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TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 1

This is part one of the preliminary transcript and video clips of Warren Buffett's appearances on CNBC's Squawk Box on Monday, March 9, 2009.

ANNOUNCER: This is a special presentation of SQUAWK BOX: ASK WARREN BUFFETT. The legendary investor will answer your e-mails, fixing the economy, restoring trust, searching for value. Your chance to connect with the "Oracle of Omaha." Squawk Box begins right now.

BECKY QUICK: Good morning, everybody, and welcome to SQUAWK BOX right here on CNBC. I'm Becky Quick along with Joe Kernen. Carl's off today, but Joe, we have a very special guest with us this morning. We are talking about Warren Buffett. He's here with us, and he is here with us for the next three hours. We are very excited to be spending this time. We are here at the Nebraska Furniture Mart. And, Warren, it's great to have you here. Thank you very much for joining us this morning.

WARREN BUFFETT: I enjoy everything about it except the hour.

BECKY: "Except the hour," and we do appreciate your getting up extra early. We should point out it's 5 AM here in Omaha, so you are quite the trooper for coming out.

BUFFETT: Thanks.

BECKY: I know we've got the next three hours to spend with you, and, in most instances, I might think, three hours is an incredibly long time, but I have to tell you, given everything with the state of the economy right now, three hours may not be enough time. So, again, we appreciate your time with us today.

BUFFETT: Thanks. Mm-hmm.

BECKY: Warren, why don't we start off talking right away about the economy? Because that's what people are wondering right now. What's happening with the economy? We hear all the time from people who are very concerned and, frankly, quite frightened about what's happening right now.

BUFFETT: Yeah. Well, when we talked in September.

JOE KERNEN: Warren, hold on.

BUFFETT: Yeah?

JOE: I'm sorry to break in. Merck and Schering-Plough are merging, Warren.

BECKY: Whoa.

BUFFETT: Hm.

BECKY: All right.

JOE: I'm sorry.

BECKY: Merck and Schering-Plough merging. We thought we already had enough to talk about with you this morning, Warren, but why don't we start off with some news?

JOE: I would never presume to jump in like that on the Oracle; but, I'm sorry, board of directors unanimously approving a definitive merger under which the companies will combine under the name Merck in a stock and cash transaction. Schering-Plough shareholders will receive .5767 shares of Merck and $10.50 in cash for each share of Schering-Plough. Each Merck share will obviously be a--become a share of the combined company. Richard Clark, the chairman, president and CEO of Merck will lead the combined company. This is--this is a real blockbuster and right at 6 AM on a Monday. And I think you'd have to say, Warren, as far as animal spirits, this could be--you know, this may not--this may not solve all of our problems, but it certainly is an endorsement of American business and--in that M&A is alive and well.

BUFFETT: Yeah. Animals spirits are always there. The only question is who has the funds to kind of carry out the ideas that the animal spirits come up with? But, particularly in pharma, they have good balance sheets, generally, and they can make deals.

JOE: I...

BECKY: Are you surprised to see a deal of this size right now, though?

BUFFETT: Well, I'm surprised at any deal this size even now, sure. That's true. It's very hard to make deals for companies in most industries.

JOE: Guys...

BECKY: Joe?

JOE: Yeah. Schering-Plough closed at $17.63, and, at current values, this is $23.61 for Schering-Plough for a total of $41.1 billion for this deal. I guess you'd also have to say that the whole Vioxx controversy. We can lay that to rest now for the them to be feeling comfortable enough to acquire Schering-Plough for $41 billion, but...

BUFFETT: Yep.

JOE: ...this is a pleasant, pleasant ride. And, Warren, you own--you're all over the place with--you own foreign drug companies, you own stakes in--stakes in foreign drug companies and in some domestic companies as well. It's always been one of your favorites.

BUFFETT: But we don't own any Schering, that's why you see these tears coming down my face.

BECKY: What about Merck? Do you own any Merck either?

BUFFETT: No, not any Merck.

BECKY: Not in your private account either?

BUFFETT: No.

Warren Buffett
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Warren Buffett

BECKY: OK. What is...

JOE: What's your biggest holding? You do have some--I know you--what are your foreign drug company that you have stakes in, Warren?

BUFFETT: Sanofi and the biggest one is Sanofi-Aventis , and we have J&J domestically.

JOE: Right. OK. All right, Beck.

BECKY: OK. So, Warren, we're going to talk more about this merger and what this means. I mean, do you expect to see other deals that would come as a result of this?

BUFFETT: Well, every deal does tend to brew another deal, I mean.

BECKY: Hm.

BUFFETT: Particularly with people in the industry. If, you know, if Coca-Cola buys something, Pepsi thinks about something in the same arena.

BECKY: Hm.

BUFFETT: I've been in enough board meetings to hear that. There's a--there's a lot of--every CEO has, you know, has a little bit of that `all the other kids are doing it,' you know.

BECKY: Right. We'll talk a lot more about this, but let's get back to the state of the economy...

BUFFETT: Sure.

BECKY: ...in general as well. What do you see right now? You spooked a lot of people last week when you talked about how the economy was in tatters and would be there for quite some time.

: Yeah. The economy, ever since we talked in September, we talked about it being an economic Pearl Harbor and how--what was happening in the financial world would move over to the real world very quickly. It's fallen off a cliff, and not only has the economy slowed down a lot, people have really changed their behavior like nothing I've ever seen. Luxury goods and that sort of thing have just sort of stopped, and that's why Wal-Mart is doing well and you know, and I won't name the ones that are doing poorly. But there's been a reset in people's minds, and we see that in something like (Berkshire subsidiary) Geico where year after year after year we say you can save some money insuring with Geico, and year after year there's been a certain number of people who have said, `You know, I've got this pal, Rotary Joe, and I've been insuring with him and for 100 bucks, why should I shift?' Every week we're just seeing it build and build. More and more people are calling. Our price differentials haven't widened, our advertising isn't that much different, but the American public really has changed their buying habits. On the reverse side, our jewelry stores just get killed in a period like this. And high end gets hurt the most, next down gets hurt the second most, and the lowest people get hurt the least.

BECKY: What's happening? What--you knew--you told us a while ago, you told us this was an economic Pearl Harbor about six months ago, but did this happen more quickly or more severely than even you expected?

BUFFETT: It certainly happened clofse to the worst case. I mean, you never know what's going to happen, but I would not have--I would not have thought there could've been a much worse case than what has happened. Although, I will say this, the Fed did some things in September when it happened...

BECKY: Mm-hmm.

BUFFETT: ...that were vital in keeping the place going. I mean, when the--if they hadn't have insured money market accounts and, in effect, commercial paper, you know, you and I would be meeting at McDonald's this morning.

BECKY: Instead.

BUFFETT: Yeah. Right.

BECKY: So why do you think consumers have gotten as frightened as they have?

BUFFETT: Well...

BECKY: The fear doesn't like too strong of a word.

BUFFETT: No. They're scared, and fear is very contagious.

BECKY: Hm.

BUFFETT: And I've never seen the consumer or the Americans just generally more fearful than this. And they're also confused. And you can get fearful very quickly, but you don't get confident, you know, in five minutes. You can get fearful in five minutes, but you won't get confident for some time. And government is going to play an enormous factor in how fast it comes back. And if you're confused and fearful, you don't get over being fearful till you aren't confused. I mean, the message has to be very, very clear as to what government will be doing. And I think we've had--and it's the nature of the political process, somewhat, but we've had muddled messages, and the American public does not know what--they feel that they don't know what's going on and their reaction, then, is to absolutely pull back.

BECKY: So there've been a lot of fingers of blame that have pointed in a lot of different directions. But you're saying the message from Washington has been confused or...

BUFFETT: Well, I think it's the nature of things.

BECKY: Right.

BUFFETT: I mean, I think people watch 535 members of Congress each give their view of what every player is doing and all of that sort of thing, and I think that, you know, you had a change of administrations and you're dealing with things that people don't understand. I mean, when you first brought up the term SIV or something like that or when you talk about credit default swaps or you talk about--it's--when the public hears that, they just, they think something's wrong and they don't understand it.

BECKY: And still, this is the worst case scenario from what you had imagined. What went wrong? Why did we wind up in that worst case scenario?

BUFFETT: Well, we went wrong originally because we had a belief that--and everybody had the belief. I had it, the government had it, mortgage lenders had it, borrowers had it, media had it, everybody thought house prices could go nothing but up and--or at least they couldn't go down a lot. And once you had that belief--and it was nationwide--it didn't make any difference what you lent on the house because if the guy couldn't pay, you'd sell it at a profit anyway or you wouldn't lose much money. So you had 11 trillion of residential mortgage debt built on this theory that who was borrowing it, what their income was really wasn't that important because the house itself had to go up in price. And when that tumbled and houses which might've been worth 22 trillion at the peak are worth maybe four or five trillion less, A, it's a huge amount out of people's net worth. It's the biggest asset most people have. And then secondarily, all of these instruments that were built on it, which people didn't understand too well, started toppling to various degrees in value and then that exposed other things. I mean, it was like, you know, some kid saying, `The emperor has no clothes.' And then after he says that, he said, `On top of that, the emperor doesn't have any underwear either.' You know. I mean, various layers have been--and they interact. When people get scared, they change their buying habits. When they quit buying as much, people lay off. We are in a very, very vicious negative feedback cycle. It will end, but, believe me, I mean, I don't want this to be the last line of the movie, the last line of my annual report that America's best days lie ahead. And we can talk about why that is, but--and that is the final answer.

But how fast we get there depends enormously on not only the wisdom of government policy, but the degree in which it's communicated properly. People--when you have a Pearl Harbor, you have to know the nation is going to be united on December 8th to take care of whatever comes up. And we have little squabbles, otherwise we put them aside and everybody goes to work on defense plans, we start building planes, we start building ships, even though they're not going to be ready tomorrow, people join. The Army doesn't blame the Navy because there were too many ships in Pearl Harbor, and it shouldn't have happened. The Army doesn't say, `Well, it was your fault, so we're not going to send our troops.' None of that sort of thing. We got united, and we really need that now.

BECKY: Do you think that there has not been that to that extent? There's not enough of the united front right now?

BUFFETT: Yeah, I think--and I can understand why because, economically--Pearl Harbor itself, you knew exactly what had happened and we wiped out a good bit of the fleet and all of that and people knew in a general way what had to be done and they knew who they had to respond to a leader who was unquestionably the commander and chief. And so you didn't have--start congressional hearings on December 8th, you know, that were going to last for weeks while all of the commanders and the various people were in various ways pilloried or taunted or whatever about `Why in the world did they let this happen?' and the Republicans didn't say, `You Democrats have been in since 1933, and it's all your fault.' None of that. I mean, people said, `We've got to get something done.' And they--and they trusted their leadership to do it and put aside mostly the partisan stuff and the--and we went--and everybody, incidentally, felt we'd win the war, even though we, you know, for the first six months, we were--Corregidor fell and we had the death march of Bataan, all kinds of--there was terrible, terrible news, but we knew that if we stuck together and we followed leadership, we would--we would prevail.

BECKY: We're going to have a lot more time to talk about solutions this morning, but in terms of the economy, where do you think it goes from here? What's the best case scenario and the worst case scenario?

BUFFETT: Well, it can't turn around on a dime. That doesn't happen. I mean, it--a lot of stuff works this way. When 600,000 more people become unemployed last month, that not only affects those 600,000, it affects them terribly, but it affects everybody else. They get scared about losing their jobs. The percentage of people are scared about losing their jobs in this country is way higher than the actual numbers that are going to lose them, but they're behaving in an entirely different manner. I mean, they are not--they are not going to go into a--even at Costco or Walmart, their jewelry departments are way down, but other departments are up. People, they started saving money. For years we told them to save money, and now they're saving money, and that's a double whammy. So we've had this great economic machine like nothing the world's ever seen, and it started sputtering a little, and we said, `Well, maybe we should kind of slow it down and see what happens.' And it sputters more. And what we may not realize is that there's interaction, that the slower you run the machine at, the more it sputters. So it's a job to get it working again, and it won't happen fast, Becky, I mean--and unemployment will lag at the end, the actual turn around.

BECKY: We're already talking about unemployment at 8 percent. Where do you see it headed?

BUFFETT: I can't name a number because, frankly, it depends to an extent on the wisdom of government policies. It's going to go higher. It's probably going to go a fair amount higher, but on the other hand, five years from now I can guarantee you that the machine will be running fine, but I'd like to get there a lot faster than five years. And we can.

BECKY: And, Joe, did you want to jump in here, too?

JOE: I want to--you just said something interesting, Mr. Buffett, and that is it depends on the wisdom of our policies. And I understand, you know, in a time of war everyone rallying behind the commander and chief. But, obviously, there are differences on what the wisdom of our polices should be from here on out. Now, the "loyal opposition" is going to be about, as it's called, will be behind the president, but certainly you could see that if we--if people think there's some wrong-minded policies that are being rushed into law at this point because of the crisis, I mean, that's--it's the loyal opposition's duty to say what they feel, right?

BUFFETT: Right. And, Joe, it--if you're in a war, and we really are on an economic war, there's a obligation to the majority to behave in ways that don't go around inflaming the minority. If on December 8th when--maybe it's December 7th, when Roosevelt convened Congress to have a vote on the war, he didn't say, `I'm throwing in about 10 of my pet projects,' and you didn't have congress people putting on 8,000 earmarks onto the declaration of war in 1941.

BUFFETT: So I think--I think that the minority has--they really do have an obligation to support things that in general are clearly designed to fight the war in a big way. And I don't think you should--I don't think before D-Day on June--on June 5th you ought to have--or June 1st, maybe, have a congressional hearing and have 535 people give their opinion about where the troops should land and, you know, what the weather should be and how many troops should land and all of that. And I think after June 6th you don't--you don't have another hearing that says, `Gee, if we'd just landed a mile north.'

JOE: Yeah, but you might--might not have fixed...

BUFFETT: But I say...

JOE: You might not--you might not have fixed global warming the day after--the day after D-Day, Warren.

BUFFETT: Absolutely. And I think that the--I think that the Republicans have an obligation to regard this as an economic war and to realize you need one leader and, in general, support of that. But I think that the--I think that the Democrats--and I voted for Obama and I strongly support him, and I think he's the right guy--but I think they should not use this--when they're calling for unity on a question this important, they should not use it to roll the Republicans all.

JOE: Hm.

BUFFETT: I think--I think a lot of things should be--job one is to win the war, job--the economic war, job two is to win the economic war, and job three. And you can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat. So I would--I would absolutely say for the--for the interim, till we get this one solved, I would not be pushing a lot of things that are--you know are contentious, and I also--I also would do no finger-pointing whatsoever. I would--you know, I would not say, you know, `George'--`the previous administration got us into this.' Forget it. I mean, you know, the Navy made a mistake at Pearl Harbor and had too many ships there. But the idea that we'd spend our time after that, you know, pointing fingers at the Navy, we needed the Navy. So I would--I would--I would--no finger-pointing, no vengeance, none of that stuff. Just look forward.

ASK WARREN TRANSCRIPT CONTINUES WITH PART TWO

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