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CNBC Transcript Part 7: Warren Buffett Changes His Mind On Auto Bailout

Monday, 27 Feb 2012 | 4:47 PM ET
Ask Warren Buffett | The Transcript Part 7
Ask Warren Buffett | The Transcript Part 7

Warren Buffett appeared live on CNBC's Squawk Box this morning, February 27, 2012, for his annual "Ask Warren" three-hour marathon.

This is part seven of a transcript of his comments. (Click here for part six)

BECKY: Welcome back to SQUAWK BOX, everyone. We are live this morning in Omaha with Warren Buffett.

And, Warren, one of the subjects we've discussed this morning is Simpson-Bowles and what needs to happen or what you think needs to happen. We've been talking to CEOs, to business leaders and to personalities over the last several months and asking them about Simpson-Bowles. I thought you might listen in for a moment when we hear what Clint Eastwood had to say about Simpson-Bowles just after that Super Bowl half-time ad that they had. Why don't you listen in right here.

BECKY on tape: Have you seen Simpson-Bowles and some of the ideas that they had put forth, the panel that the president convened...

Buffett: Congress Owes a Vote on Simpson/Bowles
Weighing in on why he thinks Simpson/Bowles will pass Congress, with Warren Buffett, Berkshire Hathaway chairman/CEO. Buffett also discusses GOP candidate Mitt Romney's tax return and says he faults the U.S. Congress to allow such a low tax rate for the super wealthy.

CLINT EASTWOOD: Yes. Yes.

BECKY: ...and then it's kind of gone away since then.

EASTWOOD: Yeah. Well, likely I did. In fact, I was kind of amazed when they took the Simpson-Bowles and assigned them to this research and then they came back with a recommendation which was exactly stop spending and then everybody said that's enough, you guys, go home. And I thought that's a waste of money, waste of time, wasted effort from everybody. It wasn't very spirited for the country when people would see that. I think Simpson — I think both those gentlemen are smart and they had — certainly worth listening to if you've gone ahead and assigned them to this project.

BECKY: Warren, Clint Eastwood has been a longtime Republican, he ran as a Republican for mayor of Carmel.

BUFFETT: Sure.

BECKY: But you've echoed some similar sentiments this morning.

BUFFETT: I agree with him 100 percent. I mean and I think that — I think that Simpson — I hope they put it into — draft it into legislation or legislative form and I think that — I think it ought to go to Congress and I think that Congress ought to take a vote on it and we can see whether they like it or not. But the American public, I think, are entitled to have that happen. And for Congress to say, you know, we can't get anything done because it's an election year, I would just say if they feel that way let's just skip paying them this year and let them come back next year but — if they're not going to work on it. So I would — I would love the idea of the American public, whether it's through business leaders, whether it's through Clint Eastwood or saying, you know, let's just have a vote on this. These fellows worked for 10 months, they're conscientious, they're smart, they're decent, they come from both sides. They got people on both sides to agree on it. Let's have a vote on it and everybody's going to dislike something in it but the question is, is it better than what we're doing now?

BECKY: You think a vote like that would actually pass Congress?

BUFFETT: Yeah, I do. If there was enough pressure. If the motivation came because — for Congress to take it up, came about because virtually every CEO in the country, labor leaders, educators, everybody else was saying give us a vote on this and I think if it went up there next month I think it would probably pass. Yeah.

BECKY: So...

BUFFETT: I don't — I don't think they — I think they'd be thinking about the next election. They think if they voted against it, you know, maybe if the people wanted it and they voted against it they might not vote for those legislators.

BECKY: It sounded like you were blaming Congress just now for not bringing that bill to a vote to this point. Other people have blamed Obama and his administration for not forcing an issue.

BUFFETT: Well, Congress initiates legislation. That's their function under the Constitution. You know, they take an oath to support the Constitution, it's their job to bring forth legislation which they think is beneficial for the country. And here you couldn't have had a better group work on it. They've come up with something. Congress certainly hasn't come up with something, so let them take it up.

BECKY: OK. Is there anything that you would do to try and force that issue?

BUFFETT: Well, I think there may be some efforts going on in that. I'm not part of them, but I — but I would certainly sign on to anything. If Clint Eastwood presented something that said give us a vote, I'd sign it.

BECKY: OK. Let's talk a little bit more about some of the issues coming up this November. I know that you are a supporter of President Obama's. You've raised money for him. But you also told us when we sat down with you in November that among the Republican candidates you liked Mitt Romney the most. Is that still the way you feel?

BUFFETT: Yeah, I think — I would say that if I — among the four candidates the Republicans have up, if one of them's going to be president I would probably prefer it would be Mitt Romney.

BECKY: Why is that?

BUFFETT: I've looked at his tax returns, I've got his tax returns here. They're about six times as long as mine. The — I just think that he would be more likely to makes more sensible decisions and less — and less — fewer nonsensical decisions than any of the other three.

BECKY: What did you find in his tax returns?

BUFFETT: I found that he was paying a very low tax rate. His tax return and my tax return are the only two that are out there...

BECKY: We knew that though.

BUFFETT: ...from the super-rich, so it's kind of a limited sample at the moment. And his return, kind of interesting. We printed it on both sides of the paper. So here's — this is on both sides of and take a look at it. It's a — it's a — it's a lot of pages. And I don't fault him for anything in this tax return. He is doing exactly what the US Congress told him to do. I do fault the US Congress for writing a tax code that allows that kind of a return to be filed.

BECKY: And, again, this is some ground that we've covered earlier today already, but your point is that the tax laws should be changed, especially for the very richest Americans?

BUFFETT: Yeah. And if I don't fault him, though. But he is paying a much lower tax rate counting payroll taxes than anybody in my office except for me, yeah.

BECKY: And...

BUFFETT: We will have people working on these presses here at the World Herald and they will be paying a higher tax rate — they'll come here in the middle of the night — they'll be paying a higher tax rate than Governor Romney or me.

BECKY: And that's what you would like to see changed.

BUFFETT: I think that should be changed. And these people have no voice in getting that changed.

BECKY: All right, let's talk about some other issues, too. We have touched on a lot of the different companies that you hold. Another major one is Johnson & Johnson. And that's another company that you've been a shareholder in for a long time that's also seen a management change recently. Bill Weldon...

BUFFETT: Right.

BECKY: ...is going to be the chairman but not the CEO. Alex Gorsky's going to be stepping in there. How do you feel about that particular change and how do you feel about Johnson & Johnson lately?

BUFFETT: Well, Johnson & Johnson obviously is — has messed up in a lot of ways in the last few years. You know, my friend Jim Burke used to run that and it does not have the reputation now that it had, you know, a few years back. It's still got a lot of wonderful products and it's got a wonderful balance sheet and all of that, but there have been too many mistakes made at Johnson & Johnson.

BECKY: What went wrong?

BUFFETT: I don't know. I wasn't — but clearly they have not lived up to their own standards.

BECKY: You have not been selling your stake though.

BUFFETT: No, we haven't been buying more, though, either.

BECKY: But why haven't you sold them?

BUFFETT: Well, we might. I mean, there are things I like better than J&J. The four biggest ones I've named. And conceivably we've got a lot of cash around so I don't need to sell things. We've got — still got 30-something billion cash around and so I've got a lot of extra cash. So I don't focus on selling things that are — Johnson & Johnson is still an attractive business at its price. But if I needed money that would be on my — on my sell list as opposed to Wells Fargo or the others I've named.

BECKY: You still on the prowl for a major acquisition above $10 billion?

BUFFETT: You bet. You bet. Yeah, we — yeah, that's my job and the money does keep coming in, and I like buying businesses better than anything else. Lubrizol was a great buy for us, and you know, the best one we've made in recent years obviously is BNSF. But I love the idea of buying big businesses for Berkshire that we can own forever. As I mentioned in the annual report, we have — we know own eight companies that each by itself would be on the Fortune 500 as a stand-alone company. So there's 492 to go and I've got the names of every one of them in my mind.

BECKY: OK. Andrew, you have a question?

ANDREW: Yeah. Warren, we've got a number of emails from people who've asked why you haven't doubled down and bought more shares of Coca-Cola. You look at the way the shares have moved, you know, ever over the past couple of years since the financial crisis is actually — it's obviously gone on a huge run. What's the answer?

BUFFETT: It's a wonderful company. And it's our — at market it is our single biggest investment. At market we've got almost $14 billion in it. So it already — I mean, it is our number one investment. And it's not inconceivable we would buy more but in the last year I bought primarily IBM. Among marketables I put almost $11 billion in that and I put about a billion in Wells Fargo. I regarded those both as more attractive then Coke last year, but that can change. I mean, I always think in terms of the ones we own presently as to whether we should add to them. And Coca-Cola, Muhtar Kent has done a terrific job at Coke. I mean, he's been a fabulous manager and Pepsi's giving us a little help.

BECKY: Hm. You know, Warren, let's talk also about what's happening in Europe. We've talked to you over the last year or so as we've watched the European situation play out and you noticed that very early that it was going to be a big problem. Are you convinced that Europe has turned the corner in terms of dealing with its financial crisis?

BUFFETT: Well, it turned the corner in terms of its funding crisis for its banks a few months ago when the ECB said they would give these three-year loans at 1 percent and they gave almost — well, it was 400 and something billion euros, which translates to maybe $600 billion.

I mean, they opened up their window. So they — the European banks were facing a funding problem and they get less of their money from deposits and more from, essentially, bonds...

BECKY: Mm-hmm.

BUFFETT: ...than the American banks, and they're in far different shape than the American banks. So they had this huge funding problem that was really coming down the pike pretty fast. The ECB solved that temporarily. But that does not solve the solvency problems of European banks and it does not solve the imbalances of — fiscal imbalances of countries that cannot print their own money. The basic problem they have is they gave up their right to print their own money, the 17 countries that are part of the Euro Union. So — monetary union — so you can't believe how fundamental it is. If you owe money — the difference between being able to print your own money to pay it and not being able to print is night and day. Now they are wrestling with that and this action by the ECB to stave off funding problems for the banks gives them more breathing space on that. But the problem hasn't been solved yet.

BECKY: And the expectation is more money will be needed. This weekend the news was that the G-20 kind of gave them the stiff arm in terms of looking for more money there. They would like to see Germany and some of the other European countries raise more money first.

BUFFETT: When you're spending more than you're taking in, which is true for the European Monetary Union as a whole, big time, when you're spending more than you're taking in and you can't print money, you have a problem. And you are dependent on the confidence of the world to keep lending you more and more money even though you don't — you're not able to print the stuff to pay them off. People are very happy giving the United States government money because we can print it to give it to them. How much it's worth is another question when you get it. The danger is inflation, the danger is not getting back dollars. The danger in Europe is, you know, how does a country that's spending more than it's taking in and can't print money, how can it — if it loses the confidence of the market, the game is over.

BECKY: All right. Joe, you have a question, too?

JOE: Yeah. You got the — we got the big primaries coming up and one's in Michigan, Warren, and I know you've seen the — all the debate being reignited about the auto bailout, you've got, you know, Romney and Santorum talking about it in one respect, we had Steve Ratner, you can't turn on the TV without seeing him somewhere defending it and saying there would have been no DIP financing. The Wall Street Journal weighed in over the weekend, I thought it was an interesting piece, the op-ed piece, just talking about that maybe the whole bailout made the auto industry — it's still there, the stocks are above zero, they're still running, but maybe didn't set up the future that great for the auto industry here. Would you ever consider buying a stake in GM or Ford at this point?

BUFFETT: Well, I've always felt it's too hard in the auto industry to predict who the winners are going to be. There were 2,000 auto companies established in the United States in the 20th century and what have we got left, you know, a couple. So it's very hard to pick — to pick winners. I don't — there will be a big auto industry five, 10, 20 years from now that we will be selling lots of cars, I just don't know whose cars they're going to be...

JOE: I mean, the...

BUFFETT: ...any more...

JOE: ...the Journal...

BUFFETT: But I would say this.

JOE: Yeah, go ahead.

BUFFETT: Well, I would say this, I was kind of on the fence about the auto bailout for quite a while. I mean, it kind of went against my instincts, but I will tell you, Steve Ratner is 100 percent right when he says there was not a dime of private capital that would have — would have been available for a managed bankruptcy absent government help. I mean, look, it's very clear to me in hindsight, it wasn't so clear to me at the time...

JOE: Right.

BUFFETT: ...but it's very clear to me in hindsight that the auto bailout was one of the best things that have happened in this economy. The dominos that would have fallen — you know, we saw dominos fall in September of 2008, we saw them fall so fast and such big ones, you know, we did not need a repeat of that with what would have started with the auto industry. But I do not claim any great foresight on that.

JOE: Yeah. Yeah.

BUFFETT: I have really mixed emotions.

Ask Warren Buffett | Download the transcript
Ask Warren Buffett | Download the transcript

JOE: The Journal delicately dances around that and says that, you know, in hindsight it's tough to say if the government hadn't been there and there hadn't been crowding out, nobody knows who might have come forward. They also go on to say — they also go on to say that some of the foreign automakers that now build cars in this country would have been interested in all of the assets if it had been done in a — in a normal way and they'd be making — they may have bought, you know, maybe we'd be making Toyotas in Detroit right now or something. But they make the point...

BUFFETT: Mm-hmm.

JOE: ...that the steel industry was able to come back after the normal paths were followed and it's been rationalized and that the future is much brighter because they were able to deal with all the legacy issues. I guess Ratner and others say that a lot of legacy issues were dealt with, but the Journal's point was that it would have even been — all these balance sheet issues would have been rationalized even more, in fact it may have had a better future. Now we've got CAFE standards that are going to go to 50 miles per gallon, you know, very quickly and it's going to be a tough — very tough future for our automakers here to try and hit those and give Americans things they want to buy.

BUFFETT: I would just say this, Joe, if all of the steel — the big steelmakers, you know, if 90 percent of the American steel capacity — if in March of 2009 it was all running out of cash simultaneously, believe it, there would have been no private solution. And I got a call in the spring — or maybe it was late winter — of 2009 and — from one of the — one of the automakers and looking for capital, there wasn't any place they were going to get a dime. I mean, it was — it would have been crazy to put capital in unless an overall solution was going to be engineered by somebody that really had the capacity to write checks, and that was the federal government. And like I said, I didn't — that's not a philosophical answer, that is just a pragmatic answer of what was going on in the world at that time. It would have been devastating. It would have unwound the progress that we'd been making from the fall of 2008.

JOE: Well, they're still too big to fail then, Warren, I mean we would have to do it again. I mean, the precedent has been set, we will still — I mean they will never go under. I don't know, you wonder — philosophically it's not good to talk about...

BUFFETT: No, they're...

JOE: ...but sometimes you do need to talk philosophically just because capitalism doesn't work if we — if you know that it's going to happen every time.

BUFFETT: It's too big — it's too big to fail all at once. I mean it...

JOE: Yeah.

BUFFETT: ...it's just like — you know, General Electric was in line there...

JOE: I know.

BUFFETT: ...in September of 2008. Now they didn't — they didn't do anything themselves, they were just one great big domino and they were right next to other dominos that were toppling.

JOE: Yeah.

BUFFETT: But what we learned in 2008 is that when dominos topple in this society, when big ones do, and when you start off with the two biggest institutions, Freddie and Fannie, you know, of the United States government with 40 percent of the mortgages insured and they go under conservatorship, you will find out that there are an awful lot of dominos in line. And you've got to have a firewall someplace and the only person that — the only entity that can come up with a firewall at that time is the US government. And incidentally, there's not great moral hazard in doing what they did. The shareholders of AIG, of Citi, of Freddie, of Fannie, you name it, they got creamed. I mean, it isn't like they got rewarded for the fact that they had their investment in it, they got totally creamed. They are not there sitting, `Goody, goody, I want to do this again,' you know. So the moral hazard thing can get misinterpreted.

BECKY: Joe, I think we have to sneak in a break here?

JOE: Oh, yeah, we definitely have to do that, or I will have moral hazard if we don't — I've been told that personally.

Coming up, more from Warren Buffett. He's answering your emails and tweets, and keep them coming, Warren Buffett is trending on — what does that mean?

ANDREW: It means that people are watching the show as we speak and they're writing about this interview.

JOE: What does trending mean?

ANDREW: Trending means that there are thousands of people who are putting the word "Buffett" in their tweets, which means that people are tracking it...

JOE: They're not...

ANDREW: ...and there suddenly is this trending.

JOE: ...they're not misspelling it, they're not headed to a buffet for sure? I mean...

ANDREW: They could be headed to a buffet, but more likely they're watching SQUAWK.

JOE: I don't think any Twitter people go to buffets anymore, because old people — right?

ANDREW: No, they're all in the buffet line tweeting at the same time.

JOE: All right. It's trending on Twitter big time, a lot of trending going on.

ANDREW: Yes.

JOE: Woo! Right behind "The Artist" and Meryl Streep.

ANDREW: Right.

JOE: Right. But first, we're going to get a — we got to get this — a sneak peek at Squawk on the Street's new set at the New York Stock Exchange. High-tech extraordinaire. SQUAWK BOX will be right back.

CLICK HERE FOR PART 8: WARREN BUFFETT ON STOCK BUYBACKS AND HIS GREATEST WORRY

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Keep up with Warren Buffett on CNBC.com and follow alexcrippen on Twitter.

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