Warren Buffett Watch

Charlie Rose:

And those more tools might be in addition to what’s in this plan?

Warren Buffett:

Well, they need plenty of money and they really need plenty of flexibility to carry out this plan.  They also need in my view to very much tie it to market prices.  I have said, Charlie, that the 700 billion, if they buy mortgage-related securities or mortgages themselves at current market prices, they’re going to make money over time because the United States government has staying power and it has a low cost of borrowing.  And if I could take one percent of that 700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I'd make a lot of money.  It’s -- I mean you have hedge funds and people like that buying these assets to yield 15 or 20 percent, I mean, that’s the buyer for these people that are trying to unload them.  The U.S. Treasury has got borrowing costs like nobody else has.  They can borrow basically unlimited amounts.  They can stay there for years and years.  These assets will be worth more money over time.  So when Merrill Lynch sells a bunch of mortgage-related assets at 22 cents on the dollar like they did a month or so ago, the buyer goes -- is going to make money, and he’s going to make a lot more money if it happens to be an institution like the U.S. government which has very, very cheap borrowing costs.

Charlie Rose:

So you are saying to those taxpayers who are worried about what’s going to happen to the $700 billion, chances are good that when these securities are purchased and sold, you’ll get a lot of your money back.

Warren Buffett:

I think [inaudible].

Charlie Rose:

Or all of your money back, and maybe something else [spelled phonetically].

Warren Buffett:

I would bet on it.  I mean, if I got a chance to take one percent of the deal either way, I would make that bet.  When Berkshire Hathaway laid out three billion dollars for GE today, we didn’t spend it, we invested it.  When the Federal government buys the mortgages, they’re not spending it, they’re investing it.  Now, they’re investing it in distress type assets but they’re buying them at distress prices if they buy them at market.  It’s the kind of stuff I love to do.  I just don’t have 700 million.  Maybe we could go in it together.

[laughter]

You know, with your money and my brains, I mean, there’s no telling how far we’d go.

Charlie Rose:

Whatever, I’ll take the deal, whatever you want to do.  There is this, though, I mean, in terms of alternatives, some people have suggested for example that why don’t we -- why isn’t America doing what Berkshire Hathaway is doing?  Why isn’t that a better deal for America?

Warren Buffett:

I don’t think it would be crazy to have a model or an entity model on the Reconstruction Finance Corp.  That goes back to 1932, although it was really implemented in ’33 under Jesse Jones, and it invested in mostly banks initially and preferred stock and that sort of thing.  So there are two things needed in the system, the one that’s needed overwhelmingly is liquidity.  I mean, when people are trying to [unintelligible], there has to be somebody there to buy.  And they don’t have to buy at a fancy prices, but to buy.  And then there’s also a capital problem with some of the institutions.  We have provided capital here with a couple of institutions recently.  The Federal government did that in the ‘30s for the RFC and I think there could well be a proper role for government in that.

Charlie Rose:

Would that have been a better idea today?

Warren Buffett:

It wouldn’t have been big enough today.  And it wouldn’t have been -- you couldn’t have -- if you’d set up at RFC today and you gave them $100 billion invested in the [spelled phonetically] capital, there’d be a very cumbersome type of application process and everything, these assets are getting shoved out day by day, and loans are coming to a commercial papers not being renewed.  I mean, the commercial paper market, when that dries up, you know, that’s just like sucking the blood out of the economic body of the United States.  And that’s happening.  So I would say that an RFC-like thing might make sense.  I probably would do it myself.  But I don’t think trying to combine that with what’s going through now, I think what is needed now is liquidity.

Charlie Rose:

All right.  There are those who -- you just said you would do it yourself -- there are those who believe and it has been suggested, you know, that this is the time for Warren Buffett to answer the call of his government in a country that’s been very good to him. I mean what are you prepared to do yourself beyond run Berkshire Hathaway well is this.

Warren Buffett: 
That's my job.  But any time I can be of help to the government in terms of giving advice -- I've given a little advice, actually.  [talking simultaneously] anyway, no.  I obviously am willing to do that.  I'm here tonight talking about this for that reason.  It isn't going to do anything for Berkshire Hathaway.  Well, that isn't really true.  I mean anything that enables this economy to run in the manner that it should -- I mean we've got the same clients out there we had two years ago.  We have the houses, we've got people -- more productive than they've ever been in the history of this country.  We've got a wonderful economic formula in this country, but right now, it is being -- it's been brought to a halt by some events --

Charlie Rose: 
By?

Warren Buffett: 
Well, it's the deleveraging that's going on right now that has caused the credit crisis.

Charlie Rose: 
I mentioned earlier in this introduction do you, if you read your letters to your stockholders which you write, and Carol Loomis edits every year, and you think of your sister as the person [talking simultaneously]

Warren Buffett: 
Two sisters, yeah.

Charlie Rose: 
You have talked about derivatives.  Derivatives are, in part, at the core of this problem, yes?

Warren Buffett: 
AIG would be doing fine today.  It was one of the ten largest companies in the United States in terms of market value, over 200 billion, the most respected insurer and everything in the world.  If they never heard of the word derivatives, they'd be doing fine.  They'd be going to work in the morning and they would have no troubles.  But they -- they -- it was very easy to do, because it's very tempting to write numbers on little pieces of paper and you can report the profit you want to, and there is no limit on it.  I mean there is no capital requirements to it or anything of the sort.  And basically, I said there were possibly financial weapons of mass destruction, and they had them.  They destroyed AIG.  They certainly contributed to the destruction of Bear Sterns and Lehman.  Although Lehman had other problems, too.

Charlie Rose: 
I'm interested in this because people are asking, did people get away with murder here?  Were there people who simply gained the system and took advantage and made huge amounts of profit, and we had accesses that inevitably led to where we are today?

Warren Buffett: 
Well, we had all of that.  But I would say the biggest single cause was we had an incredible residential real estate bubble.  I mean you can go back to tulip bulbs in Holland 400 years ago.  The human beings going through combinations of fear and greed and all of that sort of thing, their behavior can lead to bubbles.  And it may have had and Internet bubble at one time, you've had a farm bubble, farmland bubble in the Midwest which resulted in all kinds of tragedy in the early '80s.  But 300 million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently.  And that got billed into a $20 trillion residential home market.  Lending was done based on it, and everybody did a lot of foolish things.  And people really behaved in a fraudulent way or something, we'll go back and find the culprits later on.  But that really isn't the problem we have.  I mean that's where it came from, though.  We leveraged up and if you have a 20 percent fall in value of a $20 trillion asset, that's $4 trillion.  And when $4 trillion lands -- losses land in the wrong part of this economy, it can gum up the whole place.

Charlie Rose: 
And it continues with respect to the housing market.

Warren Buffett: 
It continues.

Charlie Rose: 
And some will argue that we have to do something about that in terms of a long-term recovery of the American economy.

Warren Buffett: 
Well, there is no question we have an access stock.  The good thing is, we have household formation in this country.  We have a country where I don't know whether it's a million households a year or more, but good form.  So we can eat off an [unintelligible], but too big, and house prices just soared beyond -- beyond reason in many places and they got financed in silly ways, and people lied about loans, all kinds of accesses entered into it.  But that is what -- that is the single biggest cause of why we're here.

Charlie Rose: 
And should wise people have known better?

Warren Buffett: 
People should always know better.

Charlie Rose: 
Yeah.

Warren Buffett: 
I mean people -- people don't get -- they don't get smarter about things that get as basic as greed and you can't stand to see your neighbor getting rich.  You know you're smarter than he is, and he's doing these things, you know, and he's getting rich, and your spouse is getting unhappy with you because you aren't doing -- pretty soon you start doing it.  And so you get what I call the natural progression, the three Is.  The innovators, the imitators, and the idiots.  And that's what happens.  Everybody just kind of goes along.  And you look kind of silly if you disagree.  I mean, you know, you could have these crazy Internet valuations in the late 1990s, but they prove themselves out in the market.  The next day they were selling for more than they were the day before, and people said, you know, you're crazy if you don't get in on this.  So it's very human.  Now, with housing it's something even more dramatic than that, because most people aspire to own their own home.  And if you really think that houses prices are going to go up next year and the year after, you feel if I don't buy it this year, I'm going to have to buy it next year.  That's not true of an Internet stock.  But it's true of a home.  And when somebody makes it very easy for you to do it by saying you don't really have to put up my money, you can lie about your income a little, or we'll give you 100 percent mortgage, you're going to do it, because everybody that's done it has been proven right.  You have what they call social tools, and, you know, you're going to feel like an idiot if you didn't do it, because the house cost more.

Charlie Rose: 
It's sound money.

Warren Buffett: 
It's sound money, sure.

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