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Warren Buffett and Jack Welch Live on Squawk Box: The Transcript

This morning on CNBC's Squawk Box, Warren Buffett chatted by telephone with the Squawk team and guest host Jack Welch, the former Chairman and CEO of CNBC parent General Electric. Becky Quick is traveling with Buffett in China, and put him on the phone to react to news this morning that Merrill Lynch had to write-down almost $8 billionin bad bets on mortgage securities and leveraged loans.

A video clip appears in this earlier WBW post.

Among the topics: Merrill Lynch's big write-down, the SIV "super fund", the health of the U.S. economy, the railroad industry and why lots of furniture-buyers in Boston are hoping the Red Sox win the World Series.

Carl: If you're just waking up, Merrill Lynch coming out with an addition two-and-a-half billion dollars in writeoffs for the third quarter. We have Becky Quick traveling with Warren Buffett in China this morning. They arrived in Dalian, how long ago Becky?

Becky: Carl, we've been here for just about ten hours, less than 12 hours. We arrived this morning, I believe, around 9:30. We've just finished up from that dinner we told you about before. Last time I called in, you were asking about some of those PetroChina headlines that have been coming out, and my guess is that happened because Mr. Buffett earlier today, probably about three hours ago, was at a press conference with somewhere between 35 to 50 journalists here in Dalian. He was asked a series of questions, one of which was what about that PetroChina stake? He did point out he has sold off his entire stake, as he said before. And he also added to that today, that since he's sold off, since that news was made, he had written a letter to the head of PetroChina thanking him for all of his efforts and his work and the reason he sold out of that stock is because it had appreciated so much and he did make a handy profit out of it. Of course, the stock's taken off since then, and he pointed that out as well. He had written that letter to make sure it arrived in China before he did today.

This news from Merrill Lynch that you were just talking about, was something Mr Buffett and I had just been talking about. We just heard the news ourselves when we called into the control room. But he's here right now and I thought I'd put him on with you. I hear you also have a friend of his on the set, Jack Welch, so maybe the two of them could talk a little bit about that. I'll put him on right now.

Joe Kernen: Great. Mr. Buffett?

Warren Buffett: Jack?

Joe: How are you? It's Joe Kernen.

Warren: Good.

Joe: Good to hear from you.

Warren: Oh, hi, Joe.

Joe; You avoided the Bear Stearns investment, never had any interest, we found that out now. Now we see that Merrill Lynch lost $2.85, their write-down in the last month has become seven-and-a-half billion. Do you think we're getting close to fair value yet on some of this stuff?

Warren: Well, I don't know the answer to that. That is a big number, but, I, you know, I've, I've looked at some of the instruments out there and they're hard to figure the value of.

Joe: Is it marked to myth, that's a term you like to use. Are we still at mark to myth or is it getting closer to being marked to reality?

Warren: Well, we're getting closer, but that doesn't mean we're there. (Laughs.) The way to find out what something is worth is to sell a small piece of it. You know, if they sell 10 percent of their position, it's hard to argue the other 90 percent is worth more than that. It may be worth less because of size, but it's not worth more. You know, they may not like the market but I didn't like it with some of the stocks I've owned over the years but that was the market.

Jack Welch: Warren .. Jack.

Warren: Jack, how are ya?

Jack: Hey, how are you?

Warren: I'm here in China, and they're all asking me about the round of golf you played against Greg Norman some years ago. You have anything you'd like me to tell them?

Jack: Give them the t-shirt you made.

Warren: I'm giving it to them hole-by-hole, just the way you've always gave it to me. (Laughter.)

Jack: You know, when I heard you were looking at some Bear Stearns stuff, it reminded me of our joint forays into Wall Street. (Laughter.)

Warren: Jack, I never figured out which one of the two of us was getting the other in trouble. (Laughs.) You went into Wall Street, I went into airlines, or maybe it was vice versa, but (laughs) we went hand in hand into trouble. (Laughs).

Joe: Mr. Buffett, this super fund. The SIV super fund. Do you think that's a good idea?

Warren: Well, I don't know the facts on it but I do think if they sold paper into the super fund they ought to sell 10 percent of the paper independently and find out what that brings in terms of the price they seek for what's put into the super fund.

Joe: Do you see, from what you know so far, do you see the problems here, the SIV problems, the mortgage-related problems, do you see, have we got a good handle on how badly it's actually going to hit the economy or the stock market at this point or could it get a lot worse?

Warren: No, it's hard to figure because they're a lot of people having trouble with their mortgages now but there could be more, particularly if there are reset provisions in the monthly payments. So, it's hard to tell. I mean, in the end, our economy does fine. But that doesn't mean it can't have some dislocations for a year or two. Overall, five years from now, ten years from now the American economy will be fine, but that doesn't mean it will be true in five months or ten months.

Carl Quintanilla: Warren, it's Carl. I know you had a press conference earlier today in Dalian, talking about the Chinese market. You've got 47 billion in cash and you've talked for months about your inability to find investments that are worth your time. All of a sudden, you're traveling to Israel, you're now in China for the first time in 12 years. Are you finding anything overseas that you were not finding at home?

Warren: No, well, we've bought some international stocks this year and we were buying them last year but I'm over here in connection with an operating business, Iscar. They're opening a plant here, it's a major plant. It's a terrific company so I just came over to cut a ribbon which is about the limit of my talent. (Laughter.)

Carl: I bet you cut ribbons better than just about anybody,

Warren: (Laughs) Well, I've had a little practice.

Carl: You're quoted this morning as saying the China market is still, I'm thinking, your words, 'too hot.' Too hot to buy, you need to keep looking.

Warren: No, I, I, just said that we very seldom buy into a market that's gone up a whole lot, and I don't know anything real specific about the Chinese market or Chinese stocks. But I do know that when prices have gone up a whole lot then I'm more skeptical when they've gone down a whole lot. I really like the look of markets that have gone down rather than markets that have gone up. But I will say this, what I've seen in China just today, in terms of the industrial development in Dalian, is making a believer in me, certainly in the economy, but that doesn't mean that I think the stocks are attractive.

Joe: You probably, I don't know if you watch all your companies. You probably saw Burlington. You're right again on Burlington Northern, Mr. Buffett. There it goes. I just like to get your take on what you find so appealing about the railroads. I've heard people say you're going to run fiber optics on all your rails ..

Warren: No.

Joe: .. I've heard people say it's an ethanol play. Why are you going into the railroads in a big way? What do you see?

Warren: It's neither thing you mentioned. The railroads are a better business than they were in the past. They aren't a wonderful business, they're very capital intensive. They earn reasonable returns on capital but they don't earn sensational returns, they're just too capital intensive. But, they're a lot better business than they were in the past. Their position is a is trucking has improved. And just the excess capacity in the rail system has declined a lot, or disappeared, to some extent. So, it's better business than it was but it's not a marvelous business. And I don't see how it ever will be given it's as capital intensive as it is.

But, you know, for a hundred years, it was a terrible business for a hundred years. It's like what someone once said about the Chicago Cubs: every team has a bad century every now and then. (Laughs.) Well, the rail industry had a bad century, too. But it's gotten a lot better. But it's not a wonderful business.

Jack: Warren, Jack. There are 40,000 consumers in Boston who hope like hell that Jordan's loses that bet and ... (Warren laughs) .. your insurance payment has to be made.

Warren: There's going to be a lot of free furniture in Boston. (Laughter.)

Jack: 40,000 people went in and loaded up.

Warren: Yeah, well, that sounds about right, Jack. (Laughs.) I figured you were one of those that bought furniture there when you got (inaudible) the Red Sox won the World Series.

Jack: Absolutely.

Warren: When you're coaching they'll probably take it. (Laughter.)

Carl: Warren, I don't want to keep you too long, but, is there anything that the Chuck Princes of the world of the Jimmy Caynes of the world can do to whet your appetite for some of these names that are obviously getting a lot of attention?

Warren: It's always possible, but, we haven't done anything, but, well, it depends on whether you're talking about the securities that they own or whether you're talking about their own securities. Jack's my advisor on brokerage stocks. (Laughter.)

Joe: That whet my appetite. Would it, so you like some of the securities they own maybe more than the securities of the banks themselves?

Warren: Well, I do think there could be possibilities down the line, although we haven't seen it yet, but there could be possibilities down the line in some distressed paper. But my guess is that there could also be a lot of money lost in distressed paper, too. It's very hard to figure.

Joe: OK, I'm just going to try one more time on a big picture thing, Mr. Buffett. And that is, the rate cuts we're getting from Bernanke and company right now, are we getting enough benefit from the rate cuts to make up for the decline we're seeing in the dollar?

Warren: Oh, I really, I really don't know the answer to that. the Fed is ... (silence).

Joe: See, he doesn't want to answer that one. I want to try one more time but it looks like we lost him.

Carl: If we lost the signal, it was the best-timed phone signal ..

Joe: He doesn't weigh in, really, on big policy things, like that.

Carl: He says he's not an economist. He's said that for years.

Joe: But he makes bets on the dollar. Huge bets on the dollar. He ..

Carl: He was wrong for awhile but he's been right, in a big way.

Becky will continue to report on her experiences On the Road with Warren Buffett both on CNBC's Squawk Box (6a-9a ET weekdays) and here on Warren Buffett Watch.

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