CNBC Buffett Transcript Part 7: What Should Happen to CEOs of Failed Companies

Warren Buffett appeared live on CNBC's Squawk Box this morning, March 2, 2011.

This is Part Seven of a transcript of his comments.

Click here for Part Six: China and America's Diminishing Dominance

BECKY QUICK: Welcome back to Squawk Box here on CNBC. We are in Omaha, Nebraska, this morning at the Durham Museum with Warren Buffett. We're going to be answering some of your e-mail questions. And, Warren, just again for people who are coming in late, we're in the Durham Museum in front of the Ernest Buffett Grocery Store. And this is pretty important to you.

BUFFETT: Yeah. That store was founded my— founded by my great-grandfather, Sidney...

BECKY: Mm-hmm.

BUFFETT: ...in 1869, which is when the transcontinental railroad was completed. That's when the UP hooked up with the Central Pacific at Promontory Point, Utah. And my grandfather had two sons that worked with him, Ernest and Frank, and unfortunately they both fell in love with the same woman at the store. So she married my grandfather, and for about 20 or 30 years Frank didn't speak to him and opened up another grocery store, but not that we carry grudges in the Buffett family. But Charlie Munger and I ended up working there.

BECKY: Yeah.

BUFFETT: He worked there in the late 1930s, I worked there around 1940, and we never knew each other. But we did have this experience of working for my grandfather, which, believe me was an experience. He believes in hard work.

BECKY: Yeah, you wrote about that in the annual letter, as well, and said that the thing that you learned coming out of that is the importance of liquidity and not getting overleveraged.

BUFFETT: Yeah. My grandfather left— gave $1,000 eventually, at 10 years after the marriage of each of his children and my aunt didn't marry, but he gave her $1,000 as well and he sent them this letter and he said, `Put this money away.' He said, `Don't get tempted to invest it because some day you may need money and who knows what you're can do with your investment then.' So you'll always want to have some cash. He gave me a $2 bill when I was a kid and he said carry this around and he said you'll, you know, you'll never be broke.

BECKY: Now Berkshire has how much in cash?

BUFFETT: Well, we probably have about— I think we had about 38 billion at the end of the year, so.

BECKY: It's a lesson you took to heart.

BUFFETT: Yeah. He would be happy.

BECKY: OK. Let's get to some of the viewer e-mails and a significant number of those e-mails that came in had to do with Berkshire's investments. You spent a lot of time talking about that in your annual letter. But one that came in from J.P. in Delaware says that "Given that Wells Fargo is your second-largest equity holding, how concerned are you with the resignation of the CFO and the manner in which the company disclosed this?"

BUFFETT: Yeah, I don't think the manner in which they disclosed it was very good. The— but Howard Atkins was a terrific CEO or CFO.

BECKY: CFO, yeah.

BUFFETT: And you know, I didn't know him personally, I never met him personally, but I— but I watched him on television, I saw what he wrote and everything. It has nothing to do with their financials.

BECKY: Mm-hmm.

BUFFETT: I spent about four hours last Saturday reading the 10-K and I feel very good about the whole Wells operation. Obviously, there's something there beyond what was in the news release and it's a tough thing. If you've got something that neither side wants to talk about, they're not going to talk about it. And I don't— I don't know the answer myself. I know it has nothing to do with financials, though, and...

BECKY: That was another viewer question that came in from Clif in Alabama.

BUFFETT: Yeah. Nothing.

BECKY: That— there was at least one analyst who wrote that this did have something to do with that.

BUFFETT: Yeah.

BECKY: You are 100 percent convinced it did not?

BUFFETT: I'd bet a lot of money that he's wrong.

BECKY: OK. That's one of many questions that have come in, but we also have questions that have come in about Moody's . Achit in Arizona writes in, "In your FCIC interview, you spoke of the inherent advantages of a duopoly that Moody's and S&P share. Why does Berkshire continue to reduce its interest in Moody's? Is there too much headline risk" for you?

BUFFETT: Well, I think that duopoly is in somewhat more danger than it was simply because people are mad at the ratings agencies and the ratings agencies totally missed what was going on in the mortgage market and that was a huge, huge miss. I don't think they were, you know— I think they were just wrong, like a lot of people were wrong about in thinking that housing prices couldn't go down a lot, but they were rating agencies and they've gotten a lot of criticism for it and their business model is sensational when it's a duopoly. I mean, I have no bargaining power. I'm going to see Moody's in the week or I think or something about our ratings.

BECKY: Mm-hmm.

BUFFETT: And you know, I dress up and do everything I can to, you know, talk about my balance sheet. But they— they're God in the ratings field and Standard & Poor's, and I need their ratings. And if they tell me the bill is X, I pay that, and if they tell me the bill is X plus 10 percent, I pay that. You know, if Coca-Cola charges too much, you know, you may think about drinking Pepsi Cola, but in the rating agency business, you need those two. and if that— either people get so upset with them or whatever it may be, or Congress gets upset, that could disappear. It won't disappear from natural reasons. I mean, it is a natural duopoly, just like— it's a little different than Freddie and Fannie were, but they also had some specific advantage. Sometimes you find situations where you get a natural— well, you used to have that in the newspaper business. You had a natural monopoly in big cities. It wasn't— it wasn't illegal, it just worked out that way.

Warren Buffett Speaks

BECKY: Mm-hmm.

BUFFETT: And that's what happened in ratings agencies. But it's not as bullet-proof as it was. Although, I will say that...

BECKY: Does that explain why you've been selling?

BUFFETT: Well, we haven't sold that aggressively.

BECKY: Mm-hmm.

BUFFETT: I mean, if you look at it during the course of 2010, we sold a very small amount of the— it looked to me that that threat was receding to some degree. But it's different than it was five years ago.

BECKY: OK. Another question comes in from Christian in Germany who writes, "You're invested in American Express, but you don't like credit cards. How does this match?" And I'm guessing Christian is referring to what you were talking about in your grandfather's letter.

BUFFETT: Yeah. No, I think— we offer credit cards at our furniture store, our jewelry store, I mean, the American public is going to use credit cards. I mean, if you say you're not going to accept credit cards, you might as well say you're not going to accept money if you're a retailer. But I tell every student class I get, high school students, university students, you know, they'd be better off if they never used credit cards now.

BECKY: Mm-hmm.

BUFFETT: Now if you use them and you pay at the end of the month so you don't start revolving, that's another question. But I can't make money if I'm out borrowing, you know, at whatever the rate may be, 12 percent, 14 percent, 16 percent, when you know, Libor's a quarter of a percent. I mean, the world isn't that inefficient. So...

BECKY: Right.

BUFFETT: ...I— if I'm going to go broke, if I borrow at credit card rates, you know, what kind of— they're going to get in trouble. I get all kinds of letters from people who've gotten in trouble on credit cards. So I think it isn't going to happen, but I think if credit cards didn't exist, I think probably the economy would be better off.

BECKY: Wow. Does American Express know you feel that way?

BUFFETT: It isn't going to happen. It isn't going to happen. I mean, you know, people are going to do it. I mean, you know, and I understand why they do it. You know, it's so nice to think that you know, I want this today and I'll pay for it tomorrow.

BECKY: Mm-hmm.

BUFFETT: But it gets a lot of people in trouble and it's expensive. And it isn't because the credit card companies are getting rich, incidentally.

BECKY: Sure.

BUFFETT: I mean, I went into the credit card business at GEICO, I thought I was this genius a couple of years ago and I was going to sell— have credit cards for GEICO customers because we have them at the furniture mart and other places and I lost about, I don't know, $60 million later on. Our losses were quite significant. I mean, credit card companies run big credit losses, it's an expensive sort of business. So it isn't that they're getting rich, necessarily, at 12 to 14 percent, but that doesn't do their customer any good that's paying that amount.

BECKY: Let me ask you one more about American Express and then Joe has a question, too. But David from London writes in, that "as AMEX's largest shareholder, are you concerned that Congress will reduce the credit interchanges fees as they have done for debit interchanges? Those account for the vast majority of AMEX's revenue."

BUFFETT: Yeah. Well, American Express has a very special card. I mean, it. The average American Express card holder, I think, I think they're probably charging, I don't know, 13, $14,000 a year. That's four times of what— or five times, maybe, I don't have the exact figures, what they're charging at Visa. And the American Express card carries more cachet, by far, than a Visa and it has more utility in many different ways. American— I decided the American Express card was special, actually, back in the early 1960s. The first credit card was the Diners Club card.

BECKY: Mm-hmm.

BUFFETT: And the Diners Club card kind of swept through. It was a— it was a hot stock and all of that.

BECKY: Mm-hmm.

BUFFETT: And then American Express came in as a defensive measure, they thought it was going to knock out their traveler's checks. And they priced their card higher than the Diners Club. Now imagine coming in against the leading guy and charging more. But they established their card as something special and it is something special. So it is— it is a— it is a superior card for somebody, particularly, that's a big spender. My wife had one of those cards that was, you know, one of those black cards that cost a lot of money and everything. I still carry the green card.

BECKY: OK, Joe:

JOE: Yeah, thanks. So Warren, so I've been sitting here thinking, I understand that chewing gum, people like to chew gum, I got that, and See's and make— you know, See's candy. I was thinking, you know, maybe a dental chain might be good, too. But what I'm getting at— where I'm going with this is I think about media and I think about the prospects for media and I don't know whether people keep chewing gum. I don't chew that much, but media is so pervasive and I just look at the outlook for media and I think about 1.2 billion people in China, but I don't know how to play it right now and I don't know whether you know how. I just see a huge opportunity.

BUFFETT: I...

JOE: I see a huge opportunity, but I don't know what to do with it. And I'm wondering if you could help me.

BUFFETT: People want to be entertained and they want to be informed. I mean, the demand for that is huge, is worldwide, it's going to go on forever. So you know, newspapers satisfy that in a very important way, particularly on a local basis. And the nature of newspapers was that you didn't want to subscribe to five of them, you subscribed to one and if there were two in town and one had 1,000 ads and one had 200 ads, you were going to buy the one with 1,000 ads because it told you were more jobs were available, more apartments were available, it gave you more sports news and whatever. So it lent itself to a single product. Now you have media where you go to the Internet and you can go— you can essentially hop from one source to another, you know, in a— in a fraction of a second. So it's a different— it's a whole different equation. It isn't— the desire for entertainment and information, you know, is— will be around forever. It's insatiable. How to get paid for it appropriately, you know, the world has changed and it's changed dramatically, and I do not consider myself an expert in the least about where media is going to go in the next 10 or 20 years. I do not know where the money is going to be made. Somebody will make a lot of money, but I'm just not that good at picking the future on it. I understood the past on that. I understood the big network television station. I mean, back when there were three networks only in the '60s, you could have run a test pattern, you know, on your television station and made a lot of money. It was— it was— it was a cinch. The orders came in over the transom. But all of a sudden they started putting more highways out there, more electronic highways and the fact that you had one of the three electronic highways diminished in importance enormously, so now you've got a network that is getting a 10 percent share, losing tons of money, and you'll have a network with, you know, a 2 share, like ESPN, making a fortune because of the way the dynamics have worked out. I don't have any great insights on that for the future. If I did, I'd— it's just— I'm just not smart enough.

JOE: I hear what you're saying, it's the same problem everyone has. I don't even know, is it content? Is that king? Or is it delivery, like Apple? I mean, you look at, Apple might be the perfect company for when I— when I, you know, with all these mobile devices.

BUFFETT: Yeah.

JOE: But I don't even know whether it's content or the distribution that is— that win.

BUFFETT: Well, if you're the best heavyweight fighter in the world, which is the way I often think of you, Joe, actually, but if you're the best heavyweight fighter in the world, if you're the best singer in the world, you know, whatever it may be, you've got the ultimate asset. I mean, the delivery mechanism will pay you one way or another and you can command it from them. But obviously, I'm not— I'm not in a position to compete in that game. So the only way I can compete is in the delivery mechanisms and all that and I'm just not that smart. But the answer is I don't have to be right about everything or even understand everything, I don't have to know what cocoa beans are going to do or what cotton's going to do, I just have to right on the decisions I make. So I stay with the simple things. Now a simple thing many years ago, back in 1965 I owned 5 percent of Disney and the whole Disney company was selling for $80 million, so at 4 million bucks bought 5 percent of the company. Well, Disney had a tremendous franchise and they could bring out "Snow White" every seven years or "Mary Poppins" or whatever it might be and wrote them down to zero, initially. Well, that was an easy decision. But I don't see easy decisions like that now and if I don't see an easy decision, I don't play.

BECKY: Warren, let me bring up a question from Pierce in Greenwich, Connecticut. He writes in about Apple, since you just mentioned it. "Do you feel the Steve Jobs saga has already taken its toll on Apple's stock price or do you feel it has yet to make its mark?"

BUFFETT: Oh, I don't— I don't know that much about Apple. I mean, all I know is Apple is an absolutely phenomenal company. I mean, to think of where they were 10 or 15 years ago and where they are now.

BECKY: Mm-hmm.

BUFFETT: And that's been done by innovation. I mean, and I think Steve Jobs has had a whole lot to do with that. But...

BECKY: I think that's the big question is how important is Steve Jobs to that company?

BUFFETT: Well, he's enormously important to Apple. And you know, Walt Disney was important to Walt Disney, a company. I mean, there's certain talents that are really rare and Steven Spielberg is important, you know, to his business. I mean, it— there— people who can read the needs of the American public before the American public even realizes that it has those needs, and then have the genius to create a product that satisfies those needs and gets there fast, and then is attractive, you know, in terms of all kinds of things, functionality that you can't believe, they deserve to get very rich. I mean, they— he saw something that I didn't see five years ago or 10 years ago.

BECKY: Mm-hmm.

CARL: I think— it kind of sounds like you're describing Squawk Box.

JOE: Yeah, Squawk Box. We're fast, we're entertaining, but then I also thought, I thought you were— when you were talking about me, I thought you were eventually going to end up with either a News Corp or a Comcast, you know, just to pull a name out of the— out of the thin air.

CARL: Warren knows...

BUFFETT: Yeah.

CARL: Warren knows something of Comcast.

JOE: Or a— or a Disney or something. I mean, I don't know, I'm just— one of those— the big companies, I think— I think it helps to have some size and some diversity with all your assets, but...

BUFFETT: Well, but of course, the big companies, you know, if you go back 30 years ago, they started going for diversity with CBS. I mean, CBS ruled the— it was the Tiffany network and it even owned the New York Yankees at one point. So it's very tough. General Motors ruled the world, you know, when I was a young investor. It— Sears ruled the world of merchandise. It's not so easy to pick the winners. It looks easy in retrospect always.

JOE: Yeah.

BUFFETT: You know there will be winners. I mean, in media there will be huge winners. I mean, somebody that can figure out a way to attract millions of users, like just take a Facebook or something.

JOE: Mm-hmm.

BUFFETT: Imagine that, you know, being in the mind of a guy five years ago and now millions, hundreds of millions of people, you know, build their lives around it to some degree. That's amazing. But I am not the guy that can do that, and I'm not the guy who can spot the guys who can do that. But fortunately, I don't have to be.

BECKY: OK, guys, we're going to continue this conversation, but for now we'll send it back to you, Joe and Carl, in the studio.

CARL: I still like Warren calling Joe a prize fighter because I picture you at a— at a weigh-in in your underwear on the scale.

JOE: Oh my God. I got some advice...

BUFFETT: He's— he is...

JOE: I don't— you know what?

BUFFETT: He's known as the Mike— he's the Mike Tyson of cable.

CARL: Yeah. He'll bite your ear off.

JOE: Bite your ear off. I might get one of those— one of those tat— do you think that would work, one of those tattoos on my...

CARL: Yeah, it would look good. That's a good look for you.

JOE: I don't know.

CARL: Anyway.

WARREN'S UNDERWEAR TIE

BECKY: Hey, guys, before you go, real quickly, let me point out one other thing. We didn't get a chance to mention this earlier, but I know, Joe and Carl, you have both gone back and forth, boxers and briefs, boxers and briefs.

JOE: Yeah.

BECKY: Today Warren wore in a special tie which shows some of his interests as well.

CARL: Really?

BUFFETT: Yeah, this is a— I don't know whether you can see this, this is a Fruit of the Loom tie, and I actually have this for airplanes and GEICO and a bunch of others. But I thought in honor of you, Joe, I would wear my underwear tie today. At Fruit of the Loom, you know, our motto is "we cover the asses of the masses," and I thought of you when we— I put this tie on.

JOE: That is— you know what? We could not see it, but we just did. I really— I like that. But I— Carl's got the right...

BUFFETT: You like that one?

JOE: Carl, you don't have to choose. You are a boxers combo brief guy, right?

CARL: Yes.

JOE: And they make something...

CARL: And you are a tighty whities guy because— you even have the underwear for the hands, remember? Jane Wells brought you...

JOE: I have underwear— I have underwear...

CARL: ...hand underwear.

JOE: No, I'm a...

BUFFETT: I wish I hadn't started this!

CARL: I know.

JOE: Yeah, I know. I know. But you did.

CARL: Thanks for nothing.

BECKY: You brought it up.

JOE: But you did. And it doesn't take much to get us to talk about this, Warren. Yeah, we'll...

BUFFETT: I can tell that.

JOE: Oh, yeah, OK, we've got...

CARL: A lot more still to come from Omaha. We still got the ADP number coming, we'll get that number and the reaction ahead of Friday's jobs number. A lot more from the Oracle of Omaha as well when we come back.

***

BECKY: All right, welcome back, everybody. We are live in Omaha, Nebraska, at the Durham Museum. We're speaking to the one and only Warren Buffett all morning long, and now it's time to get back to some of your e-mails. You've been sending them in, and we do appreciate them. They've been thoughtful e-mails. Got a lot to get through. And, Warren, why don't we jump right into this?