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TRANSCRIPT/VIDEO PART THREE: Three Hours With Warren Buffett - Live From Omaha

THIS IS PART THREE OF "THREE HOURS WITH WARREN BUFFETT - LIVE FROM OMAHA" ON CNBC'S SQUAWK BOX WITH BECKY QUICK, FRIDAY, AUGUST 22, 2008.

IT IS AN UNEDITED TRANSCRIPT AS PROVIDED BY BURRELLESLUCE.

GO TO PART ONE OR PART TWO OF THE TRANSCRIPT

CARL QUINTANILLA, co-anchor (Beijing): But first we're going to start with the man of the hour, Beck--actually, he's the man of three hours--Warren Buffett with you in Omaha.

BECKY QUICK, co-anchor (Omaha, Nebraska): That's right, Carl. We are live in Omaha today because last night there was a groundbreaking event in the world of finance and politics and it took place right here. This was the world premiere of a documentary that's called "I.O.U.S.A." This film takes a look at what it thinks are America's four key deficits and it explores into all the risks of these deficits, what it means to the future of this country and its citizens. Now, Warren, you were in the documentary last night right along with Robert Rubin, with Paul Volcker and with Alan Greenspan. So let's take a quick look at a brief clip from the film last night.

(Clip from "I.O.U.S.A.")

QUICK: OK. Again, that was a clip with Alan Greenspan from the movie last night. It premiered on hundreds of movie screens across the country last night, including right here in Omaha. After the debut, I got the chance to moderate a town hall meeting with the men who were behind the movie, Blackstone's Pete Peterson and the former US Comptroller General David Walker. This is a quick look from that. And Warren, we did have a big discussion last night about what the big problems are and exactly where things are going at this moment. In your--in your view, we just heard from Alan Greenspan, he said that you need to be looking at what's happening down the road. What do you think about that?

WARREN BUFFETT (Berkshire Hathaway Chairman & CEO): Well, I think in any personal activity, business activity or certainly governmental activity, you know, there should be--you should be thinking plenty about what happens down the road. That's one of the jobs of government is to think about what is going to be our energy situation if we don't change 20 or 30 years from now.

QUICK: Mm-hmm.

BUFFETT: What's going to be the fiscal situation. And so unfortunately, you have a many--the most important things in society, the policy cycle is longer than the electoral cycle.

QUICK: Mm-hmm.

BUFFETT: So it's very tough to elect people every two years and ask them to be thinking about something 20 years down the road.

QUICK: OK. We're going to talking more about this film in just a little bit. David Walker will be joining us again, Pete Peterson, to talk about some of these issues. We also, though, have you here for a lot of things that are happening right now in the economy. And at the top of the last hour you talked about where you think the economy is headed. You still think that the trouble in the economy, it could get much deeper from here?

BUFFETT: Well, I think you're seeing the ripples go out from what's started as a crisis in home lending and the fact that we had a--we had a housing boom fueled by a lot of lending by people who didn't know what they were lending on. And that's caused enormous problems in the financial markets as people have started looking at these instruments which they thought were triple-A and they're finding out they're about triple-F and--but those problem--problems have a way of spreading, and that caused the banks to start want--starting to want to start deleveraging in a big way. And when banks start deleveraging, that has--sends ripples out. So there's consequences to every pebble that's dropped in the ocean and we had a pretty big pebble dropped in.

QUICK: Now, you--your view of the economy comes not only from your own holdings, all the companies that you own outright--everything from GEICO to Dairy Queen to Gen Re to Acme Brick Company, all the companies that you hold--but also the holdings that you have in other big companies, correct?

BUFFETT: Right.

QUICK: What sort of insight does that give you?

BUFFETT: Well, it--obviously, I pay a lot of attention to what's happening. And we'll say at American Express--and Ken Chenault talked about that here a month ago--but they are experiencing credit deterioration and they're experiencing it sort of in all segments. So they're seeing the rich customers slow down in payments, slow down in purchases. And American Express can describe that rather than I, but I pay a lot of attention to that sort of thing. And incidentally, it will get cured at some time in the future, but right now the situation is getting worse and I would say I don't see any early end to that.

QUICK: We want to talk to you about...

BUFFETT: But I do see an end.

QUICK: You do see an end, but no early end. I mean, is that six months, is that 12 months, is that 18 months?

BUFFETT: I don't know.

QUICK: Can you put a time?

BUFFETT: Yeah, I don't know the answer to that. All I know is that it's not--I don't think it's going to be really soon. I think that--my candidate is Obama, so I think President Obama is going to have plenty on his plate in January.

QUICK: OK. Let's talk about your most recent disclosures for some of your holdings. When we saw the last numbers, your shares in Anheuser-Busch, a lot of people were surprised to see that you had gotten out of those shares before a deal went through with InBev.

BUFFETT: That's right. I sold about 60 percent of them in the second quarter.

QUICK: Why?

BUFFETT: Well, I wasn't--it was an evaluation of whether I thought the deal would go through and the desire to sell at least some of the shares. I mean, Anheuser-Busch did not want the deal to go through and they hired investment bankers, very expensive. They spent $72 million with two investment banking firms. And believe me, most of that was spent with the idea of trying to keep InBev away. So who knew how it was going to come out? And InBev persevered, they raised their price and on the remaining shares we'll do somewhat better; although there's still a time factor and we've used the money for other things. But in retrospect, I was wrong to decide to partially sell the holdings.

QUICK: What...

BUFFETT: But that--that's not news. I'm often wrong.

QUICK: What price did you sell at? It did not say in the filings.

BUFFETT: Oh, I--we probably averaged around 61 or 2, something like that.

QUICK: OK, 61 or 62, you still had a third. Are you--do you still hold that position?

BUFFETT: Yeah. We--yeah. We hold the shares, yeah. You didn't ask me that last time, so yeah.

QUICK: I know, I didn't. I had to circle back this time a lot. So you still have those shares. One of the other things from that filing that Berkshire filed with the SEC noted that you weren't talking at that point about what's going on with ConocoPhillips.

BUFFETT: That's right.

QUICK: OK. Well, we have you here right now. That means a lot of people are out there assuming that you're either buying or selling shares of Conoco and...

BUFFETT: That's certainly correct.

QUICK: And if I was a betting man, would it be right to think that maybe you were selling and taking profits based on where oil prices have gone?

BUFFETT: Well, if you were a betting man, you'd be betting.

QUICK: Oh, so you're not going to necessarily come out there on that. Let's talk about the price of oil in general.

BUFFETT: Sure.

QUICK: Price of oil has gone rapidly higher in the last few days. Once again, about 120, still down from where it was...

BUFFETT: Mm-hmm.

QUICK: ...just a month ago. But 120, you think that that's a comfortable price for oil?

BUFFETT: It's very hard to tell, but what you do know is that the situation in respect to supply and demand in oil has changed dramatically in the last five or six years from what has existed ever since World War II. I mean, ever since World War II we've always had a significant amount of producible capacity beyond the demand that existed. Now, maybe for one reason or another it wasn't being produced. 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 $3 a barrel then. So we've always had the situation post World War II where it's been a lot more supply could come on than there was demand. In the last 10 years, the first five years oil demand went up around four million barrels a day, and then in the next five years it went up another eight million barrels a day. That's 12 million barrels a day. We did not bring on, in the world, anything like that in terms of productive capacity. So at 86 million barrels a day, which is the present demand, roughly...

QUICK: Mm-hmm.

BUFFETT: ...the world that has no real buffer stock in terms of the--you can't turn the tap on and get 90 or 95. And that means that prices have been and will be quite volatile and probably--well, they have been at a--certainly at a higher level. It is a different world in terms of supply and demand on oil than existed five years ago.

QUICK: What's your thought as to what the nation needs to be doing right now? I know you've spoken with Boone Pickens about his plan.

BUFFETT: Yeah. Well, Boone's on the right track. And then one way or another, you know, we're using 20 million barrels or so a day of oil, we're using a quarter of the oil, roughly, in the world. We and the world cannot certainly keep increasing our demand for oil. If we--if we required another 10 million or 12 million barrels a day in the next 10 years, I'm not sure where it would come from or at what price it would come from. We just don't have that. The tar sands would actually--will increase some, but oil depletes, production of oil depletes.

QUICK: Hm.

BUFFETT: And so one way or another, we're going to have to learn to use a lot less oil. And my guess is we're using less oil right now in the United States because of price factors.

QUICK: Yes.

BUFFETT: But I'm not sure that the world demand is--maybe it's decreased a million barrels a day or something like that, but that isn't going to do it over 10 years. We're going to have to use less oil.

QUICK: OK, Warren, we're going to be checking in with you again after we come back. We'll have more from Omaha, folks. But we're also going to be checking in with Carl. He's got plenty more coming up in Beijing. Carl:

QUINTANILLA: Becky, if Warren breaks any more news we're going to have to just go off the air here, our heads are going to explode for all he information that's coming from him.

IS AMERICA GOING BROKE?

BUFFETT: (From town hall meeting) Every line in the tax code is important to some constituency. I'm not sure every line in the Bible is, though. The--and actually, you know, you've got thousands of lobbyists there protecting each line in the tax code and I'm--again, I'm not sure about whether the Bible has an equal army of people in--on K Street.

QUICK: All right, that was Warren Buffett answering a question on taxes during our town hall right here in Omaha last night. Again, this was a town hall that was celebrating and looking into the opening of "I.O.U.S.A.," that's a new documentary that opened and premiered last night in theaters across the country. That question that came was from someone who wrote in asking why the tax code is longer than the Bible. Well, it's something we got to talk about with plenty of our participants last night. In fact, we're joined right now by some of the other participants in that conversation. Pete Peterson is here with us this morning. Also David Walker and Bill Novelli, the CEO of the AARP. And gentlemen, thank you for being here once again this morning on the same stage where we were last night. I'm guessing everybody is working on adrenaline at this point, practically all-nighters for everybody involved. Pete, let's start out with you. The movie last night, "I.O.U.S.A.," is something that the Peter G. Peter--Peter G. Peterson Foundation did put some financial backing into. Why did you get interested in it? What's important that you think in the message?

PETE PETERSON (Peter G. Peterson Foundation): Well, Dave and I have concluded unanimously, the two of us, that the country faces some long-term challenges that if we don't address them are undeniable, at least in our opinion, unsustainable, and yet they're, politically speaking, not touchable.

QUICK: Mm-hmm.

PETERSON: And our job, we think, in a democracy like ours is to use every means we can, and this film is only part of a much broader program to educate the American public and to activate them and motivate them to do something about it. And the doing something about it is essentially to let our elected representatives know that this is serious and they want action. At the present time they feel--that is, our representatives feel that if they confront some of these long-term problems, since all of them involve somebody either giving up something or paying more for something, that it will result--not only being politically incorrect, but politically terminal.

QUICK: Mm-hmm.

PETERSON: And we've got to change that around so that they feel that if they don't do anything, then they're going to be in re-election trouble.

QUICK: David Walker, we spoke with you earlier this morning. Again, David Walker who's the former comptroller general of the United States. If you have to look and put your finger on one issue that you think is the most pressing thing, what is it?

DAVID WALKER (Peter G. Peterson Foundation): Health care costs are totally out of control. Health care costs represent 34 trillion, just Medicare alone, 34 trillion of our $53 trillion hole. The United States is the only country on the face of the earth that's dumb enough not to have a budget for health care. Every other country does. We need to engage in fundamental reform of health care to achieve universal coverage for basic and essential health care, have a budget for health care. We need universal practice standards, evidence-based practice standards, and we need to enhance personal responsibility and accountability.

QUICK: All right. Bill, you represent the AARP, and some people have said in the past that seniors get very concerned when you start taking away benefits or changing things that have been set up. What are--what does your constituency think about the plan presented here?

WILLIAM NOVELLI (AARP CEO): Well, we've done a tremendous amount of research among our 40 million members and the rest of the public down to 18 years old, and we're pretty sure that the public is ahead of the politicians. People do want change. The generations in this country are very closely connected to each other and they have one thing in common, they want this country to be strong for the future, for their children and their grandchildren. And so what we have here is a big opportunity. This video that has been done here is a good kind of wake-up call, and from an AARP standpoint we can do town hall meetings across the country, thousands of them. So this is an opportunity to make change.

QUICK: Warren, you're not convinced that things are quite as dire.

BUFFETT: No, I--the short-term outlook is not. But we've had a number of recessions in this country; in fact, we had a Great Depression, we had--we've got world wars. And throughout, the genius of the American economy, our emphasis on a meritocracy and a market system and a rule of law has enabled generation after generation to live better than their parents did. And, I mean, most of the people in this room, practically all of them last night, lived better than John D. Rockefeller lived. I mean, all kinds of things have happened. And in the 20th century alone, the standard of living of the average American went up seven for one. There's never been a period like it in history. And that's not an accident. It's because we unleash human potential and will continue to do that in the future. And we'll always have challenges and we'll always have disputes between different demographic groups and income groups. The rich don't want to pay their share of the taxes. The poor probably, you know, they--in the last 20 years, the net worth of the Forbes 400 has gone from 220 billion to a trillion five hundred and forty billion. So you'll always have fights within the family about who gets what of the pie, but the pie will grow.

QUICK: But there are points that all four of you agree on. What's the closest point where, I mean, you say, `Yes, this is something the American people need to hear?'

BUFFETT: Well, I think you should always be thinking about the future. I mean, I think you're crazy if you're not--if you're not planning out where you'll be in 10 and 20 or 30 years. You'll get surprises in those plans.

QUICK: Mm-hmm.

BUFFETT: And frankly, American ingenuity will tend to surprise on the upside much of the time. I also think that it's dangerous politically over time. It doesn't endanger the economy in a huge way, but it's dangerous politically over time to run very large current account deficits whereby there's a massive transfer of assets or IOUs to the rest of the world from America. I think that will cause a lot of demagoguery and potentially some real problems 20 years down the road. We'd still have a more prosperous society.

QUICK: Mm-hmm.

BUFFETT: But it wouldn't be--wouldn't be as good as if we didn't do it.

QUICK: David?

WALKER: I think we agree on two things. I believe all four of us do, based on listening last night and talking this morning. Number one, we need to focus on the future.

QUICK: Hm.

WALKER: We're a great country, we need to do a number of things to make sure we stay great. And secondly, we support a capable, credible and bipartisan commission to be able to make recommendations to the next president and the next Congress to deal with some of these challenges so we can start making a down payment on our big hole and try to increase the likelihood that our future will be better than our past.

QUICK: You've had conversations with both campaigns, with the McCain and the Obama campaigns. What's been your takeaway from those conversations?

WALKER: Well, the takeaway is there's a difference between getting elected and governing, and there's a tendency for people not to want to talk with too much specificity with regard to some of these challenges in order to get elected.

QUICK: Mm-hmm. Right.

WALKER: The challenge is this: If they don't at least acknowledge the problem and figure a--figure a path for it, like a commission, then you don't have a mandate to be able to do something after you're elected. And so that's why I think acknowledging the problem, endorsing a capable, credible and bipartisan commission is the right thing to do for them and the right thing for the country.

QUICK: Mr. Peterson, you put some financing into this film. Would you consider doing a debate with the two political candidates that focuses specifically on the economic issues out there?

PETERSON: I'm just the aging founder of this. We have the CEO sitting here. We're exploring all kinds of possibilities.

BUFFETT: The one thing you won't find, Becky, you won't--you won't find either candidate telling you that if we're going to spend $3.1 trillion next year, the federal government will tell you how they're going to raise 3.1 trillion. They just aren't going to come up with it. They...

QUICK: Long on promises, short on ways on how to do it right now.

WALKER: Maybe if you invited them, they'd come. But they would have some trepidation, I think. And I think we'd find some ways to come up with some funding for it if it was necessary.

QUICK: But...

PETERSON: The other big audience that we're going to focus on are the young people. And I'm one of these old fogies that doesn't even do e-mail, so I'm hardly the person to plan it. But we've got a bunch of young people who are experts looking at Facebook and MySpace and MTV and so forth, because it's going to be very important to get these young people aware of their future, incidentally, not mine. Buffett and I'll do pretty well, if we don't live...

BUFFETT: I hope so.

PETERSON: If we don't live too long.

BUFFETT: Yeah.

QUICK: David, if you had, again, to take a look and go out to Congress, do you think this is a message that plays back? You're in an election season, it's a tricky time. But what's been the push back? What's been the...

WALKER: Well, I agree with what Bill Novelli said.

QUICK: Mm-hmm.

WALKER: I mean, the American people are ahead of the politicians.

QUICK: Hm.

WALKER: They're not accustomed to hearing the truth from the politicians and they're looking for two things. They want truth and they want leadership.

QUICK: Mm-hmm.

WALKER: And they need--we need more of both right now. So I think that if we can get the American people engaged, involved, if we can get the presidential candidates to acknowledge the problem, to be able to endorse the type of commission we're talking about as a way forward, there's hope.

QUICK: OK.

NOVELLI: Becky, you got a question last night from a woman who said, `I'm a boomer and I'm worried about my adult daughter.'

QUICK: Yeah. Mm-hmm.

NOVELLI: This is true all over the country. You know, the majority of adults in this country think that their children are going to be worse off than they were. This would be the American dream going backwards. We can't let this happen.

QUICK: All right, gentlemen, I want to thank you all for joining us this morning. It's a topic we'll be discussing through this morning as well. But also coming up, this is something you've never heard Warren Buffett talk about ever before. We're going to be back in two minutes. I'm as intrigued as you are.

BUFFETT: (Unintelligible)

QUICK: So is he, you should see his face. We're going to be spending the morning with the world's most famous investor and we have much more SQUAWK right after this.

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