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CNBC INTERVIEW TRANSCRIPT & VIDEO, Part 1:  Warren Buffett Explains His $5B Goldman Investment

Warren Buffett was interviewed live by telephone on CNBC's Squawk Box this morning about his surprise investment of at least $5 billion in Goldman Sachs.

A summary is available in the post Warren Buffett to CNBC: Government Bailout Plan Made $5B Goldman Investment Possible.

This is part one of the complete transcript of that conversation. (Click here for part two .. Click here for part three)

BECKY QUICK: We know you get all kinds of deals, all kinds of people who come knocking asking you to jump in. You've said no to everything to this point. Why is this the right deal at the right time?

WARREN BUFFETT: Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.

BECKY: Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?

BUFFETT: Well, I would say this. If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price?

CNBC.COM POLL: BUFFETT'S BET, A BOOST OF CONFIDENCE?

BUFFETT: Well, there's just no telling what would happen. Last week we were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.

CARL QUINTANILLA: Warren, we can almost hear you measuring your words as you speak, because what we're talking about has such gravity. There are people out there who either don't, or are unwilling, to acknowledge what exactly, how serious the situation was last week. And I'm hearing you say is that, was it the most frightening experience you've had in your lifetime, in terms of evaluating where this economy stands?

BUFFETT: Yeah, well, both the economy and the financial markets, but there're so intertwined that what happens, they're joined at the hip. And it doesn't pay to get into horror stories in terms of naming institutions or anything. But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week. And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do. there's no Plan B for this.

BECKY: Warren, you mentioned that Wall Street could not have taken another week like that. But what does that mean to the American taxpayer who's sitting at home saying, 'Why is this my problem?'

BUFFETT: Yeah, well, it's everybody's problem. Unfortunately, the economy is a little like a bathtub. You can't have cold water in the front and hot water in the back. And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business. Look, right now business is having trouble throughout the economy. But a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt. It was, and still is, a very, very dangerous situation. No plan is going to be perfect, but thanks heavens that Paulson had the imagination to step up with something that is of the scope that can really do something about it. And what he did with the money market funds, that was not an idea that I had, but as soon as I heard about it, that was an important stroke. Because the money, pulling out of the money market funds and going to Treasuries, and driving Treasury yields down to zero. That -- a few more days of that and people would have been reading about lots and lots of troubles.

JOE KERNEN: People listen, Warren, when you speak. And I don't know if you watched the hearings yesterday ...

BUFFETT: I got to watch some of them.

JOE: But when the more dire it looked, in terms of communicating, with some of these Senators, the three-month or one-month bill, again, started acting similar to what was happening on Thursday. Now we averted that disaster on Thursday, but it's already been three or four days. It's almost as if these guys already forgot about the position that we were in. Do you think that accounted -- we're still susceptible to that happening again if it looked like they're not going to go through with this?

WOULD BUFFETT JOIN THE OVERSIGHT BOARD?

BUFFETT: No, it would get worse. Last week will look like Nirvana (laughs) if they don't do something. I think they will. I understand where they're very mad about what's happened in the past, but this isn't the time to vent your spleen about that. This is the time to do something that gets this country back on the right track. What you have, Joe, you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they're trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that's willing to leverage up. And there's no one that can leverage up except the United States government. And what they're talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that's going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won't do it perfectly right, I think they'll make a lot of money. Because if they don't -- they shouldn't buy these debt instruments at what the institutions paid. They shouldn't buy them at what they're carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

BECKY: Are you buying instruments like these in the market?

BUFFETT: Well, I don't want to leverage up. No one wants to leverage up in this thing. So, if I could buy a hundred billion of these kinds of instruments at today's prices, and borrow non-recourse 90 billion, which I can't, but if I could do that, I would do that with the expectation of significant profit.

JOE: But the government can do that. You can't. And that's why the private sector can't, even you, can't save the system.

BUFFETT: I can't come close to it. But they have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don't have covenants. They don't have -- I mean, they are in the ideal position. So, for example, if I were hiring advisers, as I talked about doing to buy these things, I would tell those advisers, 'Look it! People are buying these instruments to make 15 percent. So if you're going to charge me any fees, I'm going to defer those fees until I get rid of these instruments later on. If I don't make at least ten percent on my assets, you know, your fee goes down the drain. Because it should be a lead-pipe cinch to make 10 percent at the kind of prices that exist now. I wouldn't try to write that into the legislation. I don't think you should -- I think they should punish, in many cases, the people -- I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years. They should, maybe, eliminate bonues. They may wish to do some of those things. I don't think you should try to write it into the instrument, though. I think that gets so damn complicated and ties people's hands. But if I were administering the program, I think I'd be fairly tough about some of those things, and I'd make sure that the advisers earned me a return that was well above my cost of borrowing before they got paid a dime.

BECKY: Would you administer the program?

JOE: Yeah, can you be on the oversight board? (Buffett laughs.) Can you be on the oversight board?

BUFFETT: I'd love to administer (laughs). I'd love to administer it for nothing, but I would really love to administer and get some kind of an override in terms of the profits, which is naturally the way Wall Street thinks. No, it's not my game to do that, but I will tell you that the buyers of the instruments these days are going to do better than the sellers. And the big buyer, if they -- they shouldn't pay any attention to the cost of these instruments to the selling institutions. They shouldn't pay any attention to the carrying value. In fact, one thing you might do, is if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don't want the Treasury to be a patsy. But I'll tell you, with Hank Paulson on top of it, you couldn't have any better guy to do that. The important thing is that if this program extends into the next administration is to have somebody in the next administration that has similar market savvy.

PART TWO OF THE BUFFETT TRANSCRIPT: FATEFUL ENCOUNTER AT THE WORLD'S FAIR

Current Berkshire stock prices:

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Goldman Sachs:

Questions? Comments? Email me at buffettwatch@cnbc.com

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