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Sunday, January 24, 2010

FOX BUSINESS VIDEO: Liz Claman Interview with Warren Buffett (UPDATED WITH TRANSCRIPT & VIDEO) - 21/1/10



Berkshire Hathaway Chairman and CEO Warren Buffett sat down with FOX Business Network’s Liz Claman and spoke about the President’s new bank proposal, saying that he feels that “the CEO has to be the chief risk officer” and if a bank fails “the CEO and his wife would forfeit their net worth.”

See and read the full interview here at Everything Warren Buffett below:

Video from Interview

On "Banks too Big to fail"



We will keep buying businesses



Thank the Lord for Bernanke



On the business of taking risks



On the Kraft Cadbury merger




Below is the full transcript of the interview:

LIZ CLAMAN, FBN ANCHOR: This is the perfect day to be joined by Warren Buffett in town for a Washington Post board meeting, but let's get Mr.

Buffett's reaction to the president's proposal. He is dead set on getting after the big banks and does not want them to take risks. What do you think of this proposal?

WARREN BUFFETT, CEO, BERKSHIRE-HATHAWAY: Well, I have not heard the proposal. I was in the directors' meeting all morning. I have not heard it.

I would say this, that the real key in my view, you always have banks that are too big to fail, unfortunately. We cannot operate in this world without having some very big banks. Regulators hate that fact, I hate that fact, but there will be institutions that if they are -- government will have to do something about it.

The answer -- one of the answers - could be many answers - but one of the answers is to make it so the CEO of the institution that fails or that goes with the government and needs help really gets destroyed himself financially. I mean, why should he come out any better that somebody who gets laid off from a job as an autoworker? General Motors? So, I would -- if I was running things, if a bank had to go to the government for help, the CEO and his wife would forfeit all their net worth. And that would apply to any CEO that had been there in the previous two years.

I think you have to change the incentives. I mean, the incentives a few years ago was to try to report higher quarterly earnings every quarter.

That's what Wall Street applauded, that's what the world applauded. It is nice to have carrots, but you need sticks. And the stick - the idea that some guy is worth $500 million leaves and only has $50 million left is not much of a stick as far as I am concerned.

I really think there should ought to be huge downsides because the CEO has to be the chief risk officer of a big bank.

CLAMAN: But that is not what is here. What he is proposing he wants to limit the scope and size - the scope of the risks that these banks can take, especially if they have depositors' money within them. He doesn't want them to make proprietary trades, you know, where -- on their own books. He feels that is the way to prevent another type of financial meltdown. Is the right or is he wrong?

BUFFETT: I'd have to see the legislation. It is pretty hard to define risk. I mean, Genree (ph) when I inherited it, we had 23,000 derivative contracts. I could not understand them, so I got out of the business.

But there will be big transactions in this world and lots and lots of commerce worldwide between very large institutions. So, exactly how you police that, I am not sure. The way I would try to do it, in one way, I would try to make sure the person in charge paid a huge penalty if the place got in trouble.

CLAMAN: OK, well...

BUFFETT: And that has not happened in the last few years.

CLAMAN: Yes, and also, again, that is not really on the table. It is more of a "let's go back to the some of the tenets of Glass-Steagall which separated investment banking from basic depositors' banks." And Paul Volcker, the former Fed chair under Ronald Reagan, is front and center here saying this is what we need to at least get closer to. Do we need we should bring back Glass-Steagall, Warren?

BUFFETT: Well, I was not unhappy with Glass-Steagall when it was in place. That is not something in any way that I champion getting rid of. Sometimes it is hard to put the genie back in the bottle. So, I would have to see the specifics.

But the idea of the banks taking huge risks were, in effect, the CEO -- the bank shareholders suffer. If you own stock in Citigroup, if you own stock in Bank of America, if you own stock in Fannie and Freddie, AIG - you don't have to worry about moral hazard. Those people lost 90, 95 percent of their money. But it's the person that got them into their trouble that's walked away. So, I would have a lot of downside for the CEO.

CLAMAN: Fannie and Freddie don't get mentioned a lot when it comes to getting crimped (ph) on that type of risk and all of the involvement that regulation that has bored down on. And I look at that and I say, "Well, they still have billions and billions of our taxpayer dollars."

BUFFETT: Well, Fannie and Freddie were creatures of Congress. They were supervised by Congress, and they actually sent the report annually to Sarbanes and Oxley. And every year, a 100-page report would go over and say these places are operating fine and risk looks (ph) and all that sort of thing. Congress was in charge of supervising, and they had a 200-person office that did nothing but look after those two, and look what happened.

So, I have some doubts of the efficacy of simple regulations. I like the really great personal downsid. I think that can be more reflective.

CLAMAN: Well, in the short term, if this proposal were to get some traction, at least on behalf of the president and Congress, how long before Goldman, which you own, and Morgan Stanley, they split off and get rid of their bank charters?

BUFFETT: I think it would be logical that they would do so. I mean, I don't know anything about the specifics of this, but the banking aspect is a very small part. If you talk about banking, you're talking about JP Morgan and B of A and Wells Fargo and those other kinds of institutions.

CLAMAN: But looking at Goldman Sachs, and looking now at how everybody is breathing down Goldman's back -- you've made a $5 billion investment last year at the lows. It looks brilliant now. What are you, on paper

-- we're trying to calculate this, but it's hard with the dividends - 3-plus billion dollars to the upside now?

Aren't you tempted to cash in on some of that? I know you said you would hold onto it for five years, but sooner rather than later, if the regulatory atmosphere ices out and (INAUDIBLE) Goldman Sachs...

BUFFETT: I am not tempted at all. No, that thought does not cross my mind.

CLAMAN: So, you'll hold for five years?

BUFFETTF: Or longer. With the warrants (ph), we have to exercise in five years. With the preferred -- they can call us at some point at a 10 percent premium. But no, I would not be bearish on Goldman Sachs at all.

Goldman Sachs, they fulfill an enormous function in this world. The world without investment banks, we'd be moving back a long way into a different century if you did not have investment banks do what they do.

CLAMAN: Yet President Obama is - let's call it what it is -- demonizing them, and some Americans agree with that because they feel like it was these very institutions that took crazy risks and darn near brought down the whole system. And Warren, isn't it you and Charlie Munger, your partner, who have always been against outsized compensation and outrageous risk that of course ended up on the backs of the American taxpayer?

BUFFETT: Yes. Although it wasn't - it wasn't just the banks. I mean, we all participated. Congress participated through Freddie and Fannie and a million other ways. Millions of Americans participated through liars' loans and signing up and misstating income. 309 million Americans thought houses could do nothing but go up, and that translated into all kinds of folly throughout the system.

CLAMAN: What were you thinking back then at the height of the housing craziness and the market?

BUFFETT: Well, I wish I'd been thinking a little harder.

(LAUGHTER)

BUFFETT: It looked a little crazy to me, but I should have done more about it than I did. But...

CLAMAN: What would you have done?

BUFFETT: Well, I would have tried to figure out some way - yes, you cannot short houses very well, but I would look for instruments that were similar. I would happen much more in tune if I'd really paid attention. I would have been looking at those instruments and maybe shorting the companies that were big and the mortgage business or something of the sort.

CLAMAN: Goldman Sachs...

BUFFETT: Although I would not be shorting, but I would have looked for ways to protect myself from the bubble that was going to pop.

CLAMAN: Goldman Sachs earnings out today. Don't know if you heard; they knocked the ball out of the park, the cover off the ball - whatever analogy you want to use. Three dollars better than expected earnings per share. At the lows, at the most worrisome times in 2008, did you expect that this name and others would come back as quickly as they have?

BUFFETT: We also buy General Electric and it is not back up to the price of our warrants, in that case.

So -- I never know what will happen in the next six months or one year in the stock market or the economy, but I felt Goldman Sachs was very well managed. We did put $5 million in before the government when - at a time when people were petrified in this country.

But I felt they had excellent management. I felt they had very conservative marks in terms of how they kept their books, and I wrote a check because I thought the country -- I thought Bernanke and Paulson would do the right thing, and Sheila Bair, and they did.

CLAMAN: Ben Bernanke. Obviously, reconfirmation hearings coming up.

You just said you feel he did the right thing. There are some members of Congress, mostly Republican, who feel he should not be reconfirmed.

They're railing and yelling and say he's not the guy and this is the guy that shepherded a wrong direction and didn't see it coming. What do you say to that?

BUFFETT: Well, I would say they ought to get down on their knees every night and thank the Lord that Bernanke was there through this. He took some unprecedented actions, he took them quickly, he kept us from going on in to the precipice. No question in my mind about that.

(CROSSTALK)

BUFFETT: Guaranteeing -- these are actions collectively -- collectively but guaranteeing the money-market fund, in terms of guaranteeing commercial paper, he took the actions that were necessary to prevent absolute panic from paralyzing this country. We came close enough as it was. And there wasn't anyone else doing it. Congress was not doing it

-- whoever they criticize now was not explaining this thing rationally at that time. Those guys, I'm talking about, Paulson and Bernanke particularly - they stood up and did what they had to be done.

CLAMAN: And you say reconfirm Ben Bernanke?

BUFFETT: Absolutely.

CLAMAN: Timothy Geithner, the Treasury secretary. Your thoughts on him?

BUFFETT: I think he's terrific. I think - you can always dream up something that could have been done a little - but I describe that period as the economic Pearl Harbor. Now, maybe we did not send the ships out of Pearl Harbor, you know, San Diego, out at the right place the next day precisely or anything. The important thing after Pearl Harbor, was what the country saw their government was going to act and act properly and decisively, and that we would win the war. And that's what happened...

CLAMAN: And the markets are way up off of the lows, so clearly, that part worked. But looking at what the Fed has done, it has propped up a lot here, and they bought mortgage-backed securities -- at some point you have to kick the crutches away and walk on your own.

What happens - have you thought, Warren, because your mind works differently than most of ours -- have you thought about what happens when the Fed exits that propping-up stage? Some people are worried interest rates would jump exponentially and that might derail the recovery.

BUFFETT: Well, if we run huge fiscal deficits the Fed is not going to exit. I mean, they are not going to be selling into a market that also the United States Congress is also forcing to buy, maybe a trillion or a trillion-and-a-half of U.S. government securities.

So, I think fiscal policy is going to be the real problem to figure that out right...

CLAMAN: Spending less at the government level and bring down the deficit.

BUFFETT: We're taking in 15 percent of GDP and we're spending 25 percent of GDP, very roughly. We can do that for a short time, and it is proper that we do it for a short time. But we have to get weaned off of it, and Congress has to be the one to wean us off of that.

CLAMAN: You just supported some of what President Obama's says. Timothy Geithner, the Treasury secretary, Ben Bernanke, the Fed chief. You're a true capitalist, yet you continue to support an administration that proposes regulation that appears to be against what, in great part, you believe them. How long do you wholeheartedly support this administration?

BUFFETT: Oh, I support it. There is plenty of regulation needed with financial institutions. There's no question about that. You have

to look at how it's written, and I - I've seen nothing on that. But

our financial institutions should be regulated.

And incidentially, before the bubble - and the bubble took in everyone.

I mean the regulators were fooled, the bankers were fooled, the mortgage bankers were fooled. The American people was fooled, Congress was fooled. I mean, we all fell into the trap that housing prices could do nothing but go up. So, no matter what you borrowed against it, it did not make a difference. They'd be worth more next year.

That was probably not a failure of regulation. People have a propensity periodically to do some very stupid things in financial markets, and this time they did it in the housing market.

CLAMAN: Warren's going to stay with us. We're going to take a quick commercial break. When we come back, we'll be talking about his ideas of saving newspapers. He just came from "The Washington Post." Of course, he's shrugging his shoulders, if that tells you anything.

(LAUGHTER)

CLAMAN: We will be talking much more about that and his view of the world, especially financing when we come back. More with Warren Buffett right here on Fox Business.

(COMMERCIAL BREAK)

CLAMAN: Mr. Buffett goes to Washington, D.C., and we are with him, right here on Fox Business. Welcome back to Warren Buffett.

We're continuing our conversation, of course. Your view on so many things matters to a lot of people because you are arguably the greatest living investor and I'd love to know your thoughts on this Massachusetts election. I bring that up because it makes me wonder about the whole financial zeitgeist in people's minds about -- thinking that any kind of change is the change that they want. Three major elections since President Obama has taken office. And that would be the gubernatorial races in Virginia, in New Jersey, and then of course the state Senate race in Massachusetts. All three went to Republicans.

What does Massachusetts tell you?

BUFFETT: Well, it tells us that people are unhappy with how they see the world around them right now. They see a high jobless rate, they see people having problems with their mortgages. They're in a fairly negative mood currently. They'll get over it at some point.

But right now they're not happy with Congress, they're not happy with banks, they're not happy with the administration, they're not happy with the health care bill. Whatever it may be, some combination of that so they're going to vote against whoever they think is down here in Washington.

CLAMAN: Is that misguided?

BUFFETT: It probably is but it does send a message. I mean, you have to respond to that, because in the end, to get things done in this country, you need -- you've got people marching with you. And people right now are not marching with Washington

CLAMAN: Well, yes. I mean, we, at Fox Business do this thing called "Red Ink Watch." If you print out the stimulus bill, it's about this

high. I mean, how many trees had to die for this thing? And people

look at it and they say, we don't feel any job creation even though we've come way off of the job losses and the bleeding that we saw in the employment world.

BUFFETT: Yes, and they saw that stimulus bill with 8,000 earmarks or something of the sort.

They do not view Washington favorably. And that feeling, I think, is probably -- about Washington -- has soured some during the past year.

Partly because of the factors like the economy, but partly because of what they see on television when they watch Congress.

CLAMAN: Congress is such -- not running very high on the polls at the moment.

Let's get to Berkshire. Of course, yesterday, you have the big meetings and everybody voted to split the B shares, the cheaper shares, less expensive, let's not say "cheaper." And today is the first day they're trading.

Warren, the volatility is crazy. Five times normal volume which is what you always have bristled against. You wanted long term shareholders.

Again the stock is hitting a new high.

Does this make you happy? Or does it disconcert you a little bit?

BUFFETT: Well, we want to get the same kind of shareholders we've attracted in the past. We want to get people who look at buying a share in Berkshire like buying a piece of a farm or an apartment house that they intend to hold forever. And it's up to us to attract those kind of people what our policies are, or communications are with them. And I think it'll be OK. But my guess is there's been a little more action than is idea today.

CLAMAN: Well, they're running about $72 and change at the moment.

BUFFETT: Well, I'm not talking about the price on it. But just, in the end, you know, we hope we have shareholders who are in sync with us, who measure us the way we measure ourselves. We've got this sort if

(INAUDIBLE) and all that sort of thing.

CLAMAN: What do you say to the day traders who are in today?

BUFFETT: We don't want any day traders.

CLAMAN: No day traders.

BUFFETT: No. And incidentally, we get very, very few of them in the end.

CLAMAN: You know, you did this so you could complete the purchase of Burlington Northern -- the railroad. I want to make a comparison here, because you are also, of course, Kraft's largest shareholder. You've been adamant saying you were against Kraft buying Cadbury.

How does issuing shares of Berkshire at what many believe is a lower valuation with these B shares, to buy Burlington Northern, a business that is far more cyclical, perhaps than Cadbury would be to Kraft.

How does that differ than what Kraft is doing?

BUFFETT: Well, Kraft is paying -- Kraft, for example, sold a piece of business in part. Whether they sold it at nine times operating earnings, after tax they only have 2.5 billion after tax. They said they sold it for 3.7 billion, but they sold in a very tax-inefficient manner. So, they did that to buy something that's probably, by the time you get through adding the cost they're going to incur deal, costs and everything is 16 and 17 times earnings.

We're not doing anything like that at Berkshire. We are issuing some shares which I hate issuing -- Charlie hates issuing, the board of directors hates issuing them. But, it was the only way we could make the deal and we are using $22 billion of cash in what we think is a very effective manner.

And we're not selling off any of our businesses to do so.

CLAMAN: Not selling any businesses?

BUFFETT: No, no.

CLAMAN: But you used the liquidity from the 50 /1 split that's leftover to buy more businesses other than Burlington?

BUFFETT: We'll keep buying businesses. Yes. As long as I'm alive we'll be buying businesses.

CLAMAN: You'll be buying businesses.

BUFFETT: Yes. And we'll try to buy them for cash. Sometimes we may have to use some stock. But we'll use as little stock as possible.

CLAMAN: This reminds me, of course, and you're the biggest shareholder of Coca-Cola, as well. You were against Coke buying Quaker Oats. And PepsiCo picked it up and that, of course, was Gatorade and it worked out very well for PepsiCo.

BUFFETT: I'm not so sure. Look at Gatorade lately?

CLAMAN: Do you disagree?

BUFFETT: Have you looked at Gatorade lately? It's down, I think it's down -- I shouldn't name a figure, probably, but I think it's down something like 20 percent or so in sales.

CLAMAN: But you don't think you're wrong with being against Kraft and Cadbury.

BUFFETT: No, no. Listen, I respect Irene Rosenfeld. She's a first-class person. She likes the deal, I don't like the deal. It's that simple. But I don't question the motives, I don't question their straightforwardness or anything like that at all.

CLAMAN: Was this the first time you publicly have stated that you were against a deal?

BUFFETT: It would be of long time. Yes, I can't remember. I've privately been against some.

CLAMAN: I think you haven't tasted Cadbury's Fruit and Nut Milk Chocolate. Because it's very good.

BUFFETT: Nothing wrong with the products. It's the price.

CLAMAN: What intrigues you these days out there? And I know you don't like to tip your hand, but -- you're not tipping your hand. But, a couple years ago now, you bought an Israeli company Iscar, and it turned out to be a money printer. You just bought it outright. At the time you said the Israelis are the smartest people to do business with, or at least among them.

Are you looking in Israel?

BUFFETT: I would love to have another one like Iscar, I can tell you that.

The people of Iscar came to me, and actually they did about a year ago when we bought a company in Japan. If they say, we think it's a good idea to do X, I'm going to do X.

CLAMAN: They're that smart?

BUFFETT: They're good.

They're not just smart. They're hardworking, too. They just keep going. I mean, they don't have time to stop by Omaha and tell me what's going on in. I don't want them too. I'd rather have them out there doing things.

(LAUGHTER)

CLAMAN: You go visit them.

BUFFETT: Absolutely.

CLAMAN: You're a believer, obviously, in stocks and of course the stock market. What would you tell -- I'm just going to throw this out there and say, a 25 year-old guy who's making $40,000 right now and has a long time horizon?

You know, are you still really pro putting into individual names and thinking about stocks?

BUFFETT: I would tell him, whatever he saves maybe he saves $2,000 a year, maybe he saves $4,000 a year. It's tough to say when you're making $40,000 a year, particular if you have a family. But, whatever he saves, I would just tell him to put it regularly month after month after month in an index of funds.

CLAMAN: Let me go back to General Re. You mentioned them. Today it's announced, or yesterday, that they have settled paying a $92 million fine for the problems with AIG.

Looking at that situation what have you learned from that? There were fake trades made at General Re.

BUFFETT: We did something wrong and we pay the price. It's that simple. I mean, it's five years since it started but it shouldn't have been done. And there's nothing inappropriate about the fine we paid.

So, I have no problem with it.

CLAMAN: They say that parents are very vulnerable through their children. When you buy a company sometimes you don't know the problems that are going on. You got a new board member -- Stephen Burke of Comcast. Comcast just spent a big chunk of change on NBC and they opened up a can of worms with the Jay Leno/Conan O'Brien thing.

BUFFETT: Well, we didn't buy NBC. We have 225,000 or so employees. If you have a city of 225,000, probably someone is doing something wrong.

What you try to do is, you try to catch it, you try to minimize it, you try to correct it if you find it.

By today, I'm sure somebody at some operation at Berkshire is doing something they shouldn't be doing. I mean, 225,000 people. That's a lot of people. And it's our job to try to and minimize it. It's our job if we find out about it to do something properly to correct it. We can't eliminate it forever. I mean, I wish we could but we can't.

CLAMAN: As a new board member for Stephen Burke. Is he replacing somebody on Berkshire's board?

BUFFETT: No. No, no. Absolutely not. No, no. no. I should have asked him a long time ago but -- to join us but he is not replacing anybody.

CLAMAN: One of your other board members Bill Gates -- he's blogging now. Did you see he's got a blog out there -- Gates Notes.

You always say that you're a --

BUFFETT: I taught that guy everything he knows about computers. I'm glad he's finally picked up on it.

(LAUGHTER)

CLAMAN: And he's Twittering. What he put on his blog was an interview with he and you and Charlie Rose.

Are you going to say, OK, Bill, I'm going to blog, too.

BUFFETT: You've got it backwards. I mean, I'm glad Bill's mastered it.

(LAUGHTER)

BUFFETT: I'll give up the blogging.

CLAMAN: I'll be seeing Bill Gates in Davos next week. And there's so much discussion about pandemics. And, of course, he and the Gates Foundation -- you've given most of your money to them -- work to make sure that we can stem any kind of problem there.

What do you think about that risk? You take risk every day with a lot of your insurance companies.

BUFFETT: We just wrote the largest life insurance contract, I believe, that's ever been written. And we'll probably have $50 billion of premium income over the next 40 or 50 years. It's on hundreds of thousands of lives.

CLAMAN: What company is that?

BUFFETT: Well, we reinsured them at National Indemnity, a subsidiary of ours, or, the life company -- Berkshire Hathaway Life.

CLAMAN: And the value of that again is?

BUFFETT: The premiums could end up being over $50 billion eventually.

Now we just hope the losses aren't over $60 billion. But a pandemic would not be good news for Berkshire.

CLAMAN: You'd be out there inoculating people.

BUFFETT: I'd do whatever it took. I mean --

(LAUGHTER)

BUFFETT: No, I mean, that's a risk we run. We run a risk of, you know, in terms of terrorists doing a lot of things, but we're in the business of taking risks and we try to get paid appropriately.

CLAMAN: Well, as we finish up, that is the story of the day is risk and how the President doesn't want financial institutions taking risks.

So, as we finish up, what's your final thought on that?

BUFFETT: Well, I tell people -- and it's going to be in the annual report again this year -- when you have a company as large as Berkshire and with all the obligations we have to paraplegics that have been injured we're going to have to pay for 50 years, to all the employees we have, all the staff members we have, I have to be the chief risk officer.

And the truth us, I should be the best person to do that because I have this overview of this whole operation and I understand the risk and I think that should be the case. Every large financial institution -- that the CEO regards his position as number one, as the chief risk officer. You have a lot of other functions, too. But he wakes up every morning and thinks about, is this place built to take anything?

CLAMAN: And this should take the hit that come with it?

BUFFETT: Absolutely.

CLAMAN: Warren Buffett of Berkshire Hathaway. Good to see you.

BUFFETT: Thanks.

CLAMAN: We'll be seeing you soon.

BUFFETT: OK, Liz.

END




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