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TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 3

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

Previous transcripts:Part One, Part Two

BECKY: The front page of the (Wall Street) Journal today, Warren, says that some of the progress we've made in the credit markets has been backsliding. It's been going away. LIBOR rates have been inching higher once again. Have you seen that as well in the credit markets?

BUFFETT: Yeah, I've seen that. It's not like it got a worse of the situation in September, but when people lose confidence, yeah, I don't care whether they're big shots, you know, running big companies, or big banks, or whether they're the guy on the street, they behave exactly the same way. I mean, this goes back to the human--you know, the "Naked Ape" type of thing, reaction. The fear or flight stuff comes in and where they flee is something this government guaranteed. And you've seen it, yeah, and you'll continue to see it. They have--people have to be confident. The system doesn't work without confidence and they are--they're not confident now and they are confused and the government has to speak with real clarity. Government's done a lot of good things in terms of the banking system...

BECKY: Mm-hmm.

BUFFETT: ...but frankly when you have changes of administration, when you have--when you have 535 members of Congress criticizing maybe various policies and maybe taunting even people, the reaction of the public to that is, you know, `I'm going to go to something this government guaranteed,' and the world won't work if that continues to be the case.

BECKY: Well, let's get back to that, though. How could the administration possibly rein in 535 members of Congress, not to mention it's a 24-hour news cycle and we put just about anybody and everybody on to spout their views?

BUFFETT: Well, I think that the first--you have to recognize that it is an economic Pearl Harbor. If you don't believe that, then why should members of Congress not, you know, why shouldn't they throw in 8,000 earmarks or do what they've been doing? Congress, and I think I said this six months ago, I mean, they're a patriotic group of people. I don't think maybe they understood fully, some of them, the gravity of the situation and what is required. What is required is a commander in chief that is looked at as being the commander in chief in a time of war and the support that generally he needs and other things that have to be given up. When we get all this solved and go back to yelling at each other, you know, and putting in pet projects and doing all that sort of thing. But for the time being we should put that, as much as we can, aside and then frankly, nobody but the president now will be believable to the American people.

I mean, you can't--people have heard--they don't--names like Paulson, Geithner, Bernanke, those--that's just a muddle to them. The only authoritative voice in the United States who says, `This is what we're going to do, this is what we're not going to do,' and very specifically, is the president of the United States.

BECKY: Joe:

JOE: Yeah, I--really quickly on that--on that Merck dividend I want to--I said they're going to try. They're committed to maintaining it. I'm hearing from work--or from Merck. They're committed to maintaining that dividend. So it's about 6.7 percent.

I want to get back quickly, Mr. Buffett, we were talking about this article in the Journal. Look at your Berkshire AAA bonds, look at General Electric, which is still AAA. Look at those bonds. Look at Goldman Sachs bonds. The thrust of this piece is that when you're not sure what the government's going to do eventually to fix things, even senior debt holders aren't sure that they'd end up with the assets of the firm. How do you expect this to work itself out? What does the government need to do? You--Mr.--or President Obama needs to speak for the government obviously, but we're not really sure how--you know, what steps are going to be taken in the financial system.

BUFFETT: Well, if I've got just a minute, I'll back up a little. In the 19th century you had at least six huge financial panics. They were--and they caused in many cases by people losing confidence in banks. So if somebody lost confidence in a bank in Omaha they got in a line and as soon as somebody got in the line at the First National there was a line at the Second National and so on. We learn time after time--and they called them panics. The reason they called them panics was because if you went to the bank and couldn't get your money out you panicked. And that same situation will continue to exist forever. People, if they've got their money someplace and they get worried about it they want to get it out fast and if they see other people wanting to get it out, they want to do the same thing. So along came the 20th century. We put in the Fed and we thought that would calm down people. But when the '30s came along, we recognized that without faith in the banking system this economy was never going to get well. So we formed the FDIC. Now, this is an interesting group of pages here. This has 3600 banks that the FDIC has assisted. Three thousand six hundred. There's only about 7,000 banks in the United States, another 1400 savings institutions. No depositor of an insured deposit has ever lost a penny since 1934. It was a huge factor in making this economy work to be one of the greatest--well, the greatest economy that's ever existed. Thirty-six hundred times the FDIC has come in. In the last year, they have moved, I think, something close to 8 percent of the deposits in the United States. It hasn't cost the taxpayer one dime, no depositor has lost one dime. Now, what the American people have to be sure of is that when organizations as big as the ones that have been in the news, like a Citigroup...

BECKY: Right.

BUFFETT: ...where people know the FDIC can't come over and move it to the Second National Bank of Omaha or something overnight, they have to be sure that all deposits, really, all debt liabilities of Citigroup are going be met. There's--and the truth is we're going to do that. People say they're too big to fail, but you really need somebody that's totally authoritative who can say, `Just forget about the problems of ever worrying about having your money or actually a debt instrument of a bank.' It's too important that--to be left ambiguous on that subject. And all of the--the FDIC's raising more money now. But the FDIC will take care of banks. They talk about nationalizing banks, they nationalized for a nanosecond 20 banks this year, roughly 20 last year. They moved it overnight, it's all working fine. Nobody loses a dime. And people have to feel that way about the entire banking system. And if they don't, we will have--you'll have more articles like the one you talked about in the Journal.

BECKY: Yesterday, Senator Richard Shelby and Senator John McCain both made comments on the morning news programs and said things to the extent that they should let some of these banks fail. "Close them down, get them out of the business. If they're dead they ought to be buried," Shelby was commenting.

BUFFETT: Here's 3600. Not all of these got--but overwhelmingly these did die and get buried. And we have had--we had one over the weekend in Georgia, I believe. We had about 20 this year, we had 20 last year. The peak year we had over 500 and the country went on fine because they didn't panic about banks. So there's no question that a bank that's going to go broke should be allowed to go broke. You know, the thing you have to make sure of is that the people that gave their money to that bank--the shareholders can get wiped out. The shareholders have gotten wiped out of thousands of banks over the years. That--but...

BECKY: Shelby also said those Citi has also been--has always been a problem child. Can you do that with a bank the size of Citigroup ?

BUFFETT: Well, Citi is--Citi's probably going to keep shrinking, but in the end nobody should be worried about having their money in Citi. On the other hand, there's really no moral hazard to that. When your stock goes from $50 to $1, I don't think you create way more moral hazard than when it goes from $50 to zero. I mean, you know, we have a system that penalizes enormously the shareholders of banks where the management screw up. But we have to make it very clear, you know, no Fed-speak type stuff or anything. We have to make it very clear that people are not going to lose money. That doesn't say they're not going to fail. We're going--we're going to have--we'll have more pages of this stuff as we go along. It's the nature. But we provided for it.

BECKY: Welcome back to this special edition of SQUAWK BOX. We are live at the Nebraska Furniture Mart with Warren Buffett and we've been getting thousands and thousands of e-mails from our viewers. Warren, we'd like to start with one that echoes a theme we heard again and again. This comes from Terry in San Antonio, Texas, who asks, "Will everything be all right?"

BUFFETT: Everything will be all right. We do have the greatest economic machine that man has ever created, I believe. We started with four million people back in 1790 and look where we've come and it wasn't because we were smarter than other people, it wasn't because our land was more fertile or we had more minerals or our climate was more favorable. We had a system that worked. It unleashed the human potential. Didn't work every year, we had six panics in the 19th century, in the 20th century we had the Great Depression and World Wars, all kinds of things. But we have a system, largely free market, rule of law, equality of opportunity, all of those things that cause the potential of humans to get unleashed, and we're far from done. So I think your kids will live better than mine, your grandchildren will live better than your kids. There's no question about that. But the machine gets gummed up from time to time and it's--if you take the bulk of those centuries, probably 15 years were bad years, but we go forward.

BECKY: Which brings us to another question. A lot of people have been trying to figure out is this different from what we saw back in the Great Depression. I'm going to jump ahead to one from Dan from Shohola, Pennsylvania, who asks a question very pointedly about this. "How is the market better off today than when we were in the 1929 to 1933 period?"

BUFFETT: Well, we certainly--it's different. I mean, there's a lot of similarities between all recessions or in this case depressions or call them panics like they did back in the 19th century, and there's always differences. One key similarity is that there was a paralysis of confidence in banks and--which is silly now because of the FDIC. I mean, we--but if you went back, my dad, on August 15th, 1931, worked at a bank and he went there and it was closed and he had no job and he had his savings--small savings in there. I mean, if you don't trust where you have your money, the world stops. And they recognized that, but it was a little belatedly. They didn't put in deposit insurance until it was started in 1934 in the Glass-Steagall Act. We have a system that's far better organized to deal with that.

The trouble is that a lot of people don't believe in the system. It needs to be clarified. Actually, the head of the New York Fed, Mr. (William) Dudley, on Friday, you can go to their Web site and read it, he describes it perfectly. But nobody's going to listen to Mr. Dudley very much throughout the United States. The people coming to Furniture Mart today don't know who he is and they're not going to go to his Web site. You really need--you need the president of the United States enunciating it.

BECKY: Enunciating it. It seems like Barack Obama talks pretty frequently about what he sees, what he'd like to have happen. What's wrong with the message that he's put out to this point?

BUFFETT: Well, I don't think there's anything wrong with the message at all and I think he's--he speak wonderfully, but I think--and I think there should be--there's a necessity that Congress takes the attitude that this is a war and that he is the commander and chief and that--and that a lot of the normal things that go on in Washington are really inappropriate in this setting. But I think--I think basically that it has to be as clear as possibly can be made, and I think only the president can do it, that no one, and, you know, the FDIC limit is $250,000, but I think--I think absolutely that no one should be worried about having their money in a bank in the United States or actually owning their debt.

BECKY: OK. You talk about how this was an economic Pearl Harbor. Dan from Spring Lake Heights in New Jersey writes in, he wants to know was our financial system just hours, days away from collapse?

BUFFETT: In September, I think it was. If there was a week where 200 billion, as I remember, in the first three days or so poured out of the money market funds, which had about 3 trillion in them, the money was just gushing out when Reserve broke the buck. That meant that the commercial paper market was disappearing. You know, the blood was being drained from the American economic body and we had some very prompt, wise, action. Chairman Bernanke, the Fed, I mean, they stepped in and said the commercial paper market is going to work. That made a huge difference. People came in and said the money market funds, you know, you weren't going to lose money in money market funds. They said the same thing about money market funds we should now say about the whole banking system. And actually, we've said it in various ways. If you read that Federal Reserve New York chairman speech, it says it, but it doesn't say it the way the American people will get it. The president of the United States has to say it very clearly that you just don't have to worry about that.

BECKY: Joe?

JOE: Yeah, thanks. Returning for one second, Warren, you know, when you speak, the wires just start hitting. I'm going to read two of them to you. One is "Buffett says that the parties need to unite behind Obama." Then the next one is, "Dems should--Buffett says that the Democrats should keep pet projects out of the economic rescue efforts." It just seems like it's nice to say we all need to get along, but we're right back where we started. Who's more at fault here? Is it 50/50?

BUFFETT: Well...

JOE: Did the Dems put too much in or is it just more partisanship from the Republicans?

BUFFETT: Well, I have--I have taken a vow not to point fingers at anybody. I have taken a few--I have taken a few swipes in the past. I will just say that patriotic Democrats, patriotic Americans will realize that this is a war and if they didn't realize it immediately, I can understand it. It's not--it's not as dramatic as a physical war where the news comes over and you know you're under attack. But it is--it is virtually as serious and I think that once the degree of that seriousness becomes apparent to both parties, I think they will--I think overwhelmingly they will behave well. But that does mean that the Democrats have to behave just as well as the--you can't ask the Republicans to cooperate in the spirit of this and then at the same time try and steamroll them on a whole bunch of other things. You ought to agree that this is the job to get done and when we get done, that doesn't mean you don't do anything else in government. But in terms of the contentious things, just let them wait until we get the economy working. Because if we don't get the economy working...

JOE: Yeah.

BUFFETT: ...just forget about the other things.

JOE: There's the rub. There's the rub, though, Warren. You know, there's where we need details on what is absolutely essential and what isn't. And that's where the contentiousness comes in, unfortunately. We--can you just go down...

BUFFETT: Well...

JOE: Can you go down the list of things and say we need this, we don't need this, we need this, we don't need this, we need this and then we can send it to...

BUFFETT: Right.

JOE: We can send it to Washington so I can say Warren Buffett says this?

BUFFETT: We need clarity on the financial system, on exact--on what will be done. And bank--incidentally, regulators hate that. When I ran Salomon (in the 1990s), I told everybody, don't ever say we're too big to fail. I mean, it's like waving about 12 red flags in front of a bull to say that to a regulator. He doesn't want to be told he doesn't have any choice. So it's a--it's a phrase they hate to use. I can understand that. But the answer is, the American banking system, overall, is too big to fail and you have to apply that. And incidentally, we have quasi-banks that have very large liabilities and where they would impact the system dramatically if left alone. It may be unfortunate we have them, it may be that we need corrective legislation so it doesn't come up again, but we have to deal with the situation we have now. And frankly, that was recognized in AIG. I mean, everybody hates, you know, what they had to do in that, but the problems they would've had if they just said, `Well, this isn't a bank and the hell with them, they made their mistakes,' that's crazy. We have to deal with all large quasi-financial institutions as well as all of the banks and people can't be worried about them and we can't have a contagion like we almost had in September. I mean, the world did come almost to a stop in September.

BECKY: One person wrote in and this e-mail is one we had prepared for later, but somebody asked about Glass-Steagall. Should it be brought back?

BUFFETT: Well, I think there--you need legislation. I mean, whether it's exactly Glass-Steagall. Glass-Steagall brought in the FDIC. It was a wonderful thing. We need banks to get back to banking. I mean, we have learned that handing these people, you know, exotic instruments and all kinds of ability to do things off balance sheet and this desire to improve your earnings a little every quarter, you can't run a financial institution and show nice, smooth growth and earnings. One way or another, you're going to cheat. And there was a lot of that that went on and we need--we need banks to get back to banking. But we need to get through this situation. We should not be giving lectures to people. And incidentally, the one thing that's very important now is banks--and this may come as a surprise to you. Banking has never been better in one sense. I mean, the banks are getting their money very cheaply, deposits are coming in, spreads have never been wider, all the new business they're doing is terrific. They will earn their way out of it, in most cases, overwhelming number of cases. And they should not be spooked by the idea they're going to have to issue tons of stock at some very low price under the circumstances where the very actions of--that that may be coming keep pushing down the price. So that's spooking, you know, people in the banking business. But the banks can earn their way out of this. I mean, the average cost of funds for Wells Fargo, for example, the fourth quarter last year, was 1.44 percent. I can earn money with money at 1.44 percent. I mean, it's cheap. It's abundant and the spreads are terrific.

BECKY: But Warren, you say that as a way of reassuring shareholders, people who should be looking at the financial system, people who are worried about it. But how do you say that without stoking populist anger, that the banks are making money hand over fist? Why should we keep helping them out?

BUFFETT: Yeah. Well, the ship builders made money during World War II. I mean, you know, I--nobody went around saying Henry Kaiser's making too much money because he's turning out all these ships, or Curtiss-Wright's making too much money because they're turning out plane. They did put in excess profits taxes and all that thing. That was fine. But the focus was on what do we need to do? And if that's kept in mind and Joe asked me about these comments, I am--I am going to take no shots at anybody. It just isn't important. The important thing is we do the right thing going forward.

BECKY: All right. Let's hold that thought, and Joe, we'll be back in just a moment with more.

ASK WARREN TRANSCRIPTS AND VIDEOS CONTINUE WITH PART FOUR

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