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CNBC Exclusive: CNBC Transcript: Billionaire Investor Warren Buffett and Bank of America CEO Brian Moynihan Sit Down with Becky Quick Today

WHEN: FRIDAY, SEPTEMBER 20TH

WHERE: CNBC'S "SQUAWK BOX"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with CNBC's Becky Quick who sat down with billionaire investor Warren Buffett and Bank of America CEO Brian Moynihan on CNBC's "Squawk Box" today, Friday, September 20th.

All references must be sourced to CNBC.

BECKY QUICK: Why don't we start off talking about the relationship that you two have? It's been just over two years since-- Warren, you called up Brian, you made him a proposition. This is-- this deal, how's it been working for you so far--

WARREN BUFFETT: Well, it's worked, but the important thing is that Brian was doing the right things two years ago. I mean-- and he laid it out. He said what he was gonna do, it would take time. I mean, it's just the nature of things. So, he's cleared away the debris of the past-- not entirely, but he made-- he'd already made significant progress.

So, you knew he was gonna make more progress. He went back to the basics of a wonderful business, and-- a deposit-based-- to be the envy of every banker in the world. And he got rid of all this-- stuff that was-- you know, that'd been sort of accumulated as they tried to play various trends of the period from 2004 to 2007 or-- '08. And-- it was all in place, but it did take time. And so I got a chance to buy-- you know, when the crop was halfway out of the ground, but not all the-- all the way up to harvest.

BECKY QUICK: So it's been two years since that deal. You-- are in a position, Brian, where you can call the preferred at any point, and-- what does it cost you? $300 million a year? It's gotta be good to have Warren as an investor, but are you planning on calling--

BRIAN MOYNIHAN: Why are you bringing this up? Warren Capital-- deferred comment-- he-- you know, the-- he has-- 700 million shares in our company. And that's-- I think of a common shareholder, he gets a preferred yield. You know, we'll work out. There's no plans to do anything. It's-- we've got other instruments that are much more expensive to our company that-- we're calling. And his capital helped us do that, frankly.

It allowed us to replace us some preferreds. We did $5 billion this year so far. Last year we did some, and so we're trying to get 8% and 9% instruments out. And then they'll be some day when we'll talk about this, but that's far out there--

WARREN BUFFETT: But I'll be in the witness protection program, and you won't be able to find me.

BRIAN MOYNIHAN: He likes cash yield. You gotta-- the other thing about Warren, quickly is he-- he likes the cash yields.

BECKY QUICK: Well, it-- Warren, just in terms of the-- warrants that you have, are you going to exercise those at any point--

WARREN BUFFETT: Well, we'll-- exercise 'em eventually, but we'll wait till-- it all-- it's a 90% probability at least that we will exercise 'em probably the last month, which would be eight years or so from now. We-- there's no reason to exercise them sooner.

There would be-- if there were a high dividend on the common or something like that. So that-- that's conceivable, but-- but basically we love the position-- of being an owner. But-- and we'll love it when we exercise-- in close to eight years.

BECKY QUICK: Where do you think Brian is, just in terms of re-building the bank and re-positioning it?

WARREN BUFFETT: Well, he's with different obje-- he probably can't say precisely where he is in relationship to the-- some of the legal stuff. I mean, yeah-- but you know that-- an enormous amount of progress has been made. You know that the expenses are coming-- just working through the mortgage problems.

I mean, the -- he can tell you the numbers or the amount that was costing quarter by quarter and how it's come down. And the balance sheet is in incredibly better shape. I mean-- it-- he's gotten rid of a lot of the high cost-- then-- and the amount that's coming due in the next few years in terms of debt has fallen-- gone down considerably. And it's just been improved in all kinds of ways.

BECKY QUICK: Brian, just in terms of what has been happening with the mortgage business? I know you've talked about this recently. How much did demand for mortgages drop let's say over the last quarter?

BRIAN MOYNIHAN: We-- there two-- a couple of different parts. The purchase business has stayed pretty strong, and so it's been relatively consistent. So-- and you're even seeing that in some of the new home numbers and stuff. There-- it's a pretty consistent market. The re-fi market came down, you know, quite a bit.

And so, you know-- and dramatic. It's moving down-- second quarter, third quarter-- in order to origination volumes. But we-- we've been clear about that, but the purchase piece has been pretty consistent, which is important because that-- when you go to the broader economy-- that's really a lot of the broader economy.

That's people buying homes, new homes that get built, that do it, and when people buy a home, typically even-- a home somebody else lived in, they improve it, which is good for the economy. And that-- that's all good measure. Re-fis are terrific for the-- cash flow of the individual-- that-- the re-fis. But in terms of core economic job creating activity, it's not as much. And so we're down, but-- and we'll see how we end the quarter. The first two months weren't so bad 'cause we were carrying over a big pipeline, but it's come down from there.

WARREN BUFFETT: When you think about it, Bernanke has poured purchasing power into the economy by having rates at a level where people can re-fi and have just that much more in their pocket every month to buy things. That it's been a huge factor.

BECKY QUICK: Yeah, although there are people who say by keeping interest rates at zero like this, it hurts savers--

WARREN BUFFETT: It does--

BECKY QUICK: --it hurts people who are-- in the middle class, frankly, that-- that the Fed and the administration are hoping to help?

WARREN BUFFETT: It's very, very tough on savers. You know, that's why I wrote five years ago that cash it the worst thing you're gonna own that --

BECKY QUICK: Right--

WARREN BUFFETT: --and-- I feel very sympathetic for people that counted on CDs or U.S. Treasuries or something to maintain their standard of living. It just doesn't work.

BECKY QUICK: Brian, let's go back to the regulatory issues. JPMorgan is paying $920 million to settle a lawsuit and make it go away. You're in a position where you're not settling, at least when it comes to some of the mortgage -- that the government has made in terms of mortgage fraud. Why not settle?

BRIAN MOYNIHAN: Well, we always make an assessment that's pretty straightforward, which is what's the cost to defend yourself versus the cost of a settlement, and then what are the ramifications of that settlement. And we make that decision all the time. So unfortunately we've had to make it more than we'd like over the last couple years, honestly.

And-- but it was always an assessment. These trial-- to go through a trial is tremendously expensive, for both us and the other side, and typically that's what leads you to some rational conclusion. Unfortunately, it always waits until you get right at the eve of trial, so to speak. And-- so we've got the case goin' on-- $8.5 billion as we speak because that one is different because it was a case to confirm-- a settlement. We already settled.

And that will go through-- systems and stuff, so-- it sets the judgment we make. So a lot of people say why would you pay anything? And-- the answer typically is-- we may believe we're absolutely right legally, but if it costs me, you know, tens of millions of dollars to be right, and I only-- it costs me tens of millions of dollars to get it behind us the-- that's a judgment you make-- the disruption, the cost, and just the work.

BECKY QUICK: Would it make a difference if the government was insisting that you admit wrongdoing? Would that be a deal breaker?

BRIAN MOYNIHAN: Well-- I mean, you'd have to look at the facts and circumstances. I can't-- I can't get into what-- JP's case is, 'cause I didn't see it. I've only read what you've read, but, you know, the-- really even that's a debate in all these settlements in terms of how exactly the settlement papers work. And you have the lawyers that-- that work on that for you, but-- and I think it'd come down to the individual case.

BECKY QUICK: We should point out that the case that we're talking about is one that concerns Countrywide and it concern practices that happened in 2007 and 2008 before-- Bank of America even bought Countrywide. We had Hank Paulson on last week, the former Treasury Secretary.

And he said he thinks it's unfair what the government is doing in terms of going after-- banks that helped the government out by buying the companies that were in big trouble, and then turning around and suing them for bad behavior that was happening before they bought that bank. Can either of you weigh in on that?

WARREN BUFFETT: Well, I think if you think something the government is doing is unfair, it's quite unwise to express it on national television. Since I'm not involved I'll say it.

BRIAN MOYNIHAN: It's nice to have the-- around with you.

BECKY QUICK: So let's talk a little bit more about the economy and exactly what you two are seeing because I think between the two of you, you have an incredibly good idea about what's happening in American-- economy. Consumer, Warren, and housing-- you have a lot of businesses--

WARREN BUFFETT: Our furniture stores are up 8% or 9% in-- in-- in August against the best figures they'd had a year ago. Carpet is strong, you know, all-- well, most of the businesses are strong. Our railroad carried-- we had 207,000 cars last week.

That-- that's the highest of the year. Our peak was 216,000 the low was 152,000 but we think this fall, if the harvest is normal-- we'll be very-- we'll just be at the peak that we had-- before everything-- hit the fan.

BECKY QUICK: But that-- I mean, that-- you're back at the peak? It--

WARREN BUFFETT: Yeah, I--

BECKY QUICK: It's better than people might say--

WARREN BUFFETT: --and you're seeing housing-- but-- you know, we've got a real estate brokerage operation, and I look at the median prices in all these different markets-- each month as-- what-- what's taking place. And that's coming back. Things are coming back.

But it-- the slope doesn't-- it doesn't go like this, and it doesn't flatten out. It just kinda keeps going at-- the-- rather constant rate, although there's-- you see pockets of strength in one area or another a little bit as you go along. But business is-- overall it's getting better, and I would say that-- well, as I look at our businesses, it-- three-quarters of 'em at least would be doing better.

BECKY QUICK: Brian, what about this demand from the small businesses and medium and large businesses, too?

BRIAN MOYNIHAN: Well, we're seeing in-- in companies with under $50 million in revenue, the demand for loans is strong. Our middle market book has grown nicely in the first couple quarters. Small business originations are up 30%-- 25% year over year in the last couple years.

And so it's all going the right direction. The interesting point is the borrowing rate-- so a person has a line of credit could borrow $100. They're only borrowing in these small-end of segments $50. And typically, they'd borrow $60.

Or in the higher end they'd borrow $30, and they're borrowing $30, and they usually borrowed $40. That's because they don't have that much opportunity, and that-- frankly, they're making a lot of money, and they're very efficient. So one of the-- difficult situations going on in America is the producers of products are so efficient that they're not hiring a lot more people to-- continue to generate revenue growth.

You know, that's one of the difficulties of getting us out with an unemployment number that we all wanna get to as fast as possible. But the underlying facts-- the credits there, the competition for middle market loan is as severe as I've ever seen it in terms of people on top of it saying, "I wanna make the loan to customer A, B or C." So it's really-- it's pretty strong.

BECKY QUICK: So what's holding hiring back at this point?

BRIAN MOYNIHAN: You know, it's-- I think final demand is still uncertain for a lot of companies. So, you know -- had housing starts down to-- what-- with a half million at the low point or -- and are now $900-and-some thousand. That's a big demand lift, but they remember the half million, so they're not saying, "Well, I'm gonna open up a brand-new, you know, wall board factory," or something like that to -- whether it goes to $1.3 million. They'll sit there and say, "I'll squeeze every ounce out of production-- "

BRIAN MOYNIHAN: "-- to $1.1 million-- " you know, and that's what's happening. Now all this is good, and it will break through where they'll have to do things. And-- I don't-- have to sound like they're anti- growth. They're really pro-growth, they're just pro-worried-growth right now.

And that, I think, is still holdin' 'em back 'cause at 2%, it's a grind. And, now, 2% versus 1% is better, and the second quarter if sequester was gonna make the economy not grow, and it surprised everybody. So the-- there's a lot of fundamental aspects that we see across businesses that you just-- are just relentlessly movin' forward as long as we don't do something to really knock 'em off kilter.

BECKY QUICK: Something to knock 'em off kilter like not agree to lift the debt ceiling?

WARREN BUFFETT: Well, that would be pretty damn dumb. You don't like to say that on national TV, but--

BECKY QUICK: If they do-- have some sort of government shutdown over this, what happens? What's the fallout?

WARREN BUFFETT: Well, it would get resolved in a reasonable-- I mean, the market is not gonna fall apart because-- they expect Washington will only act.

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