Warren Buffett Watch

Warren Buffett:

Yeah, I think you’ll have plenty of scrutiny as how the money’s invested.  I mean, just like the RFC.  When the RFC operated, people knew which institutions they were buying preferred stock in.  And it worked very well.

Charlie Rose:

But is this different from the Resolution Trust Company because they are talking about securities, not real estate?

Warren Buffett:

Yeah, well Resolution Trust Company was set up to liquidate a bunch of assets that the government had inherited because the savings and loans went broke.  So the savings and loans went broke, the government stepped in, paid off depositors, and now they’re left with this mass of assets to sell.  We’re not talking about selling here, we’re talking about buying intelligently.  They were selling what they got handed to them by a bunch of savings and loan operators that had in many cases had done some very dumb thing.  But their job was to liquidate it.  And they liquidated.  This is an entirely different proposition. 

Charlie Rose:

You have said to me before that capitalism is not a perfect system.  It may be better than all the other systems, but it’s not a perfect system.  You talked about it in terms of some of its failings.  People are looking at this now and saying, you know, excesses of capitalism, number one, markets that don’t work.  And there’s some people in certain countries are pointing a finger at us and saying, “See, we told you, the markets will not always deliver for you.” 

Warren Buffett:

Markets aren’t -- people do, as long as you have markets, you’ll have excesses.  People went crazy with tulip bulbs.  They went crazy with the South Sea Bubble, they went crazy internet stocks, they went crazy with the uranium stocks back when I was first getting started.  I mean, you know, you’re not going to change the human animal.  And the human animal really doesn’t get a lot smarter.  Now, you can you know you can have institutions that put curbs on that in various ways, and actually what the banks, you know, they have various capital ratios and that sort of thing, but the banks got around them, I mean, they set up sieves and that sort of thing just to get more leverage.  People love leverage when it’s working.  I mean, it’s so easy to borrow money from a guy at X and put it out at X [inaudible].

[talking simultaneously]

Charlie Rose:

-- going up, you’re --

Warren Buffett:

Yeah, but you don’t get the X plus one back, if you still have the X on the other side you’re in trouble.

Charlie Rose:

There is this, too, accounting.  You have strong feelings about accounting and mark [spelled phonetically] to market.  Tell me where you are on that issue.

Warren Buffett:

A lot of people disagree with me on this, I believe in mark to market.  I think that accounting in 1974 Charlie, it was either 1974 or ’75, we owned a bunch of common stocks at Berkshire Hathaway.  I told our shareholders what the market was.  And we used that.  I said I think these things are worth a lot more than market.  And I think we’re going to make a lot of money out of it.  But this is what they’re worth today.  And I don't think anybody gets hurt by telling the truth on that sort of thing.  And I think that once you start saying we’re going to peg these things at some price that isn’t market, God knows what a financial [talking simultaneously].

Charlie Rose:

[inaudible] these people make that argue against you will say the assets are worth much more than mark to market says and therefore --

Warren Buffett:

They’re not worth it today.

Charlie Rose:

-- therefore we’re not seeing a reality.

Warren Buffett:

Well, but that is the reality.  And that’s the reality of what they’re going to sell them to the Treasury for.  You know, I --

Charlie Rose:

You get market.

Warren Buffett:

You get in a lot of trouble when you start putting fictitious numbers --

Charlie Rose:

On value.

Warren Buffett:

-- on value.  I mean, you can explain the fact that these are depressed prices, you know.  We think these assets are going to be worth a lot more.  And I think that case can be made in certain situations.  But I think to just say, you know, we're going to say a dollar of cash is worth $2 all of a sudden, it isn't worth $2.  It's worth a dollar today.  And I think once you start putting phony figures into financial statements, you get in a lot of trouble.  And we've seen so much of that in the last 20 years.

Charlie Rose: 
Is it getting worse?

Warren Buffett: 
I don't think it's getting worse.  I think people -- what people want to do is make it get worse.  [laughter]

Charlie Rose: 
But what would you reform about that in terms of the way the accounting process -- you'd keep mark to market?

Warren Buffett: 
The rule [unintelligible].  I mean it's -- it's a nightmare to administer some of this sort of thing, but I want to tell the shareholders of Berkshire, to the percent we own marketable securities or things for which there are market, even if those markets -- I want to tell them what it's all about.  As a matter of fact, I've already written a section in the annual report for next year explaining why I think in one case that the figures on our balance sheet as calculated are wrong.  But it's the standard way of doing it.  It's holy writ.  The SEC wants us to do it that way, and we'll do it that way, and I'll explain why I think it's wrong and shareholders can read it and see whether they agree with my logic or don't.

Charlie Rose: 
You -- when you look at the prospects for this country, there are other people who argue, you know, that America, as good as it is, lives in a world today and there are books being written in which our supremacy, our primacy will now have to be shared.  That we may still own as much of the pie as we had, but other people will own a lot more.

Warren Buffett: 
That's great.  You know, I want our -- I want our pie to grow all the people, but if some other guy's pie is growing a little faster, that's terrific.  It will be good for us in the long run, and I mean there are, you know, six and a half billion people in this world.  And it's great for 300 million to keep enjoying more and more property, but I think it's terrific if, you know, the remainder do.  And I think if they can learn something from us in terms of our system, and I think they have, they are learning more about how to unleash the potential of their citizenry to turn out more goods and services that their citizens want or that we want, I think that's terrific.  And that's -- you know, I think it's much better to live in the world where those around you, particularly when some of them have nuclear bombs, I think it's much better to live in a world where their lives are getting better also.

Charlie Rose: 
Yeah.  But you mean you look at that.  So when you look at China today, and you look at some Asian countries and the amount of American debt they have, how much does that concern you in today's economic circumstances?  And are they losing some of their confidence in America?  And does that pose a huge problem for us?

Warren Buffett: 
Well, somebody's buying these treasury bills at 1/20th of one percent.  I mean the -- we -- [talking simultaneously] consuming about $2 billion a day of goods and services beyond what we're producing.  In other words, the rest of the world sends about $2 billion a day net of something.  We got to send them something in return, don't we.  So we send them little pieces of paper.  That would be nice if they stuck them all under a mattress, but they got to buy something with them.  Sometimes they buy a treasury note, sometimes they set up sovereign wealth funds.  They can do all kinds of things.  They can buy our companies here.  As long as we consume more than we produce, and we trade away little pieces of the country daily, they're going to own something.  Now, they can't run from American assets.  I mean every day the rest of the world is going to have about two billion more of American assets than we have, as long as they sell us these goods.

Charlie Rose: 
Because we're borrowing two million dollars --

Warren Buffett: 
Yeah, and they want to sell us these goods.

Charlie Rose: 
But you don't believe that's good.  I mean you believe that an increasing current accounts deficit is bad.

Warren Buffett: 
I think it's bad.

Charlie Rose: 
And it reflects American's consumption ideas rather than its savings ideas.

Warren Buffett: 
Yeah.

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