Warren Buffett was interviewed live this morning (Wednesday) on CNBC's Squawk Box, ahead of a special Berkshire Hathaway shareholders meeting to approve the company's proposed Class B stock split.
This is the second part of an unofficial transcript of the entire one-hour interview conducted by Becky Quick.
CLICK HERE FOR PART ONE
In this section, Buffett discusses compensation of bank CEOs, restricting leverage, Americans' frustration with their government, and why businesses aren't hiring.
BECKY QUICK: In terms of going after a debate with Massachusetts, the President went up and actually campaigned for (the Democratic Senate candidate Martha) Coakley and started saying things about the banks. About how (Republican candidate Scott) Brown is for the Wall Street banks and she's not.
WARREN BUFFETT: Well, banks - Maybe if I was running for office today I'd be chewing out banks, too. But basically the government is going to get back its money overwhelmingly for banks. The FDIC, which is funded entirely by banks, is taking care of the failed banks. There were 140 banks that failed last year. Most of them were small community banks which everybody, you know, the hero of things generally. And in the end, that's been taken care of by the FDIC and the FDIC is funded by the banks. The banks are cleaning up their own mess, in effect, on that. Like they say, the banks have come through this very strongly. But they're not earning - they talk about obscene profits - well let's just, J.P. Morgan, you know, their earnings on equity were less than the average of the last ten years last year. You take Wells Fargo, their earnings on equity were less than the average of the last ten years. B of A and Citi, I mean if you want to call their profits obscene you may be thinking of a different sort of obscenity. (Laughs.)
BECKY: At the same time, though, compensation is coming back to the levels that we haven't seen in the past.
BUFFETT: Compensation at the investment banks. I don't think that if you look at the commercial banks that you will find their compensation practices are significantly different than a few years back. I would love to have no compensation at banks because we own some banks and then it would all go to the shareholders. (Laughs.) I mean, the choice isn't the Federal government or bonuses, the choice is the stockholders or bonuses.
BECKY: But people say that the real difference is should the government be backstopping, not just the safe banks that are doing loans, doing things that need to be done, but also the investment banks at the same time. Should they be in the same house, and should the government be backstopping the investment banks as well when they can turn around and pay out these high compensations.
BUFFETT: I don't think they should be backstopping them.
BECKY: But how do you split them, short of doing something like Glass-Steagal?
BUFFETT: Well, if you look at Morgan Stanley and Goldman Sachs, the two big investment banks, independently, I don't think they should be backstopped, backstopping them. Incidentally, in September of 2008, Goldman went out to raise their own money. They saw the situation that was developing and they raised 12 billion dollars there in September of 2008, which we participated in. They felt that they needed capital because they didn't know if the world was going to come to an end or not and they went out and raised it. They were a participant then in the TARP subsequently, but they were given no choice.
BECKY: I don't want to put words in your mouth, though. When you say the government shouldn't be backstopping those investment banks, how do you get around this idea of if the commercial bank is with the investment bank, how do you get around backstopping that if these are so important to our nation and we have to keep them supported, this notion of too big to fail?
BUFFETT: I think, and I'm not even sure how you draft this into statutes, but the banks that got into big trouble, it was management at the top. And a number of those went away rich. They didn't go away as rich as they were earlier, but I think that's terrible. I think, if I were on the board of directors of a bank, and you do this in conjunction with the government, but I think you should have something so that if a bank ever has to go to the Federal government, not to the FDIC because that's a form of insurance, but if they have to go to the Federal government to be saved, the CEO and any CEO of the previous two years before that, and his wife, they sign something so that they are essentially wiped out. If an institution that's so important to this country really causes the country great difficulty, I think the CEO, I want that CEO's equation to be that if this place goes down or needs government help, I'm busted. And I can't put it all in my wife's name and she's busted, too. And then I would have strict penalties for directors, probably five times their average compensation or something. I think that would do more to change behavior, the kind of behavior that gets us into trouble, then anything else you could do.
BECKY: So you're talking about the guys like Chuck Prince -
BUFFETT: Yeah -
BECKY: - and others who walked away?
BUFFETT: When they walk away I don't want - We've got unemployment insurance. Millions of people are on it now and certainly anybody that causes that kind of trouble, and I would have it extend for two years after they left or something of the sort. And like I say, if they want to sign, I would just, as a member of the board of some super-large institution like that, I would just say that's part of taking the deal. If you can't keep this place away from needing the Federal government for help, you're going to be broke.
BECKY: But back to this idea, and I'm sorry to keep harping on this, but back to this idea of the investment banks teamed up with the regular boring bank side of things, should there be a split there that's forced by Congress, or do you think this idea of attaching it to the CEOs and directors would handle that problem?
BUFFETT: I think - Well, I would like what I just suggested but I do think that - I think when very large banks that are really, if anything happens to them they have to go to the government, I think they should be reined in on leverage and I think they should be reined in on some of the kind of activities they've engaged in, yes.
BECKY: What do you like that you see in the proposals for national financial reform right now and what do you think is missing?
BUFFETT: Well, I think the hard part is to restrict leverage. I mean, leverage is what gets people into trouble. And the trouble is you can't measure it by a single ratio. There's all kinds. I mean you can have a lot of leverage on government bonds and then you can do other things where 2-for-1 leverage is too strong. I think you do need a regulator that can draw up some kind of sensible regulations as to different kinds of instruments, and maybe prohibit some in terms of the activities of commercial banks.
BECKY: You need a new regulator or the existing ones?
BUFFETT: I think I would trust the Fed.
BECKY: You would trust the Federal Reserve? But there are a lot of movements in Congress right now, both from the right and the left, to go after the Federal Reserve and strip some of its powers.
BUFFETT: I think that's a mistake. I think that an independent Fed is incredibly important to the economic future of the country.
BECKY: Ben Bernanke is looking for this reconfirmation. They say a vote could come as early as this Friday. Should he be reconfirmed?
BUFFETT: If I could vote twice, I would. He should be, I mean, he did a magnificent job over this period. Now, everybody can do it somewhat better. We could sit here and armchair quarterback him, but when I look back at particularly September and October of 2008, he took some extraordinary actions that, if they hadn't been taken, willingness to act like that, and even stretch his authority some. But he did what you do, and we talked about it being an economic Pearl Harbor, he did what should have been done in response to that Pearl Harbor. And I think he's done a stellar job.
BECKY: What happens if he's not reconfirmed? What's at risk?
BUFFETT: Well, just tell me a day ahead of time so I can sell some stocks. (Laughs.)
BECKY: You think there would be a strong selloff?
BUFFETT: Oh, I think so, sure.
BECKY: Across the board?
BUFFETT: Yeah. I think it'd be justified.
BECKY: You do?
BUFFETT: Yeah, I think - I think one of the - I think Congress generally is the worry of the American people, particularly what they've seen over the last 12, 18 months. If Congress essentially said we can do this better then a Ben Banana, and we think we know, I would get very worried.
BECKY: You mentioned Americans' frustration with Congress. Do you read this vote in Massachusetts last night as some sort of a referendum on the job Congress is doing right now? The job the White House is doing right now? On the health care reform bill? Or something else?
BUFFETT: No, it's those three things plus the economy. I mean, it's some mix. Who knows what goes on in someone's mind when they enter a ballot box. Somebody said the word 'motivation' should never be used in the singular, because you get these things all mixed up in your mind. But certainly, people generally in the country do not like the health bill. Whether it's a good thing or not. But they don't like it, and they don't feel good about Congress and they feel less good about the Administration than they did a year ago, clearly. And they feel like the economy is dragging on for a long time. So all of those factors converged, and probably to some extent the particular candidates, you know. If Vicki Kennedy had been the Democratic candidate I don't think there's any question she would have won, probably three-to-two or something. But it was referendum of sorts, sure. It was a big one.
BECKY: You say American people are less happy with the Administration, they're frustrated with Congress, they don't like the health care bill. What about you? You're a big supporter -
BUFFETT: Well, going back to the American people, I think their expectations were probably too high on the economy. And I think, incidentally, to President ABM's credit, he tried to dampen those. Every time I heard him speak, he would say we didn't get into this in a short period and we're not going to get out of it in a short period. But, he's attempted to do that, but when it grinds along, you know, people are hurting. A lot of people are hurting and they, perhaps unreasonably, I would say it would be unreasonable, but they expected better things by this point and that wasn't in the cards.
BECKY: You talk a little bit about what has happened with the economy. Is there anything different the Administration could of, or should have, done?
BUFFETT: It's, you know, probably if you're going to spend close to 800 billion on a stimulus, I think it could have been done in a way that had more immediate impact. But, you know, what we saw with the stimulus bill, 8000 earmarks or something. I mean, that is the sort of thing that is depressing to the American public. It's depressing to me. That is old-style Washington squared. And so I think in a sense even on the stimulus bill, some of the benefits of the stimulus were lost by the fact that it was Washington as usual.
JOE: Hey, Warren.
BECKY: Joe, you have a question as well?
JOE: I did. I ask it in the converse, Warren. OK, that's something that they did do that maybe could have been done differently, but are there things that were done that actually hurt the economy? We hear it all the time, about the uncertainty of a lot of the pending legislation. Tax policy, cap and trade, health care, down the line. There are people who say that is causing corporate managers not to hire and that we're actually lengthening the slowdown. Is that your view, too?
BUFFETT: Well, I hear that, Joe. I would say this. At Berkshire we're down 25-thousand, maybe, or something in employment from 245-thousand.
BECKY: Off what base?
BUFFETT: Off a base, in the last year, year and a half. Take our carpet business. Our carpet business is down 65-hundred people and that's concentrated in a fairly small, not all of it, but a lot of it is concentrated in a small area of Georgia. We will hire people when the orders come in. I get the orders every day, the incoming orders. I look at them. And we want to hire people but we're not going to hire people just to stand around. So, we're not reluctant to hire people in Georgia at our - or at ACME Brick in our brick business, which ran up the worst year in many, many decades. We've got a thousand people, perhaps from the peak, that we're down at the brick business. It's not because we're losing share of market. We're gaining share of market in these cases. But we're not reluctant to hire at ACME Brick or Shaw Carpet because of what's going on in Washington. We're worried about hiring there because of what's going on in our order book. If we get orders for brick, if we get orders for carpet, we're going to put people back to work tomorrow, but we're not getting orders yet.
JOE: But it's possible to bite off more than you can chew. And maybe a lot of Americans would have been content with economy, security. The economy and security. Maybe that would have been enough.
BUFFETT: You're not going to have people feeling good until jobs come back. I mean, it's that simple. And jobs haven't come back. And one of the problems we have is that we have these people who are dropping out of the workforce. Normally you need about 100,000 a month in jobs just to stay even in unemployment. We've got people dropping out of the workforce. But those people may very well come back in, in addition to the normal gain, in the year or two, in the next two years to come. So unemployment is going to be a tough figure. That's going to determine the mood of the American people.
CARL: Warren --
BUFFETT: The mood of the American people is going to be - Go ahead.
CARL: Warren, Joe talks about economy, security, and those are really our short-term concerns. But you've talked a lot about the longer-term structural issues the government needs to address. And when you can't get health care reform through, will you have the White House, a majority in the House and a supermajority in the Senate, how in the world do you think we're going to tackle things like Medicare, Social Security?
BUFFETT: Well, that's one of the things that bothers the American people, when they see how government is functioning, not just in the last year but prior thereto. But I think people who are expecting a year ago with the new administration that you were going to see a different style of behavior in Congress, probably have become pretty disillusioned in the last year. Incidentally, over the longer term, it's going to work extraordinarily well. I mean, we have not come close to fulfilling the potential of this country or our people. But we are going through a rough patch now and it ties in very directly with what you said in terms of jobs. Until you get jobs, a better jobs picture, you're not going to have a happy American public.
JOE: As a Cornhusker, did you not like that, what did they call it, the Cornhusker Husk or whatever it is? Were you embarrassed by that as well?
BUFFETT: I don't think it was that popular out here. I think the whole idea, if you look at that, you can call that a special form of earmark. And people don't like the idea that if you pass a bill like the stimulus bill that various Congressmen and Senators find 8000, or whatever it was, items that they want to stick on it. I mean, this Christmas tree approach, and of course, bad behavior begets bad behavior. After a while even the guys who say I don't want to do this sort of thing on principle, they feel kind of silly facing their constituents when everybody else is doing it. So if the other guy's doing it, that becomes an argument for it and it gets to be, you know, it gets to be that K Street and lobbyists get terribly important and sticking little special items on bills as they go along. And I think our Cornhusker thing was one example of that. But it wasn't the only example. As I remember, Louisiana, Massachusetts, it --
BUFFETT: It's not - What you've seen in the last year has not been encouraging, I'll put it that way.
BECKY: You know, you mentioned that there's more the Administration maybe could have done even though the American people had expectations that are out of whack. Paul Krugman wrote this week in the New York Times that all of these bad things happened, the failure of the Democratic candidate in Massachusetts, it all because they didn't spend more on the stimulus. Is that something you agree with?
BUFFETT: I don't think it would have made that much difference. People talk about the stimulus having created a million-and-a-half, or saving a million-and-a-half. I generally am very skeptical of figures that economists talk around, or even sometimes even projections of CEOs that they toss around. (Laughs.) We have a lot to work through. It really goes back to what we talked about almost two years ago. This country got very, very leveraged-up in a lot of respects. It got leveraged at the individual level and housing and the government levels, everyplace. And deleveraging is a painful project, process. And it takes a long time and we're not done.
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