Getting Past ‘Pearl Harbor': Ask Warren Transcript - Part 1
BUFFETT: It doesn't. It probably won't change the spread much because most banks, particularly larger banks, tend to be fairly asset and liability neutral. They have about as much that's going to fluctuate in terms of rate on the asset side as they have on the liability side. So, if their liability side goes up 100 basis points in terms of what they're paying for deposits, the chances are the loan side is about that much is getting adjusted as well. So it has an effect to a moderate degree, but it's not a big element.
BUFFETT: It's tougher--it's tougher for the customers, though...
QUICK: It is.
BUFFETT: ...the higher the rates go, obviously.
QUICK: It is, it is. Joe: q
KERNEN: Thanks. Like I think back to the--what--some of the stuff you said, Warren, about how you wish you had done even more, and I guess you're talking about in the investment in Goldman, I think about that, the investment in GE, but I think about all the ones you passed up. You passed up some companies that are gone, and it would've been bad if you bought Bear Stearns, some of the falling knives, Lehman Brothers, things like that.
KERNEN: You passed up some companies that are gone, and it would have been bad if you bought Bear Stearns, some of the falling knives, Lehman Brothers, things like that.
KERNEN: So when you finally stepped in, that was the right time? You wish you had a, what'd you say, a swimming pool instead of a thimble? But...
BUFFETT: Well, yeah, you want to be out there with a bucket, not a thimble.
KERNEN: Yeah, a bucket. Or a swimming pool, in that case.
BUFFETT: Well, that--yeah, that's true.
KERNEN: Could you have--realistically, with risk reward in mind, could you have done more? And what would you have done, looking back on it? Give me some of the--would you have bought more Goldman, more GE, American Express? What would you have done right at that time?
BUFFETT: Well, if I'd done it perfectly, I would have been buying about a year ago instead of--instead of 18 months ago in terms of the big money. I mean it was just about a year ago on the show that the Dow and the S&P hit the low. And so I was premature on some purchasing. Corporate bonds and municipal bonds in the first quarter of 2009 just got ridiculously cheap. I mean, access to the market just almost disappeared for companies. So you had--well, you had a Harley-Davidson issue that was priced in January which we got 15 percent on, and then they sold another issue in less than a year at, I think, 5-3/4 percent. Well, that, you know, that is a--that's huge in markets. So I was early. And by and large, we always--we never--we never want to take any chances at Berkshire, so we always wanted to have about $20 billion on hand. We--you know, you never knew exactly what was going to happen, so.
KERNEN: Yeah, me, too. All right. Don't you, Carl, typically want...
QUINTANILLA: Well, he calls 20 billion a pittance.
KERNEN: Yeah, but, you know. You want to have some...
QUINTANILLA: Imagine that.
KERNEN: You want to have some liquidity. So, I mean, you want to have that--that's typically the number I use, too, Warren.
BUFFETT: It--we want...
KERNEN: I mean.
QUINTANILLA: Petty cash.
KERNEN: That's a good number.
KERNEN: We all agree on that.
BUFFETT: It--it's a yardstick. Yeah. But when you get over 20 billion, Joe, go out and spend it.
QUICK: Well, you have 20 billion right now.
QUINTANILLA: Don't worry about that.
QUICK: How quickly do you start adding back with the cash flow that the businesses kick off with some of the other situations? I mean, how fast do you build that back up?
BUFFETT: Yeah. Well, if we earn--and not making any projections, but you'd certainly expect in a normal year, with our present businesses or even a little subnormal, you know, we earn 9 billion or something like that. And our float in insurance has tended to grow. It grew about 3 billion last year.
BUFFETT: So that--if--you know, that means 12 billion there, assuming nothing--no securities mature or that nothing comes in from sales. So we get replenished fairly fast. But in this world, anybody that depends on anyone else for huge money is making a mistake. We never want to be in a position where we have to look to anybody else to--for our checks to clear. So that...
QUICK: And you've proved that with this last huge downturn in the economy. I mean, in 2000...
QUICK: ...2008, everybody was looking around for cash. Berkshire was one of the few places that was actually providing liquidity.
BUFFETT: Yeah, we--they--we had money, and there were some other people that had money, probably, but that were afraid to use it. We're never afraid to use it. But we are afraid to use money that we might need under the most extreme circumstances. I envision a situation where the stock markets close. Now, in your lifetime, the only time it's closed for any length of time was after 9/11.
BUFFETT: But if you go back to 1914, my friend Kay Graham's father, Eugene Meyer, they closed the stock exchange for months. You never know what's going to happen in finance, and you--you've got to be prepared for extraordinary things. And if you're going to last a hundred years, it means you have to last every day of the a hundred years. It isn't good enough to last 99.9 percent. So we're prepared for that.
QUICK: OK. Warren, we have a lot more questions to get to. We have to still ask you about what you think about Coca-Cola's deal. But if you're willing to stand by for a minute, we're going to get to some of the other top headlines of the morning.
BUFFETT: I'm not going any place.
QUICK: OK. So why don't--why don't you tell us about some of those things, and then we'll get back to more questions with Warren.
KERNEN: All right, let's get to some of these top stories.
QUINTANILLA: You got--you got something to add, Beck?
QUICK: Yeah. Actually, we were just listening to what you were talking about with the earthquakes, and Warren mentioned that they write earthquake insurance, too, and thought maybe we could get his thoughts on what happened with Chile over the weekend, too.
KERNEN: Yeah, that's a...
BUFFETT: Well, you're right about that--about a nine being a hundred times what a seven is. The power is just unbelievable. If you go back to the New Madrid quake in the United States back in the early 1800s, the Mississippi ran backwards and church bells in Boston were ringing from it. So earthquakes have enormous power. But I--most of our earthquake exposure's in California, and I have a sister that lives in Carmel, and I tell her to call me anytime the dogs and cats start running in circles so that we can cancel all the policies.
KERNEN: You have to move fast.
QUICK: Over the...
BUFFETT: Yeah. No, but she's on her toes.
QUICK: You know, over the weekend, though, with any of the stuff you said, mostly it's in California and beyond. But California was under a tsunami watch. Does that cover--are you covering those things, too, if it was the--if it was the aftereffect of an earthquake?
BUFFETT: Well, it's interesting. The--one of the--we have a big policy on something called fire following a quake. And the terminology in the quake business is the losses come from shake and bake. And the shake cost is covered by your earthquake policy, and the bake is covered by your homeowner's fire policy. A lot of people don't have an earthquake policy. So they have a great incentive to say that their house went from a fire and not from the quake itself. But, you know, in the San Francisco earthquake it was caused by fire.
QUICK: Yeah, exactly.
BUFFETT: I--if you have a big quake--the Pacific Northwest is vulnerable to a very big quake, too. But, really, the Midwest is very occasionally.
BUFFETT: There was some itinerant preacher wandering around about 15 years ago saying that there was going to be a huge quake in the Midwest. People actually bought a lot of policies based on that. I'd like to find that guy so we could send him out again, because...
QUICK: Well, there's a minor--there was a minor earthquake in Chicago just a few weeks ago.
BUFFETT: Yeah, exactly. Oh, they're going to happen every place.
BUFFETT: I mean, this globe has got a lot of potential.
KERNEN: So he was an itinerant preacher walking around saying there was going to be a quake, like the end is near, or?
BUFFETT: Yeah, like December 11th, you know, 1992. And people ran out and bought policies. I mean, this guy was not an underwriter.
KERNEN: No, he's--he--I think he's moved on, he's got a global...
QUINTANILLA: He's now working for Geico.
KERNEN: He's working for Gore now. No, he's got a global warming sign, "The end is near," I think. He's moved on. That's a lot more...
QUINTANILLA: You saw the op-ed over the weekend?
KERNEN: I certainly did. I certainly did. I...
QUICK: I thought we were going to get into this.
KERNEN: `I swear it's true, I swear!'
QUICK: Al Gore had an op-ed in The New York Times. You saw it?
BUFFETT: I saw that.
QUICK: Oh, you saw it.
KERNEN: `I swear it's true!'
BUFFETT: Well, you saw that--there was a section in the Berkshire report called "An Inconvenient Truth" this year.
QUICK: Yeah, but it's referring to the warming in the--too much heat in the boardroom...
BUFFETT: In the boardroom.
QUICK: ...not in the other places and around.
BUFFETT: Yeah, right.
KERNEN: Of course, yeah.
QUICK: You know, Warren, I'd like to get to a few questions that people have sent in regarding Berkshire shares.
QUICK: And what they read in the letter and questions that they additionally have. One question came in from Dan O'Neil in Brookline, Massachusetts, who said, "When Lou Simpson retires," he's currently in his 70s, "who will manage Geico's surplus?"
BUFFETT: If Lou were to retire tomorrow, I would manage it. Lou has done a magnificent job of running Geico's investments for over 20 years. And when we bought Geico--all of Geico in 19--early 1996, we just left that as-is, and Lou's done a terrific job. He's made a lot of money through incentive pay because we'd be--we pay him based on how he does vs. the--vs. the market. But if he told me he wanted to retire tomorrow--and he won't--I would just take it over myself. When something happens to me, it's very likely that all of the Berkshire investments get farmed out over maybe three or thereabouts different managers who will then work for a CEO who will be in charge of the whole place.
QUICK: OK, we have another question that comes in from Lindsay Schumacher in Cedar Rapids, Iowa, who says, "What are the anticipated impacts on Berkshire Hathaway businesses (if any) from the recent ratings downgrade?" And another way to put this is, `Is the amount of capital required to maintain a AAA rating really worth it to the shareholder?'
BUFFETT: Yeah. It has virtually no impact on us. I mean, it--if it--maybe 5 basis points, who knows? But we sold 8 billion of debt right after the second downgrade, the one that came from S&P, and it had no effect on the sale.
QUICK: It had no...
BUFFETT: A triple--a AA and a--it's--I'd like to have the AAA. I think we deserve that. I think we deserve a AAAA, but they haven't gotten around to that. But it isn't--if you're looking at it from a standard model arrangement, it isn't worth it to have it in terms of return on capital. They have a model which we don't fit very well, that we're somewhat different than other organizations in terms of the configuration of Berkshire. So they've always struggled a little bit with us. But we now have been downgraded by Standard & Poor's as well as Moody's, and our credit spreads are way down.
QUICK: We will ask you more about that, because we have some people who have questions about credit defaults swaps and what they're showing with Berkshire right now as well. We've also got to get to Coca-Cola, which we're going to get your first news on what you think about that Coca-Cola news since it came out--as he drinks his Cherry Coke right here. And we'll get to many more of these shareholder questions that are coming up, too. Thousands of you have written in, and we will answer as many of those questions as we can. SQUAWK BOX will be back right after this.
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