in July 2008]
UPI/Newscom
Mr. Buffett with Bill Gates in July 2008

In an email Friday, an assistant for Mr. Buffett said Mr. Buffett said it was "not true" that he was limiting his promotional support because he was initially upset with the contents of the book.

Ms. Schroeder says Mr. Buffett understood that her book would explore this aspect of his personal life. "He said to interview anyone I wanted," she says.

What is less clear is whether Mr. Buffett expected that Ms. Schroeder would seek out and interview as many people as she did who were familiar with Susan Buffett's life. "He said he wanted to reconcile his public and private selves," says Ms. Schroeder. "He knew I was thorough."

Ms. Schroeder acknowledges that Mr. Buffett disagreed with some of what he read in the manuscript but says he didn't ask her to delete anything. She adds that she has "multiple sources for everything of any significance in my book."

In a previous email, Mr. Buffett said, "I'm fine with the book and hope it sells well. It treats me better than I deserve but I'm willing to adjust to that." An assistant to Mr. Buffett said the book will be available for sale at the company's next annual meeting in May and that "sales should be very high."

[buffett]
Associated Press
Mr. Buffett throwing out the first pitch at the Texas Rangers baseball game against the Kansas City Royals, June, 2008

Some publishers wonder if the absence of Mr. Buffett on the morning talk shows could be a problem. Former General Electric Co. chief Jack Welch tirelessly flogged "Straight from the Gut," his 2001 memoir, on such shows and was able to overcome the fact it was published on the day of the 9/11 attacks. Revered both on Wall Street and Main Street, Mr. Buffett is only sporadically available to the public and would be a big draw in any television and radio campaign.

"It's very curious, because Warren clearly authorized her to write this book," says Rick Wolff, publisher and editor-in-chief of Business Plus, an imprint owned by Lagardere SCA's Hachette Livre. "This is unusual. A lot of money was spent on the book."

Irwyn Applebaum, publisher of Bertelsmann AG's Bantam Dell Publishing Group, says Mr. Buffett's participation in promoting the book was never guaranteed. "He gave her access to his contacts, his friends and the opportunity to get to know him better than any other writer, which is what makes the book so outstanding," he says. "Would we love to have Warren Buffett doing interviews for the book? Who wouldn't? But we're moving ahead as planned." Ms. Schroeder has been booked to appear on NBC's "Today" show on Sept. 29.

Ms. Schroeder, a public accountant by training, was a well-regarded insurance analyst at Morgan Stanley in 2003. After obtaining Mr. Buffett's cooperation on the book, she agreed to take a leave to work on the project full-time -- she remains an advisory director -- and when news of that decision circulated on Wall Street, several publishers contacted her. A friend then suggested that she work with agent David Black, who represents such best-selling authors as Mitch Albom and Erik Larson.

[book cover]
The cover of 'The Snowball' by Alice Schroeder.

"People were beginning to slice him into tiny bits: investor, corporate manager, whatever," says Ms. Schroeder of Mr. Buffett. "I thought: This man has a unified way of looking at everything. It is one set of ideas. The right book answers the question: What events in his life formed this man and influenced him?"

In fall 2005, Mr. Black submitted a 160-page proposal to New York publishers. Two eager frontrunners emerged: Bantam's Mr. Applebaum and Gina Centrello, publisher of Bertelsmann's Random House Publishing Group. Each was asked to fly independently to Omaha to meet with Mr. Buffett. "He needed assurances from publishers he had never met that they wouldn't market the book in a way that presented him as the quasi-author or that would make untrue claims," says Ms. Schroeder, 51 years old.

Mr. Applebaum, who ultimately triumphed, declined to comment on the content of "The Snowball." And while he noted that it has become a ruthlessly competitive marketplace for new books, he added, "Some books burn brightly week after week, and that's our expectation here." Bantam declined to make a copy of the book available.

Many believe "The Snowball" will be a major hit. "It will be my biggest book of the year," says Dave Hathaway, business book buyer for Barnes & Noble Inc., the country's largest book retailer. "There's a certain amount of mystery that shrouds him. He's the last true business icon."


The Snowball: Warren Buffett and the Business of Life

The Snowball: Warren Buffett and the Business of Life
By Alice Schroeder

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Price: $23.10 & eligible for FREE Super Saver Shipping on orders over $25. Details

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THE WASHINGTON POST: The game is over

Saturday, August 23, 2008; Page A14

WHEN TREASURY Secretary Henry M. Paulson Jr. unveiled his rescue plan for Fannie Mae and Freddie Mac in mid-July, he argued that the massive potential costs would never materialize. The mere pledge of government backing for the two mortgage giants would restore market confidence, Mr. Paulson said, making it easier for them to raise much-needed capital and to continue borrowing at favorable rates. It has taken a little more than a month for the markets to call Mr. Paulson's bluff. Over the past week, the companies' paltry remaining market capitalization has been nearly wiped out. More ominous, the companies are being forced to pay higher interest rates on their bonds.

Company executives grumble about alleged government leaks designed to spoil their image among investors. From where we sit, it looks as if the markets are reacting to bitter realities, including a Post story by David S. Hilzenrath that appeared Tuesday documenting Fannie Mae's risky plunge into the subprime and "Alt-A" mortgage markets during 2006 and 2007.

The firm now owns or guarantees $388.3 billion worth of the stuff. To be sure, these are relatively high-quality subprime and Alt-A loans, but there are still bound to be a lot of duds

included.

The bottom line is pretty clear: Housing prices are falling; no one knows how far or for how long. So the two firms are likely to lose billions. That gives them little or no prospect of raising enough private capital to bolster their perilously thin resources. If they also can't borrow extra-cheaply and pass those savings on to home buyers, the very reason for their special status as "government-sponsored enterprises" is in doubt. As investor Warren Buffett observed yesterday, "The game is over."

Fannie and Freddie own or guarantee half of the $12 trillion U.S. mortgage market. Central banks all over the world, and commercial banks all over America, hold their bonds. Therefore, they must be enabled to operate normally in the short term. Congress has given Mr. Paulson broad authority to keep them going with government money, and he should use it -- sooner rather than later. Prolonging the agony will only increase the cost of the inevitable government rescue, which the Congressional Budget Office has very conservatively estimated at $25 billion.

Such a bailout could prove even more complicated than the savings and loan rescue of the 1980s and 1990s. Yet it could be accomplished if Mr. Paulson got it off to a good start. Step one would be to calm the markets by explicitly pledging government support for Fannie Mae and Freddie Mac's own bonds and the mortgage debt they guarantee. Step two would be to give the two corporations enough capital to survive until the housing market touched bottom. In return, the federal government would get control over the companies, wiping out their existing shareholders (who are almost wiped out already) and ousting their management.

There is no shortage of suggestions for what should happen next. Lawrence H. Summers, a Treasury secretary during the Clinton administration, has proposed a transitional period of government operation followed by the companies' division into government and private components, the latter to be sold off in pieces. The only option that must be ruled out is a return to the hybrid "government-sponsored" business model in which taxpayers implicitly subsidized the companies' risk-taking. That game is, indeed, over.


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CNBC SQUAWK BOX: TRANSCRIPT/VIDEO PART TWO-Three Hours With Warren Buffett - Live From Omaha

THIS IS PART TWO OF "THREE HOURS WITH WARREN BUFFETT - LIVE FROM OMAHA" ON CNBC'S SQUAWK BOX WITH BECKY QUICK, FRIDAY, AUGUST 22, 2008.

IT IS AN UNEDITED TRANSCRIPT AS PROVIDED BY BURRELLESLUCE.

GO TO PART ONE OF THE TRANSCRIPT

BECKY QUICK, co-anchor (Omaha, Nebraska): Coming up, we will have much more from the "Oracle of Omaha." He has lots of wisdom to share with all of us. In fact, just listen to this.

WARREN BUFFETT ON TAPE FROM LAST NIGHT: It has not paid to sell America short since 1776, and the time to start is not 2008.

(Announcements)

QUICK: All right. Welcome back, everyone, to this special edition of SQUAWK BOX. We are live in Omaha, Nebraska, and we are fortunate enough to be joined this morning with Warren Buffett. He's got to be the world's most celebrated investor. Warren, we want to thank you for joining us here this morning.

BUFFETT: I'm enjoying it.

QUICK: Well, we have a lot to talk about. If you take a look at what's been happening with the Federal Reserve, with the challenges they've been facing, what kind of job, what kind of ratings would you give the Federal Reserve up to this point?

BUFFETT: Well, I--I'm inclined to give anybody that takes on a tough job like that a pretty good rating. I mean, they get the toughest problems of the world thrown at them. And in my job, I wait for easy pitches. I mean, I--you know, somebody can say Microsoft at 27 or General Motors at 10 and I don't have to swing. I--there's no called strike in my business. So I wait--I could wait a year and get one pitch I like and swing. And so I wait for the easy ones. And in the Federal Reserve position, you have to take on the toughest problems. There are no obvious answers, there's trade-offs. And when I--when somebody that's very bright, very public-spirited takes on the job, I'm disinclined to ever criticize.

QUICK: Do you think the Federal Reserve has gotten inflation under control? Do you think that they've focused a fair amount on the economy?

BUFFETT: No, they've got a tough problem. I mean, with these dual goals of essentially stimulating growth and at the same time containing inflation, they're in direct conflict. And the temptation is, since the lack of growth is apparent today and the inflation tends to kick in later on, to ignore the inflation aspects. It's a very tough balancing act and it can't be done perfectly. And like I say, I couldn't do it perfectly and I don't think anybody can, but I admire the people that take on the job. I admire Bernanke, I admire Greenspan. That doesn't mean I think they were always right. It's--I think they're thought to have more power than they really do have. I mean, Ben Bernanke does not have any magic wand that's going to create--enable people that have borrowed too much money on their homes or people who've lent unwisely or the banks that are too leveraged, that doesn't go away easily.

QUICK: We talked earlier this morning about Fannie Mae and Freddie Mac and some of the major problems facing those two institutions right now. In your opinion do these stocks, you think, get wiped out?

Dave Grogan / CNBC

BUFFETT: Well, there's certainly a reasonable chance of that because they wrote insurance at the wrong price. And if you write insurance and write--we write insurance at the wrong price, you know, we're going to go broke. I mean, it--when you write insurance, you make a promise. In their case, they guaranteed the credit of trillions of dollars worth of mortgages and they charged a service fee for doing it--an insurance premium you can call it--and they got the wrong price for it. And then they--their other activity, which is to run a very large sort of hedge fund with a carry, where they lend money long and they borrow money in various ways, they had a spread on that. And that works fine as long as the spread's maintained and they've done some things to protect that, but it doesn't do well if the assets crumble on them, and they've had some crumbling. So they got into trouble the way people have historically got into trouble both in terms of running a carry trade and both in--and in terms of writing insurance at the wrong prices. And there is no easy cure. You can't tear up your old insurance contracts. And they can--they keep existing because they've got the federal government behind them. And the federal government should be behind them, excluding the equity portion.

QUICK: You own shares of Fannie Mae, Berkshire Hathaway did, up until when, about 2001?

BUFFETT: We were the largest shareholders of Freddie Mac in the--in the United States, and around 2000 or 2001...

QUICK: Yeah.

BUFFETT: ...it became so apparent to me that they were intent on trying to report quarterly gains to please Wall Street, and there are all--if you've got the government behind you and you can borrow money in unlimited amounts, you can report earnings for any given quarter that you want to. I mean, the chickens don't come home to roost till later. And the management was intent on that. They started doing things on the asset side they shouldn't have done, they made promises they shouldn't have made, and so we got out.

QUICK: All right. If--is there anything that would ever convince to you get back in, or would these companies have to be completely recapitalized and reset up?

BUFFETT: It would--it would--it would take a much different situation.

QUICK: (Unintelligible)

BUFFETT: You need--if you run an institution with enormous leverage, you need somebody with a fiduciary gene running it. And they had a peculiar problem in that they were trying to serve two masters. And then Congress was telling them push the money out and foster housing in every way you can, don't require as much in down payments, make--you know, all kinds of things, take on projects that they wouldn't have taken on for an economic reason. And Wall Street was saying deliver us 15 percent earnings gains every quarter. And they tried to do both of those things, and in the end they're going to do neither.

QUICK: When you take a look at the United States and its stock market compared to what you see overseas right now, where--what makes you most excited when...

BUFFETT: Well, I see values in all arenas. I mean, we try to look for the best ones, but there's no magic to any given market and things are cheaper than they were a year ago in markets here and in markets around the world. So everything is more attractive, generally speaking, both here and in Germany and the UK and Korea and you name it. And I just try to look for the things I understand the best and that also are selling for less than I think they're worth.

QUICK: The dollar has gotten much stronger over the last month.

BUFFETT: Right.

QUICK: Is that a trend that you think can or will continue?

BUFFETT: Well, it won't continue if over the next five or 10 years we run very large current account deficits. Now, exports have been doing well lately. I mean, the country is remarkably innovative and resilient. I mean, we are going to export 12 percent of our GDP this year, and in 1970 it was 5 percent.

QUICK: Mm-hmm.

BUFFETT: So people who think that America is not in the game are totally wrong. But we have been importing like 17 percent of GDP. If we have that gap and it continues, the dollar over time will get weaker. Not necessarily next week or next month or next year, but it will get weaker over time. You can't run persistent, huge current account deficits for decades and not have consequences.

QUICK: But you don't have any bets against the dollar right now.

BUFFETT: Not right now.

QUICK: You've taken them in the past. At the moment, nothing?

BUFFETT: That's right.

QUICK: You have any currency plays right now?

BUFFETT: None--no direct currency play. We own stocks in companies in other countries, but no currency plays.

QUICK: OK, let's take a couple questions from people that we were listening from last night. Again, we've been spending the morning with you, but last night we did have CNBC crews who went out to some of the theaters across the country that were previewing "I.O.U.S.A." We got a chance to catch up with some of the people there and ask them a few questions. Let's start out with one question that's coming from Chicago.

Unidentified Woman: Hi, Warren. Identifying the debt problem and coming up with a solution seems like an easier task than motivating Congress. What would you suggest that we do to help motivate a shortsighted Congress?

QUICK: OK. That's, again, going back to how do you motivate a shortsighted congress. What would you suggest?

BUFFETT: It's very tough. I mean, in the end, can I name a politician in the last 20 years that said, `My campaign is I'm going to increase your taxes a lot and come close to closing the budget deficit.' And since nobody wants spending cut--they all want the other guy's spending cut...

QUICK: Mm-hmm.

BUFFETT: ...and, you know, we'll have to increase taxes. I--Walter Mondale tried it in 1984 without much success. Now, what I do with politicians is I ask them what they believe in and will work for that a majority of their constituents oppose. Now, if they give me an answer to that, I know they really believe that. I mean, I don't get long answers to that question. But what they...

QUICK: I bet you don't.

BUFFETT: Yeah, no. But that's the real test of what they believe in. Anybody's for anything that gets them elected, so if they--if they say, `I'm for lowering your taxes,' or `I'm for bringing all kinds of things to my district,' or `earmarking things,' you know, of course they're going to say that. And they'll say that whether they believe in it or not because it keeps their jobs. Now, the question is what do they believe in that might endanger their job if in--if done?

QUICK: What did Barack Obama say when you asked him that question? You're supporting him.

BUFFETT: Yeah. I'm not going to ask him that question.

QUICK: You haven't asked him that question.

Berkshire Portfolio

BUFFETT: No, I didn't--I didn't--I didn't put that one to him.

QUICK: Why not?

BUFFETT: I didn't feel like putting him on the spot that way.

QUICK: But he got your support anyways.

BUFFETT: Well, I have a choice of two candidates...

QUICK: Right.

BUFFETT: ...and I support Barack and I think that on balance he will be better for America. Although I admire John McCain as an individual, but I think that Barack would be better. But I will--I can tell you that both candidates are not addressing things in the campaign that are important issues, because they feel it'll cost them votes.

QUICK: What do you think is the most important issue that's not being addressed by either campaign?

BUFFETT: Well, I think in the--certainly in the financial area. Now, they've both made certain proposals on taxes, but in terms of the realism of what would happen in terms of closing budget deficits or something of the sort, I don't think they really want to get that specific about it now.

QUICK: OK. I think we're going to have more on this conversation--a little bit more about what's happening in the election, what you think about the ideas of a windfall profits tax, and we'll talk about all of those issues in just a little bit coming up. Meantime, though, we're going to take a very quick break and let you catch your breath. You can have a sip of your Cherry Coke. You, too. Anyway, folks, we'll be right back with much more from Warren Buffett on his home turf right here in Omaha, Nebraska.

QUICK: Warren, you couldn't hear what Steve had just been talking about, but he did say that one point coming out of Jackson Hole is that this rise we've seen again in the dollar--rise that we've seen again in oil is clear evidence that the Fed does not have everything under control when it comes to inflation. What do you think about that?

BUFFETT: Well, the Fed doesn't have--but even without that fact, I mean, the Fed's got real problems with inflation and have got it in commodity prices. I--every business we have, but some of them in a dramatic way, are getting cost increases thrown at us. I just was looking at the reports for July on certain businesses, and we're trying to push through price increases ourselves. And our margins are getting squeezed in certain major businesses simply because we don't get price increases as fast as we're getting them. But we're pushing up prices.

QUICK: So you see it going right through? Which...

BUFFETT: Sure it's going to go through.

QUICK: Which businesses are the toughest to get them through?

BUFFETT: Well, it's tough, and we're in various things connected with residential housing.

QUICK: Right.

BUFFETT: Take carpet, for example...

QUICK: Right.

BUFFETT: ...or insulation. These things all have a huge energy base to them. I mean, carpet is oil, and weekly we get these price increases thrown at us and they're usually effective immediately, whereas we have trouble with our retailers getting them to say, well, 30 days from now or 60 days from now. And we don't want to--we don't like telling a retailer that you can have your price increase tomorrow. So there have been increase after increase in prices and our margins are still going down, and that's happening--if you take brick, that's natural gas. I mean, there's all kinds of areas where it's happening. Food it's just--it's pouring through.

QUICK: But does that mean you were not surprised by that very hot PPI number that we just...

BUFFETT: No, I wasn't surprised at all.

QUICK: You weren't.

BUFFETT: No. I--in fact, if anything I feel that the CPI has been sort of understating what's been going on. We are in an--we are in a economy that is going to see significant--and is seeing significant inflation. The only--the only people who aren't getting much inflation are blue-collar workers and the middle class in terms of their income. So they are getting squeezed like crazy.

QUICK: Would it--does that mean you expect to see more PPI increases and eventually see that showing up in the CPI as well?

BUFFETT: It has to, but--yeah. They--the cost of living is going up and, you know, unfortunately, the prices of houses going down and there's--there are problems in the economy. We will get through this. But as Paul Volcker mentioned in the movie last night, the problem with inflation is if it gets ignited, it gets very hard to put at a--at a--at a point. I mean, Paul Volcker had to go in with a 2x4 to the economy in the early '80s and we had inflationary expectations built in to a terrific degree.

QUICK: Mm-hmm.

BUFFETT: And if that happens again, we've got lots of troubles.

QUICK: Warren, we teased earlier that we were going to mention something nobody had heard about just yet. We know that you're a huge baseball fan, but you also have a big day coming up. What is that big day?

BUFFETT: It's a--it's a huge day for all of baseball, actually. On September 9th in Fenway Park I will be starting. And--but more important than that--because I've thrown out the first pitch other times--but this time I brought my secret weapon.

Warren Buffett throws out the ceremonial first pitch before a game on June 11, 2008 between the Kansas City Royals and the Texas Rangers
John Sleezer / Kansas City Star
Warren Buffett throws out the ceremonial first pitch before a game on June 11, 2008 between the Kansas City Royals and the Texas Rangers

QUICK: Which is?

BUFFETT: Jack Welch is going to be my catcher.

QUICK: Jack Welch is your catcher.

BUFFETT: Yeah. I mean, can you imagine being able to pitch with Jack calling the pitches? And, I mean, anything he calls for. I've got--I've got a fastball, a curve, a sinker, you know, a spitball, a knuckleball, a sidearm delivery. And if Jack calls for any pitch, including the ball that bounces four or five times before it gets to the plate, I'm going to throw it.

QUICK: You're going to throw exactly what he calls for.

BUFFETT: So if I--if that's the pitch, it's because Jack called it.

QUICK: All right, we'll all be watching that. That's coming up, again, you said September 9th.

BUFFETT: September 9th, right.

QUICK: OK. Folks, we still have a lot more to come this morning. You have not heard the last from Warren Buffett yet. We'll get much more on his holdings, what he's thinking about buying and selling, maybe. We'll also talk to him about the economy. We'll get to the election and much, much more. Plus, don't forget, Carl is live in Beijing as day 13 of the Olympics comes to an end. We are going for the gold this morning. This is a special split edition of SQUAWK BOX live from America's heartland and from China. It's all coming up when we come right back.

Announcer: This is a special edition of SQUAWK BOX, live from the Holland Performing Arts Center in the heart of beautiful Omaha, Nebraska. Billionaire investor Warren Buffett in his hometown talking markets.

WARREN BUFFETT: It's a different world in terms of supply and demand on oil than existed five years ago.

Announcer: The economy.

BUFFETT: It's not over by a longshot.

Announcer: And everything in between.

BUFFETT: Coca-Cola would never be going on a country road when the Interstate's available.

Announcer: Only with us. SQUAWK BOX begins right now.

BECKY QUICK, co-anchor (Omaha, Nebraska): Good morning, everybody. Welcome back to SQUAWK BOX right here on CNBC. As you know we have quite a show in store for you today. Our special guest, who's been with us for two hours already, is a man who needs no introduction. We're talking about Warren Buffett. And, Warren, thank you again for hosting us in your hometown. It's great to be here with you in Omaha.

BUFFETT: Thank you.

(Carl Quintanilla airs from the Olympics)

(Clips from "I.O.U.S.A.")

QUICK: All right. Warren, let's get back to the state of the economy right here and around the globe. When you look around, what do you worry about most when it comes to the economy?

BUFFETT: Well, I don't worry that much in the sense that we've been through lots of recessions in the past, and that the country always comes out stronger, and so I expect--I expect stock markets to go down from time to time. I expect there to be uncovered--I expect that we will uncover credit mistakes. I expect that we'll have recessions. But I also expect, and I'm totally convinced, that your children will live better than you and your grandchildren will live better. So I don't--I don't get upset about, day-to-day, what's happening in the market. It may offer--in fact, it does offer chances to buy things more attractively. I mean, if I go to a supermarket and things are on sale, I feel better.

QUICK: All right. So let's talk about that. Are there bargains out there right now?

BUFFETT: Well, there are certainly things that are a lot cheaper than they were a few years ago, and the businesses are better. Now, that doesn't mean they're doing better today, but they are fundamentally worth more money than they were a couple of years ago, and people are just looking at the glass being half empty rather than half full now.

QUICK: When we talked to you a few months ago, you talked about how you get a lot of phone calls, people call you up with deals. How many phone calls are you getting now? Would you say it's more or fewer than you got three months ago?

BUFFETT: It's probably a little more, but I was getting calls then, too. But I don't get loads of calls, but they sometimes are talking about fairly good-sized deals, and we get the calls from the people that have run out of money. Those are not--some guy calls me up and says, `I just lost $5 billion and will you replenish it,' I don't get quite as excited about that as if somebody's got a good idea and is making money with it. But there have been more calls that have been sort of distress-type calls than opportunity calls, and what we've told them is to call sovereign wealth funds or somebody like that.

QUICK: So you're saying call the money that you think is dumb money on Wall Street?

BUFFETT: We'll call it innocent money, yeah.

Dave Grogan / CNBC

QUICK: And--yeah.

BUFFETT: Yeah, and incidentally, that's what happens.

QUICK: Yeah.

BUFFETT: I mean, if you've got a great deal in this country, you don't have to go to Beijing, you know, or the Middle East to find somebody with money to fund it. It's like when oil prospectors would come up here from Texas and they'd say, `We got a wonderful deal for you in Texas,' I always thought, there are all these oil men in Texas, you know, why didn't they call on them?

QUICK: So you think the sovereign wealth funds are getting the raw end of the deal when they buy into some of the financials?

BUFFETT: I think that they are buying what is being sold to them, and in securities you should not buy what's being sold to you. You should buy what comes from your own analysis and looks the cheapest. The idea that somebody is going to come and call on you and say, you know, `Buy $2 billion worth--this is the best thing to buy in the world,' it isn't the best thing to buy in the world. The best thing to buy in the world is something that you've dug out and that people aren't talking about and that, you know, you find yourself. Securities that are being sold to you have a special push in it. Usually, there's extra commissions in them or all kinds of things. So I don't--I don't want to get ideas from other people, basically. I want to get ideas from a bunch of facts that I uncover someplace.

QUICK: A lot of people recently have been talking about the financials, which, once again, people are saying, `Hey, they are reaching levels that inherently make these stocks cheap.' You own some of the financials.

BUFFETT: Yeah, we own--we own some businesses that we think are good businesses and that if the stock market closed for the next three years I'd be happy owning. That's the real test. I mean, if you guy buy a farm, you don't get a quote on it every day. If you buy an apartment house, you don't get a quote on it every day. You look to the rents or you looked at the crop in the case of the farm. We look to the business. So if I buy stock in a financial, what I'm--what I'm looking at is where I think they'll be in five or 10 years, and I can't pick bottoms. I don't think anybody can. I do want to stay away from the ones that I think are kind of dumbly managed.

QUICK: American Express, Wells Fargo, those are two of your big holdings...

BUFFETT: Right.

QUICK: ...in the financial arena. If you see prices come down and something you've already decided you like this business, if the prices come down, do you buy more?

BUFFETT: Sure.

QUICK: Are you buying more?

BUFFETT: Well, I bought more of one of those, you know, in recent--in recent months.

QUICK: Either American Express or Wells Fargo?

BUFFETT: Now you've got it narrowed down. They--incidentally, both of those companies were started by the same guy, as I--Wells and Fargo started American Express.

QUICK: What makes you look around and think, `Hey, things are getting better'? What would it take to convince you that, `OK, this is'--or is it just simply prices are too cheap and they shouldn't get there?

BUFFETT: Yeah, I don't--if I were going to buy a farm, I know they're going to have a drought, we'll say, two years out of 10. I know prices are going to be lousy, we'll say, two years out of 10. I would rather buy it during the drought, you know, and--or when prices are bad because, you know, I know what it's going to do over time, and the test is to buy it as cheap as you can, something that--where you really have a pretty good fix on what it's going to look like over 10 years. And you're much more likely to buy it when times are bad then when times are good.

QUICK: Is now a time, though, when you'd be looking around at financials you'd never owned a stake in before? Simply because prices have come down, do you start doing more homework? Not something that's getting pitched at you, but do you start looking around to see if anything says, `OK, this one's getting unfairly tarnished'?

BUFFETT: I'm reading far more 10-Ks in the last few months than I've been reading--far more than I was reading three years ago. Yeah, there's--there are more potentially good ideas out there than there were three years ago, and some them are in financials. I mean, I'm looking all the time. And the cheaper they get, the harder I'll look.

QUICK: And you're not just talking about companies here in the United States.

BUFFETT: No.

QUICK: You're looking outside the United States as well.

BUFFETT: Right. Yeah.

QUICK: Is there a particular country that you think is inherently--like with South Korea a few years ago, you said, `Hey, there's got to be some bargains.' Is there another particular country that you look at and say, `Hey, I don't know what they are, but there's got to be something good in there?'

BUFFETT: Well, it's not like South Korea a few years ago. South Korea, you could just turn the page--you could throw darts, you know, with South Korea, and those stocks were really, really cheap. I mean, it's astounding how cheap they were and the world ignored it. PetroChina was ridiculously cheap a few years back, but I--we need to find big things, so I have to look at market caps that are large, and that rules out a whole bunch of countries, because the businesses just aren't that large. And I have to feel I sort of understand the political climate, the taxation climate, that sort of thing, and the attitude towards shareholders. But there's a lot of countries on that, but there's none--nothing--there's nothing like South Korea was five years ago.

QUICK: All right. When you look at what's happening with commodities, we saw a huge boom in commodity prices. We've seen a huge retracement. Oil prices all of a sudden back up around $120 a barrel. But do you think this volatility in commodities prices, has any of that caught you by surprise?

BUFFETT: Well, the dollar's become worth less.

QUICK: Yeah.

BUFFETT: So to the extent that they're quoted in dollars, they haven't gone up as much in Euros or some other kind--in Brazil, the Brazilian currency, you know, has more than doubled against the American currency, so when we look at soybean prices, which happens to be a big product there, it hasn't changed relatively the same way. But, you know, the surprising thing may be that commodities stayed down as low as they were for as long as they did. What happened in oil, we had a change in the supply and demand balance, and that's big in markets. That's what you had in the rail industry, for example. I mean, anytime you get those fundamental changes where, in the case of the rail industry, over a 25-year period the amount of actual rail in the United States declined by 20-odd percent while the ton miles increased 60-some percent. Well, that changes the pricing dynamics, and, you know, that's gone on in oil. It changed the dynamics that there's not a buffer supply like there was five years ago.

QUICK: Which is why you've also bought in to some of the railroad stocks.

BUFFETT: That--I should have done it much earlier. I really missed it entirely. I mean, you could just sit there and watch ton miles go up, rail go down, at some point the pricing power shifts. And, you know, it was ridiculous what the whole rail industry was selling for 10 years ago, and it was also ridiculous that I didn't spot it.

QUICK: But you think that this is still a good place for an investment. You're there for the long haul?

BUFFETT: Well, I'm, as we say in the rail industry, I'm there for the long haul. No, I--we'll be--we've got a big position in Burlington Northern [BNI 103.47 2.30 (+2.27%) ].

QUICK: Burlington, right.

BUFFETT: We'll own it a long time.

QUICK: Warren, we're going to have much more coming up. Again, folks, if you are just tuning in, we are live with the legendary investor in his hometown of Omaha, Nebraska. Much more to discuss this morning. A lot of ground to cover, including what has him a little hot under the collar this morning. Yeah, you don't want to miss a minute of this.

QUICK: All right. Welcome back, everybody, once again, we are live in Omaha, Nebraska this morning. You know, one of the things that the nation is watching is next week, the first of the conventions kicks off, the Democratic National Convention. Originally, John Edwards was expected to be speaking at that convention, but after some revelations and a spectacular fall about--some revelations about his private life, he will no longer be speaking at the convention. Warren, you're somebody who has been supporting Barack Obama. Did you ever give money to John Edwards along the way?

BUFFETT: No, I didn't--I didn't give money to John Edwards. And, in fact, I think if I'd given money to him, I'd probably be asking for it back now. It's an interesting situation because John Edwards essentially was soliciting money from people to further his ambitions for the presidency, and, you know, people sent him 50, $100, $200, and I would say that they sent it in while they were being misled by the person who was soliciting the money from them. And, you know, I think if I were Edwards, I might give up a haircut or two and refund at least, you know, the people that gave the 50 or $100, $200 items, because they-- if they had known the facts, they wouldn't have sent him the money, and he is the guy that didn't give them the facts. I mean, he knew that, in effect, he wouldn't be elected president. I mean, the story was out there during the campaign. He denied it, but it was out there. And, in fact, I've never heard of it, but it might be kind of interesting if somebody, some contributor, would bring a class-action suit on behalf of all these people who essentially were led to send money to a man under totally false circumstances, false pretenses, and where he knew it and didn't tell them the truth.

QUICK: Hm, that'd be ironic for a trial lawyer...

BUFFETT: Yeah.

QUICK: ...to have a class-action lawsuit brought against him.

BUFFETT: I've seen a lot of class-action suits with less to it than this particular case. The facts are clear. I mean, he solicited money and he wasn't telling the truth to the people he was soliciting it from.

QUICK: How--have you had any discussions? I mean, obviously, you talked to a lot of people who are high ranked in the Democratic Party. Is that something that's been thrown around out there, or did you cook this up yourself?

BUFFETT: No, I don't think--I don't think I've heard of that. The--I don't talk to a lot of class-action lawyers, but I really think--I think those people were defrauded. They sent money under--with the person who was soliciting the money from them misinforming them even when the National Enquirer came out with it during his campaign, he kept soliciting money and saying it isn't true. I would think that they--it might be a pretty good class-action suit.

QUICK: Even to this day, he says that he--they had 99 percent of it wrong, even in the most recent interview John Edwards came up with, although he admits that he did have an affair with a woman.

BUFFETT: Well, he would have a chance at a class-action suit to respond to that.

QUICK: All right. Again, you've been supporting Obama, though.

BUFFETT: Absolutely.

QUICK: Are you going to the convention next week?

BUFFETT: No, I'm going to be in Denver one night, but I won't actually be at the convention at all, no.

QUICK: OK, but Obama has been somebody you've been supporting. Obama has some policies that don't necessarily jive with your views, specifically windfall profits tax.

BUFFETT: Yeah.

QUICK: What do you think about the windfall profit...

BUFFETT: Well, the only way you get somebody that jives with all your views is to run yourself, and I have no interest in that. The test is between two people.

QUICK: Mm-hmm.

BUFFETT: But I think--I think a windfall profits tax on oil does not make any sense. I mean, I--soybeans have gone up. Wheat's gone up. Iron ore's gone up, and those are commodities that are going up because the commodity markets have driven the prices up, and nobody's suggesting a tax, a special tax on some farmer because his corn has gone up in price or on a wheat farmer in Kansas because his wheat has gone up in price or an iron ore producer. And the oil companies are easy to pick on, but it's a world price. It isn't--is not set by ExxonMobil or anybody else. And I'm sure they're happy to have it, but the idea of taxing somebody just because their services of what they sell have gone up in price a lot, taxing them in some special way doesn't make sense to me.

QUICK: It's been an idea that's been thrown out there. Do you believe that Obama's campaign and Obama himself actually will push that through, or is this something that gets thrown to the wayside?

BUFFETT: Well, a lot of things get thrown to the wayside, and that'll be true of things put out by both candidates. I mean, I do not expect perfection in candidates. I mean, it--you know, every saint has a past, every sinner has a future, you know, so--it's a terrible mistake to expect perfection. What you do--what you do hope to get is very high-grade, very intelligent people who have the public interest at heart, who have to make various compromises in terms of getting into office, and you hope to--you hope to attract those kind of people. I think we've got two of those in this campaign, but I much prefer Obama.

QUICK: OK. We'll have more on this topic a little later. Warren Buffett, again, is going to be with us for the rest of the hour, so we do have much more to talk about. We are live from his hometown of Omaha, Nebraska.

CARL QUINTANILLA, co-anchor (Beijing):

Warren, I know you've been a fan of the games. You've probably been watching somewhat. Is there an event that appeals to you the most? I mean, are you--do you want baseball to come back in a big way as an Olympic sport?

BUFFETT: I love it all, but it's hard to beat a race that's decided by 1/100th of a second, and...

QUINTANILLA: Yes.

BUFFETT: ...and actually, the 100 meter, even though it's over so fast, I mean, it--to watch a guy sort of breeze across there in a time like Bolt did it, it's an unbelievable event.

QUICK: Hey, Darren, we were watching the clips, Darren, we were watching the clips here, and Warren had something to say when we watched you in your Speedo diving into the pool. Warren, what did you give him?

BUFFETT: I gave him a 4.3.

QUICK: A 4.3.

BUFFETT: But I'm an easy grader.

QUICK: Guys...

DARREN ROVELL: Well, I didn't try too hard. I didn't try too hard there.

QUINTANILLA: Yeah.

ROVELL: It was for effect.

QUINTANILLA: Becky...

BUFFETT: The degree of difficulty was minus one.

QUICK: OK.

QUINTANILLA: There you go. That's right. And that--touche. Give me one second, Bec, just to say one thing.

(Quintanilla thanks CNBC and NBC people on Olympics coverage, Becky and Warren thank Quintanilla and Rovell)

Announcer: This is a special edition of SQUAWK BOX live from the Holland Performing Arts Center in the heart of beautiful Omaha, Nebraska. Now, once again, here's Warren Buffett and Becky Quick.

BECKY QUICK, co-anchor (Omaha, Nebraska): Welcome back, everyone, to SQUAWK BOX here on CNBC, first in business worldwide. We are just one hour away from the opening bell right now. Again, we've been watching the futures higher through the morning. We've been spending a lot of time this morning with Warren Buffett and he's been answering questions from followers across the country. If you see right now, the Dow futures are, in fact, close to 100 points above fair value, but let's head back to California to get a question of--from one of you at home.

Unidentified Man #1: What are the odds that we could have a bank failure similar to the 1929 era?

QUICK: Warren, that question was, again, what are the odds that we could have a bank failure similar to what we saw in 1929?

WARREN BUFFETT (Berkshire Hathaway CEO): Well, that's quite unlikely, partly because of the FDIC. People--you had failures in the Great Depression where the failure of Bank A caused the failure of Bank B. When they saw a line at Bank A, everybody lined up at Bank B and then they lined up at Bank C. And the FDIC was one of the great ideas of the Depression. You've got terrific woman, Sheila Bair, running that. So we won't see failures simply because there's a wave of failures elsewhere. What we'll see here are failures where the banks were dumb in what they did and you will see a fair number of those. We had a huge number of bank failures in this Midwest area, including Nebraska, in the early 1980s when there was a farm bubble. Where there's been a real estate bubble and the bankers have participated big time, you'll see some bank failures, but you will not see any losses to anybody that--in terms of FDIC covered accounts of 100,000 or under, so nobody needs to worry about their $80,000 account at any bank, even though the bank may have been run in a dumb way.

QUICK: Although you've said it before that the financial system is much more intertwined and linked than it had been in the past, especially when you start looking at some of the investment banks and beyond. Do you worry about that?

BUFFETT: Well, that's why the Fed had to rush in on Bear Stearns.

QUICK: Right.

BUFFETT: I mean, they weren't--they weren't worried about Bear Stearns, they were worried about the consequences of Bear Stearns toppling and then the domino action following, which would've happened in my view. I think they made exactly the right decision. There's enormous interconnection and derivatives have accentuated that in a big way so that trouble spread. And even if you made sound loans getting 10 or 20 percent down, if the other guy made a bunch of dumb loans and that causes a huge supply of houses and house prices, appreciation, and even the better loans can get impaired to some degree. So nobody gets insulated from the problems of the economy. And if you're a bank, you feel some of those effects no matter how prudent you've been over time. But there's not going to be a wise--there's not going to be bank failures happening just because there's other banks fail.

QUICK: Could there be another Bear Stearns this time around, though?

BUFFETT: Sure. People--and I've said that you only find out who's been swimming naked when the tide goes out.

QUICK: Mm-hmm.

BUFFETT: Well, Wall Street has turned out to be a nudist beach. I mean, there's--there've been plenty of people that pushed balance sheets extremely hard. I mean, there was virtually no limit on credit. People, anything was going in the credit market and they were mispricing credit, they were--they were overleveraging and now the truth comes out as people start looking with, you know, some care at what's really on the liability side and the asset side of these banks. A long time ago there was a movie producer holding an annual meeting and one of his shareholders said in the film, you know, `I don't understand all these figures, Mr. Scurus,' or whatever his name was. `What do they mean?' And the CEO said, `Well,' he said, `I don't really understand them very well, either.' But he said, `But I can tell you this, the liabilities are good.' Well, that's what you find out in a period like this. The assets may not be so hot, but the liabilities are good and then that's when the trouble begins.

QUICK: When people start looking around to find the next potential Bear Stearns, Lehman Brothers is the name that comes up again and again. Should people be concerned about what's happening at Lehman?

BUFFETT: I don't think it's appropriate, really, to talk about financials.

QUICK: Financials, in particular, banks.

BUFFETT: No. I think that--I really think that's inappropriate to talk about them.

QUICK: Do you think that's caused...

BUFFETT: I have no problem talking about Fannie and Freddie because the government stands behind them.

QUICK: Do you think that's part of what caused the problems with Bear Stearns, though? Once the rumors get out, once the media picks up on it, once the names came back again and again? Is that...

BUFFETT: If you had a $400 billion balance sheet and 400 or so billion of stated equity underneath it, that means that you're dependent on the kindness of strangers every day.

QUICK: Mm-hmm.

Dave Grogan / CNBC

BUFFETT: And you know, it--if the strangers aren't there, you don't have a way of paying back the 400 billion. And so if your name is bandied--if you--in the case of the kindness of strangers, if your virtue is questioned, you know, you've got a problem. And there is no bank, investment bank, that can pay all its liabilities tomorrow, and if people present those liabilities and say we don't want to have anything to do with you, even if you offer us a little more on the repos or something of the sort, the game is over and it's a--I think Jamie Dimon said, you know, `Anybody who spreads rumors about financial institutions ought to be--ought to be put in jail.' It's--you can cause trouble. If I were to say XYZ is in trouble, they are in trouble.

QUICK: Right.

BUFFETT: I mean, you create your own fire in this case.

QUICK: Do you agree with Jamie Dimon that people should be going after the people who are spreading rumors about these financial institutions?

BUFFETT: It's hard to do. I mean, to find out where a rumor starts or anything. But I mean, it is--it's very serious business to question the integrity of a financial institution when you can't possibly pay all your liabilities the next day or the next week. And a rung--or a question creates its own dynamic and you can do a lot of harm to a financial institutions just by spreading rumors. So there ought to be penalties attached.

QUICK: I know it's hard to prove, but would your gut tell you that that's partially what happened with Bear Stearns?

BUFFETT: Well, it's partially, but there--it isn't the whole story, but Bear Stearns, you know, they had problems and their balance sheet was too big and the assets were too illiquid and--but the rumors moved it along. I mean, and it comes like that.

QUICK: Mm-hmm.

BUFFETT: You know, I ran Salomon in 1991 for a little while and we could've been put out of business. As it was, our balance sheet was shrinking every day. There was a lot of pressure. But one big story in the paper that says, you know, Salomon did go out of business tomorrow or something of the sort would have meant we would have gone out of business. I mean, everybody would have pulled their lines from us.

QUICK: OK. OK. Warren, we're going to have a lot more coming up. We've got more questions from people back home and we've got more questions from right here as well. Again, folks, if you are just joining us we, are live with Warren Buffett from Omaha, Nebraska. We'll have more SQUAWK right after this.

QUICK: Welcome back, everybody. We are in Omaha, Nebraska. Last night it was the premiere of the "I.O.U.S.A." movie and after that debut we got the chance to moderate a town hall meeting right here with the men behind the movie, Blackstone's Pete Peterson and former US Comptroller General David Walker. Warren Buffett was also on that prestigious panel and in the movie and we had a chance to send people out to go around the country to get questions, Warren, from people around the country that they'd like to have come back to you. These are people who were at the "I.O.U.S.A." premiere, but right now we do have a question from Chicago. So why don't we listen to this.

Unidentified Man #2: Hi, Warren. Given the state of the US credit markets and the way that banks are withholding lending from retail customers essentially, how do you see the housing market playing out over the next 18 to 24 months?

QUICK: Hm. That's a great question. How do you see the housing market playing out, given how banks are lending right now?

BUFFETT: Hm. It will be pretty tough. The, you know, we had a very, very big bubble and we had a lot of people do things they shouldn't have done as borrowers in terms of either counting on making payments they couldn't make or lying about their financial circumstances. We had a lot of mortgage lenders that were doing bad things and we had a lot of investors that were doing stupid things. So you put all that together and you put it into an $11 trillion mortgage market and you've got lots of pain for the investors and you've got pain for the people that can't make their payments. Now the nice thing about borrowing on a house is if you make your payments, you keep it. And so if you signed up for payments you could handle, you're fine unless you lose your job or there's a divorce or death or something of that sort. But a lot of people speculated on houses and bought them with no down payments. And the consequences of that won't get washed out in the next month or two. They will last, in my view, a considerable period of time. But the good thing about it is we have--we have household formation growth in this country. We're not a stagnant economy and we will work our way out of it, but it took--with the farm crisis here in the early '80s, it took years to work our way out of it.

QUICK: There are people who will point to statistics like with housing starts that we saw earlier this week. People said, hey, it's still down, but the rate of decline is decreasing. Is that about the best thing people can find to say about this? Or is the best...

BUFFETT: Well, the best thing they could find is if there weren't any housing starts, then we would clear up the inventory much quicker.

QUICK: Right.

BUFFETT: I mean, in the end, housing starts work against the housing recovery. So it's going to--it will take time. I mean, there--the losses are huge with the home builders and then the losses of people losing homes but, again, only if they don't make the payments. And lenders are losing a lot of money. People are finding out they didn't have any idea what they were doing when they bought the CDOs and that sort of thing. And the rating agencies did not cover themselves with glory and frankly Wall Street didn't either. So it's--there's a lot of blame to go around and we probably shouldn't worry too much about that. We should--we should worry about really creating enough households so that the excess supply gets sopped up. There's a lot of vacant homes now. And the market won't really come back until you get a normal--a close to normal ratio of vacant homes, homes up for sale compared to current sales, and that's a ways off.

QUICK: We get anecdotal evidence all the time from people who say they are having a really tough time even though they have great credit. They can't get a mortgage. Other people saying I can't get a second mortgage, I can't find something for a second home. Is it your sense from what you know about lending right now that lending has gotten that much tighter?

BUFFETT: Well, I don't know about every area in the country.

QUICK: Mm-hmm.

BUFFETT: But I think if you have a significant down payment and you have a job and your income covers the payments by the old traditional yard sticks, I don't think there's a problem getting a loan. I mean, Wells Fargo is lending a lot of money.

QUICK: Mm-hmm.

BUFFETT: And they're looking for more loans. But they're not going to lend it to you for nothing down. They're not going to lend you so that you have payments that are 50 percent of your income and that stuff--you've got to get the bad practices out of the system and then we won't have these problems.

QUICK: Fair to say that since you think these problems could stick around for a long period of time that maybe the home builders don't look that cheap and you haven't been looking there for bargains?

BUFFETT: No. The home builders still have plenty of problems and that doesn't mean--you know, the time to buy the stocks is not necessarily when they've already--their business has already turned up.

QUICK: Sure.

BUFFETT: I don't look--I don't try to pick turns in any kind of an industry in terms of buying stocks. I just like to buy them when I think they're cheap relative to their long-term earning power and I don't happen to have that conviction about home builders now, but it very well may be the case. It's just I don't have the conviction.

QUICK: OK. Warren, we have more to come. It's been a long morning already but, hey, time is flying by.

BUFFETT: You're paying me by the hour. I mean, why should I complain?

QUICK: OK. We'll have much more with Warren Buffett when we return and more from Carl in Beijing. Stick around folks, SQUAWK BOX is coming right back.

QUICK: No, it's not in his ear, folks. Welcome back, everybody. Let's get back to our conversation with Warren Buffett. Carl is also joining us right now from Beijing, and Carl, we've been chatting all through the morning talking about a lot of different things.

CARL QUINTANILLA, co-anchor (Beijing): Yes.

QUICK: But actually, we're going to have a conversation with Warren, too. One of the things he'd been wondering. Warren, do you want to toss out to Carl, what you've been thinking about?

BUFFETT: Well, I wonder what he enjoys the most over there. I mean, he has seen these terrific athletes. What one memory are you going to come back with, Carl?

QUINTANILLA: That's a good--that's a good question, Warren. You know, I was here last summer and we did a documentary about McDonald's and the city at the time was full of cranes, was very dirty, very polluted, and I still can't get over even 20 days later how the Chinese marshaled whatever resources they had to get the city to look like it does right now. They figured out some way to do big projects in a short amount of time and I think that's going to be interesting to see how they leverage that as they go west to all those big cities that we really have no idea what they look like, what the infrastructure's like there. Pictures that come in over the next year from there, I think, are going to be fascinating. My question to you is if you had to guess at this moment, how--what is your investment in China, if there is going to be one, going to look like? Is it going to be individual companies? Is it going to be currency plays, debt? Have you--have you sorted that out in your own mind?

BUFFETT: It will certainly be extensions of the businesses that we already have. We opened that plant in Dalian for Iscar almost a year ago. I was amazed when I saw what has been accomplished in Dalian at the time. But we will be there with our businesses. But I like buying securities and I like buying companies, and I'm open to doing either one. And I would be surprised if we don't do something in the next few years.

QUINTANILLA: Yeah.

Berkshire Portfolio

QUICK: You would be surprised if you don't do something and then...

QUINTANILLA: I think it's interesting, too...

QUICK: Go ahead, Carl.

QUINTANILLA: In fact, I think it's interesting, Warren, you know, we walked in here and everyone worries about China slowing down as the global economy slows. You know, will their exports be bought? You know, is their economy dependent on exports? And the lesson we got from a lot of companies here was there is a self-contained economy here. There are Chinese businessmen doing business with other Chinese, and I wonder if you think that decoupling is significant or not?

BUFFETT: Well, I think their economy is going to do fine. Who knows whether it gets overheated or the inflation picks up or something, but it's like the United States. It really isn't important what happens in the next six months or a year. It's what's going to happen over the next 10 years. We're going to do well. The truth is, the Chinese will do better, because they're starting from a lower base, but they have learned a tremendous amount about business in the last 20 years, and about how to unleash the human potential, and that's something that our country learned earlier. And--but they're picking it up very, very, very fast.

QUICK: You know, Warren, we had Jim Chanos on the program several months ago, and he had said when we asked him, what's the one thing you worry about that you think could be the next big drop? He had pointed out, well, maybe you look at this endless infrastructure play when it comes to the Indias, the Chinas of the world. Maybe that is not going to be as strong as some people think. What do you think about that idea?

BUFFETT: I don't know whether it will be or not, but I know that 10 years from now, 20 years from now, China and India are going to be a long way ahead of where they are now. So I don't really--I don't worry too much about whether there's going to be a sudden interruption or something. I wouldn't be able to predict it anyway, and if I did, I still want to be in wonderful businesses bought at the right price and have them in the right place. So I don't--I don't worry about the things that I really am not going to understand anyway. I worry about what's important and knowable. And if I can find a few things that are important and knowable, I play in that box and I don't worry about what's unimportant and I don't worry about what's unknowable.

QUICK: Mm-hmm.

QUINTANILLA: Warren, are you--are you going to try to learn Mandarin at this stage of the game?

BUFFETT: No, no, I'm not even going to try to learn how to eat the food. I am--if I can't make a deal while eating at McDonald's, I'm in trouble.

QUICK: Hey, Warren, you have a little bit of insight into the Olympics, too, right? You were in Las Vegas just before the United States basketball team left to go over.

BUFFETT: Right.

QUICK: They were in Las Vegas at the same time. They were playing the Canadian team as they warmed up. What insight can you tell us about the Redeem Team?

BUFFETT: Well, they were--we had dinner, a good many of them. LeBron was there, it was on a Thursday night, I think, and they played the Canadians the next day. And they are--they were determined to win. I mean, enough of this being humiliated stuff. So, that was a team that I would have bet a lot of money on in terms of how they were going to do when they got there, and they're a remarkable group. I was a little disappointed. I went to the Canadian game, and they had me on the sidelines, so I thought this was going to be my big moment, right? No chance. So I left at the half. I mean, if they weren't going to put me in the game, the hell with it.

QUICK: The only guy who walked away from that game early. Hey, Carl, we just want to say thank you again for everything, all your coverage, all your hard work over the last few weeks, you and your entire team out there. I know you're on your way home. We want to make sure you have a safe trip, and I can't wait for you to come home. Hurry back, OK?

QUINTANILLA: It's going to be--it's going to be fun to be back at the desk, Beck. I'll see you next week.

QUICK: OK. Carl and the entire team who are out there in Beijing, we thank you all. When we come back, folks, we have a quick parting shot from Warren Buffett. Stay right here.

QUICK: Welcome back, everybody. We are in Omaha this morning with Warren Buffett. Warren, we are headed into the heavy, heavy political season. Next week you've got the Democratic National Convention, and Barack Obama is expected to name a vice presidential candidate to go along with him today, tomorrow, sometime coming up. Who would you like to see Barack Obama pick?

BUFFETT: My first choice would be Sam Nunn. I think he'd be absolutely terrific. I have no notion of who Barack's going to pick, but he's the man, that if anything should happen to Barack, would be president of the United States. So he'd be my pick.

QUICK: OK. We are also at the Holland Performing Arts Center. You point out an interesting note. This center was built with money from Dick Holland.

BUFFETT: Yeah. Dick Holland and Dick became a partner of mine in 1958 and he gave a very, very large contribution to the--to make this possible and my guess is that the stock that he gave, it was Berkshire Hathaway. It cost about $5,000.

QUICK: OK. Again, Warren, we'd like to thank you very much for being with us for these three hours. We have completely appreciated this time.

BUFFETT: It's been fun.

QUICK: OK. Folks, that does it for us today. Again, we've been here for three hours in Omaha. Make sure you join us on Monday, though. Joe's going to be back and we're all set for you to come in. SQUAWK ON THE STREET starts right now.

END OF TRANSCRIPT

GO TO PART ONE OF THE TRANSCRIPT

Current Berkshire stock prices:

Class A: [US;BRK.A 116100.0 1100.00 (+0.96%) ]

Class B: [US;BRK.B 3870.0 35.00 (+0.91%) ]

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