Part 2

Becky Quick: When you listen to the candidates, most of the major candidates have come out with some sort of a plan for what to do about the mortgage mess that we're in right now and many of those plans actually say that we need more regulation for that, but you're a guy that believes in free markets, too. Where do you think regulation should come down on this?

Warren Buffett: Well, I think people should understand what they're signing up for when they get into a mortgage. If it has a teaser rate, that ought to be in big bold print that you're paying way less now than you'll be paying later on. I don't really know exactly how those regulations work now, but nobody should contract for something that's misunderstood, or that is missold to them. But, if somebody elects to put a tiny downpayment on it and the house goes down in price, I mean people, lose money because they spend too much on credit cards and people lose money because they buy stocks at the wrong prices. I mean, it's the nature of capitalism that people make mistakes and it probably works better when they pay for their mistakes than when they are subsidized for their mistakes. Honest mistakes, now. If somebody is defrauded in someway, that's a different situation. But the lenders, if people lend money that they're not gonna get paid back, that's their problem, basically.

BQ: Is that kind of how you see what's happened? I've certainly thought that a lot.

WB: Certainly, there's been a lot of dumb lending. And there's been lending to people who can't afford to make the payments with the idea that house appreciation would solve it all. I mean, the idea was that the asset was going to go up so what difference does it make if you can't make the payment in two years, you'll sell the house and profit. And if you want to bet on that, that's fine, but if you lose the bet, I think that's the problem for the lender. It may be a problem for the person that moved in, but if they didn't put up any down payment to speak of, they will just have free rent for a while.

A significant percentage, well not, but a percentage that will surprise you, of people defaulted on their first payment. I mean, something is crazy when that happens.

BQ: Yeah, that should not be the case.

WB: No, that should not be the case.

BQ: We've been hearing an awful lot about freezing up in the commercial paper market, too. You're somebody whose got a lot of different businesses in a lot of broad places. Is this something that you've seen in the last few weeks?

WB: Well, up til the last few weeks and even the last few days almost, people just said commercial paper is commercial paper if it's backed by a bank, it's all the same. Then you have the situation in Canada there that made people start actually thinking what name is on it and can they pay me back and all that sort of thing. People, up til a few weeks ago or few months ago, in the real estate market, they just assumed everything would be fine. They bought CMOs and CDOs without even the faintest idea of what's really behind them. And they may have bought commercial paper the same way. And you can make mistakes with any financial instrument. You can lose money with almost anything. And now there's this 'flight to quality' and really a 'flight to quality' becomes sort of a 'flight to the known' because anything that is unknown, now people are suspicious of. Where as they accepted it in the commercial paper market up to a few weeks ago.

BQ: Is this the type of thing you've seen before, because you've said it before.

WB: Sure, it happens. I mean you have the Penn Central commercial paper problem 35 years ago or a little more, around 1970. And people, when everything has been good for a while, they get careless and they assume that prices will keep going up and that will bail out anything that happens and every now and then there's a rude awakening. Five years from now, ten years from now, the houses are still there, the factories are there, the people are working. I mean, it sorts itself out. But people who have done foolish things will sometimes pay a very significant price for it.

BQ: When you look around, just from the market's perspective, does it matter who wins the White House?

WB: Well, I think it matters over time to how the country ... but ... I don't think in terms of the year following the election, I think it's just a guess what would happen then. Obviously, I think if a country is well managed for 100 years it's going to do better than if it's been poorly managed. But, we've taken a lot of bad management. I mean, I won't name names, but Peter Lynch says you should buy stock in a business that's so good, an idiot could run it, because sooner or later, one will. And our country is kind of that way. I mean, we can take a Warren Harding or something like that, or maybe a Herbert Hoover, and our country is so good that it will overcome bad management. It's still better to have good management.

BQ: I like that, I like that. Yesterday, we heard from Home Depot and Wal-Mart and they're talking about how they're feeling the pinch from consumers. But you've got a lot of consumer businesses, everything from Dairy Queen to Florsheim's .. just about every one of your businesses.

WB: Yeah ...

BQ: Is this consumer pinch really out there? Are you feeling it with your businesses?

WB: Well, we see it in certain areas. I mean, obviously anything that's connected to residential construction. We have a brick business. We have a carpet business. We have an insulation business. All those businesses feel it when the consumer pulls back in the residential construction area like they have. The furniture business in some areas is terrible, the furniture business in other areas is pretty good. But you're seeing it in the figures. You saw it in the Wal-Mart figures the other day. The consumer is still spending a lot, but they're not quite spending at the rate they were six months ago, but we've had nothing in the way of a huge consumer pullback yet.

BQ: So maybe some early twinges?

WB: Well, who knows, who knows. What we do know is more people are in trouble on real estate finance-wise by a significant margin. How that later impacts what they do ... the teaser rates, you know, are going to come home to roost, and they're going to get these boosts in mortgage payments. When your mortgage payment turns from paying a couple of percent interest to starting to pay on the higher amount, plus the amount you deferred of interest earlier, you're going to buy less of something else.

BQ: A lot of people were talking about the filing for Berkshire Hathaway, with the Dow Jones addition. People are thinking, hey, we didn't know Mr. Buffett was going to be back in the business of looking at newspapers again.

WB: You'll have to ask those people. (Laughs). Your report was accurate in saying we bought the x number of shares of Dow Jones.

BQ: You've been supporting Senator Obama and also Senator Clinton. A lot of people are starting to talk about the two of them being on the same ticket.

WB: I think, my own personal opinion, is that that would be unlikely. And I think it would be hard for the country, the first time around, to have both a woman and a black on the same ticket. That's just my own opinion. You know, it wouldn't bother me in the least. I'd love the ticket. But, you know, you're going to have a certain percentage of people that are going to vote against Hillary because she's a woman. You're going to have some people who vote for her because she's a woman. And you'll have a certain percentage that will not vote for Obama because he's a black, and maybe with Romney because he's a Mormon, and so on. So, to combine a ticket that has two prejudices, you know, prejudices of the worst kind in my view, but nevertheless they've got 'em, and you lose a few percent of the vote and most of the elections in this country have been decided by a relatively few percentage points. So, I don't think that would be smart.

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