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They started talkingabout "steady Freddie," and Fannie Mae said, `We're going to increase theearnings at 15 percent a year.' Any large financial institution that tells youthat sort of thing is giving you a line of baloney. BUFFETT: So that doesn't mean that the equity can't get wiped out, andit almost has in the stock market, and in practical sense as institutions,they don't have any net worth. Bear Stearns had--I read it,anyway--750,000 derivative contracts. And that doesn'tmean, you know--it's like gun powder or water. BUFFETT: There was no way in the world I can get my mind around that. And like I say, I couldn't do it perfectly and I don't thinkanybody can, but I admire the people that take on the job. Imean, Ben Bernanke does not have any magic wand that's going to create--enablepeople that have borrowed too much money on their homes or people who've lentunwisely or the banks that are too leveraged, that doesn't go away easily. So there have been increase after increase in pricesand our margins are still going down, and that's happening--if you take brick,that's natural gas. We know that you're a huge baseball fan, butyou also have a big day coming up. On September 9th in Fenway Park I will be starting. Unidentified Man #1: What are the odds that we could have a bank failuresimilar to the 1929 era?
I mean, they may do itfor a while, but when they can't do it with operations, they do it withaccounting and they cheat. I mean, if you look at their obligations andlook at the fact they have big deferred tax assets as assets. Now, you know, I could clone Albert Einstein, you know, and--many, many times and have him work 12-hour days forme and he would not be able to keep track of what's going on in an institutionlike that. You can do damage with a lotof things, but these have systemic--they pose systemic risks. I mean, you've had a task forceworking on, you know, what do we do to prevent these things from causing areal problems? I don't think they'regoing to cause problems at Berkshire Hathaway. Now, when we bought Gen Re, they had 23,000 plus contracts. Imean, if I--if I had spent full time and had all kinds of assistants andeverything, I never would've known what was in those contracts. Warren, we have a lot more totalk about with you this morning. QUICK: We talked earlier this morning about Fannie Mae and Freddie Mac andsome of the major problems facing those two institutions right now. I mean, there's all kinds of areas where it's happening. QUICK: But does that mean you were not surprised by that very hot PPI numberthat we just... And--but more important thanthat--because I've thrown out the first pitch other times--but this time Ibrought my secret weapon. QUICK: Warren, that question was, again, what are the odds that we could havea bank failure similar to what we saw in 1929? WARREN BUFFETT (Berkshire Hathaway CEO): Well, that's quite unlikely,partly because of the FDIC.
And that's what happened at both those places on ahuge, huge scale. They would'vebeen gone in any market where the government wasn't behind them long, longago. It's--the ones that are too big to fail may be too big to manage,in some cases. We had onecontract that was due in 100 years, so that meant that for 100 years some guyat our place put a mark on it every day and some guy at another place put amark and they got their bonuses based on it. We'd like to get to some of your holdings,more on the economy, but we also are going to take a very quick pause rightnow for a quick break. You know, Warren, we know that you are a huge sports fan. In youropinion do these stocks, you think, get wiped out? BUFFETT: Well, there's certainly a reasonable chance of [Fannie and Freddie going bankrupt] because they wrote insurance at the wrong price. BUFFETT: ..I support Barack and I think that on balance he will bebetter for America. People--you had failures in the Great Depressionwhere the failure of Bank A caused the failure of Bank B.
And we have this--they're so wound up with national housing policy, thatthey're a national problem and, with this dual situation, you know, Lincolnsaid a house divided against itself, you know, must fall. But the government is behind them, and they will stay behind them, andpeople that own insured mortgages or who own their debt, I think--nothing'sgoing to happen to them. And they're particularly difficult to manage if they'repromising Wall Street and their investors that they're going to do things thatcan't be done. I mean, that is a system that isguaranteed to cause trouble. It took mefour years under benign market conditions, and we lost 0 some million inthe process. The ones we put on may bedangerous things, too, but I do know every contract, and I know what mygain-loss arrangement is and nobody else marks them. You're somebody who watches all sorts of things, and, of course, one of your major holdings, Coca-Cola, so what better way to tie all this up than Coca-Cola, sports,you've got one of the major sponsors of the Olympics here. And, Warren, we've been talking allthings Olympics the whole way through. BUFFETT: No, I--Coca-Cola would never be going on a country road whenthe interstate's available. And if you write insurance andwrite--we write insurance at the wrong price, you know, we're going to gobroke. BUFFETT: Well, I have a choice of two candidates... Although I admire John Mc Cain as an individual, but Ithink that Barack would be better. When they saw aline at Bank A, everybody lined up at Bank B and then they lined up at Bank C.
QUICK: What's your prognosis, or what's your best guess or your best estimateof what... I mean, the country willbe doing far better five years from now than it is now, but it won't be, in myjudgment, it probably won't be doing better five months from now.
Sowe want that--we want that brand to be associated with something like the Olympics where there's happiness, where there's competition, where the nationsare getting together. QUICK: There have been people in the past who have said, `Hey, thesesponsorships get more and more expensive.' There are other ways that othercompanies can kind of make their way in... And The Times did that story earlier in the week about whether or not Bill Gates hadrented out a penthouse for a year, and whether or not Warren was stayingthere. So I enjoy it enormouslywatching it on television, and Bill was over there for a week. BUFFETT: Yeah, it's bigger than, yeah--you're good, but... QUINTANILLA: Yeah, I've heard--I've heard that if you get enough cherry Cokesin him, he will spill everything. We'll get to the men behind the film who'll be joining us when SQUAWK BOX returns live from America's heartland. QUICK: ..we do have some questions that are coming up. QUICK: A characteristic about American democracy that leads to American debt. I mean, Berkshire has debt, and it's helped us grow over time. That means a lot of people areout there assuming that you're either buying or selling shares of Conocoand... QUICK: Oh, so you're not going to necessarily come out there on that. The Texas Railroad Commission used to--which was kind of--kind of a domestic OPEC--used to shut down the wells in Texas because there was so much producing capacity and they didn't want to knock down the price, which was a barrel then. Peterson Foundation): Well, Dave and I haveconcluded unanimously, the two of us, that the country faces some long-termchallenges that if we don't address them are undeniable, at least in ouropinion, unsustainable, and yet they're, politically speaking, not touchable. And the doing something about it is essentially to letour elected representatives know that this is serious and they want action. PETERSON: And we've got to change that around so that they feel that ifthey don't do anything, then they're going to be in re-election trouble. PETERSON: The other big audience that we're going to focus on are theyoung people. And that works fine as long as the spread's maintained and they've done somethings to protect that, but it doesn't do well if the assets crumble on them,and they've had some crumbling. And theycan--they keep existing because they've got the federal government behindthem. Anybody's for anything that gets them elected, so if they--if they say, `I'mfor lowering your taxes,' or `I'm for bringing all kinds of things to mydistrict,' or `earmarking things,' you know, of course they're going to saythat. Meantime, though, we're going to take a very quick break and let you catchyour breath. I just was looking at the reports for July on certain businesses, and we're trying to push through price increasesourselves. What we'll see here arefailures where the banks were dumb in what they did and you will see a fairnumber of those. We had a lot of mortgagelenders that were doing bad things and we had a lot of investors that weredoing stupid things.So, under the right circumstances, you could seeus with a lot of money there. By the time we got to the streetcar they were all exhausted, and wecame downtown to the movie. Thebudget deficit, the savings deficit, the balance of payment/trade and theleadership. Youknow, we had tough budget controls in place, the economy was doing prettywell, we were moving to surplus, we had surpluses for four years in arow--although only one of them without the Social Security surplus. The risk is, is that, clearly, as Warren said, there arethings that need to be done today. People arehurting today, and we need to do some things to deal with that. BUFFETT: Well, I think I--probably the second point I agree with morefully. I mean, you know, the report goes in a drawer someplace and--Imean, just think of the last six or eight that you can recall and how muchcame out of them. I met with the top economic policy advisers of both of thecampaigns--they both happen to be friends of mine--to help them understandwhere we're coming from in the foundation, what we believe is important. You say that you're hopeful that the campaign will push that. We'regoing to talk about the "Oracle of Omaha," where he's investing in the stockmarket right now--at least we'll try and get that out of him. Our CNBC team was on the ground at some of thosetheaters across the country. QUICK: Although you can't expect to maintain deficits like that endlessly. BUFFETT: Yeah, you can expect to maintain a deficit that's a givenpercentage of the GDP. Buffett, I would like to know what is going tohappen with Fannie Mae. QUICK: That was, again, what would be the best investment to hedge againstthe upcoming debt crisis? No government likes to pay back its debt indollars that are equivalent to the kind they took in. I mean, if you take--I don't know whatproduct you might buy regularly, but what--whatever you use for your hairor... BUFFETT: You're not going to change that if the price level doubles. The Irvine question, another one he was just askingabout was what's going to happen with Fannie Mae? Fannie Mae's an importantinstitution in the--in the United States. I was wondering how low they have to go before you're interested.(Announcements)Announcer: This is a special edition of SQUAWK BOX live from the Holland Performing Arts Center in the heart of beautiful Omaha, Nebraska. I go to the movies, but I don't buy movie companies. QUICK: What's your thought as to what the nation needs to be doing right now? We and the world cannotcertainly keep increasing our demand for oil. BUFFETT: And so one way or another, we're going to have to learn to usea lot less oil. BUFFETT: But I'm not sure that the world demand is--maybe it's decreaseda million barrels a day or something like that, but that isn't going to do itover 10 years. QUICK: OK, Warren, we're going to be checking in with you again after we comeback. QUICK: All right, that was Warren Buffett answering a question on taxesduring our town hall right here in Omaha last night. That question that came was from someone who wrote in asking why thetax code is longer than the Bible. We need universalpractice standards, evidence-based practice standards, and we need to enhancepersonal responsibility and accountability. Bill, you represent the AARP, and some people have said inthe past that seniors get very concerned when you start taking away benefitsor changing things that have been set up. But we've had a numberof recessions in this country; in fact, we had a Great Depression, wehad--we've got world wars. It's because we unleashhuman potential and will continue to do that in the future. And Wall Street was saying deliver us 15 percent earnings gains every quarter. Again, we've been spending the morning with you, but lastnight we did have CNBC crews who went out to some of the theaters across thecountry that were previewing "I. Whatwould you suggest that we do to help motivate a shortsighted Congress? That's, again, going back to how do you motivate a shortsightedcongress. Now, if they give me an answer tothat, I know they really believe that. But there's not going to be a wise--there's not going to bebank failures happening just because there's other banks fail. People--and I've said that you only find out who's beenswimming naked when the tide goes out. I mean,there's--there've been plenty of people that pushed balance sheets extremelyhard. People, anything wasgoing in the credit market and they were mispricing credit, they were--theywere 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 sideof these banks. ' And the CEO said, `Well,' he said, `I don't really understandthem very well, either.' But he said, `But I can tell you this, theliabilities are good.' Well, that's what you find out in a period like this. BUFFETT: I have no problem talking about Fannie and Freddie because thegovernment stands behind them. BUFFETT: And you know, it--if the strangers aren't there, you don't havea way of paying back the 400 billion. A." movie and after that debut we got thechance to moderate a town hall meeting right here with the men behind themovie, Blackstone's Pete Peterson and former US Comptroller General David Walker. And the consequences of that won't get washed out in the nextmonth or two.QUICK: What was the stock that you made the bid on? We picked a movie called "The Cat Woman" with Simone Simon and "The Mummy's Hand" with Lon Chaney. In 2002the budget controls, the statutory ones that were in place that helped us takeus from deficits to surpluses expired, and Washington totally lost control. WALKER: ..the last two years talking directly to the Americanpeople with others about this. But we mustalso deal with our structural, systemic problems and not exacerbate the longrange by doing things that might be good today but further mortgage ourfuture. WALKER: Number one, publicly acknowledge that we're in a trillionhole that gets deeper 2 to 3 trillion a year even if we balance thebudget--unfortunately, we're headed the wrong way--and that they'll makeaddressing that a priority. I think that you've had situations like the Greenspan commission on Social Security... But there are occasions and, frankly, a time of recessionwould make the country more receptive. And I'm hopeful that the general election campaign will make fiscal responsibilityand intergenerational equity a higher priority. Does that mean you didn't get a great reception from either one of these twowhen you sat down with them? WALKER: Well, you know, that means most politicians like to gain votesrather than lose votes, OK? Some of hisinvestments, his thoughts on the state of the banking system. They got the chance to catch up with crowds fromthe East Coast to the West Coast. I mean, Berkshire can expect to have debt forever, andthe larger we get in terms of our equity and earning power, the more debt wecan sustain. The best thing you'regoing to have is develop your own talent. Now, onceagain, here's Warren Buffett and Becky Quick. I mean, I--I'm always interested in understanding the math of things andunderstanding as much as I can about all aspects of business. I know you've spoken with Boone Pickens about his plan. If we--if we required another10 million or 12 million barrels a day in the next 10 years, I'm not surewhere it would come from or at what price it would come from. The tar sands would actually--will increase some, but oildepletes, production of oil depletes. And my guess is we're using less oil right now in the United States because of price factors. Again, this was a townhall that was celebrating and looking into the opening of "I. Well, it's something we got to talk aboutwith plenty of our participants last night. What are--what does yourconstituency think about the plan presented here? WILLIAM NOVELLI (AARP CEO): Well, we've done a tremendous amount ofresearch among our 40 million members and the rest of the public down to 18years old, and we're pretty sure that the public is ahead of the politicians. The generations in this country are very closelyconnected to each other and they have one thing in common, they want thiscountry to be strong for the future, for their children and theirgrandchildren. This videothat has been done here is a good kind of wake-up call, and from an AARPstandpoint we can do town hall meetings across the country, thousands of them. QUICK: Warren, you're not convinced that things are quite as dire. And throughout, the genius of the Americaneconomy, our emphasis on a meritocracy and a market system and a rule of lawhas enabled generation after generation to live better than their parents did. And in the 20th century alone, the standard of livingof the average American went up seven for one. And we'll alwayshave challenges and we'll always have disputes between different demographicgroups and income groups. Andthey tried to do both of those things, and in the end they're going to doneither. I mean, we try to look forthe best ones, but there's no magic to any given market and things are cheaperthan they were a year ago in markets here and in markets around the world. QUICK: Could there be another Bear Stearns this time around, though? A long time ago there was a movie producer holding an annualmeeting and one of his shareholders said in the film, you know, `I don'tunderstand all these figures, Mr. The assets may not be so hot, but the liabilities are good and then that'swhen the trouble begins. I think that--I really think that's inappropriate to talkabout them. QUICK: Do you think that's part of what caused the problems with Bear Stearns, though? BUFFETT: If you had a 0 billion balance sheet and 400 or so billionof stated equity underneath it, that means that you're dependent on thekindness of strangers every day. And so if your name is bandied--ifyou--in the case of the kindness of strangers, if your virtue is questioned,you know, you've got a problem. Warren Buffett was also on that prestigious panel and in the movieand we had a chance to send people out to go around the country to getquestions, Warren, from people around the country that they'd like to havecome back to you. They will last, in my view, a considerable period of time. We'll have much more with Warren Buffett when we return and morefrom Carl in Beijing.This morning we have quite a show in store for you coming up today. Well, we found out that Wall Street has been kind of a nudist beach.As you probably know, our special guest for the next three hours is a man who needs no introduction. There's--it's just one discoveryafter another of firms that either didn't know what they were doing or thatdid things that they shouldn't have knowingly.