This is part four of an unofficial transcript of Warren Buffett's three-hour long live appearance on CNBC's Squawk Box this morning, Monday, November 14, 2011. (Click here for part three.)
Buffett revealed that Berkshire Hathaway has bought almost $11 billion worth of IBM common stock this year. He also said it is "not clear" that Europe has the will or ability to do "whatever is necessary" to fix its debt problems.
In this section, Buffett says the Occupy Wall Street movement doesn't have clear enough goals to spark real change and he drops a mysterious hint on what he's been buying: "Harold."
JOE: Good morning and welcome back to Squawk Box on CNBC, I'm Joe Kernen along with Andrew Ross Sorkin. Becky is back, but she's in Omaha this morning with the Oracle of Omaha.
JOE: Before we get to her and Mr. Buffett, who is going to build a—did you hear, I wasn't listening that closely but he's planning a big tomb or something that's going to employ 20,000.
ANDREW: No, he isn't. No, he isn't.
JOE: What? That was like a—that I didn't even see the wires pick up on that at. That is a—that's some interesting infrastructure. But—and you know what it's going to take 30 years to build, and he's going to wait until it's finished.
ANDREW: Oh, of course.
JOE: Which I like his—I like his style.
BUFFETT: Yeah, right.
JOE: I like his style. Andrew.
JOE: All right, we are on Buffett watch this morning and Becky Trip made—or Becky Quick made the trip to Omaha she joins us now with Berkshire Hathaway chairman and CEO Warren Buffet. I used to say to Welch that the last in-flight movie he saw on a commercial flight was "Sound of Music." For Buffett it wasn't even a—it must of—it wasn't even a talkie I don't think, the last one that he saw off.
BUFFETT: I'm going to get even on that now in just a second.
BECKY: Whoa, he says he's going to get even with you now, Joe. Look out.
JOE: Actually, I've got—should I—are you going to lead, do you want me to? Can I ask him a question, Becky, or do you want to start?
BECKY: Yeah, go ahead, jump in.
BECKY: Go ahead jump in, Joe.
JOE: I'm going to let you get even with me, too, Warren, but...
JOE: ...I want to talk—and this is Andrew's, I mean, "Too Big To Fail," great book, and that—everybody associates that with Andrew. But I've got—I've got a—sort of a—my view has evolved and you pointed that out last week. And I have real problems with too big to fail, and I think that the Occupy Wall Street movement, they may not know exactly why they're upset but the notion that you can—I was talking about it over this weekend. If you—let's say that you're a public employee and you went to Las Vegas with tax money, and you were allowed to put as much tax money that you want on blue—on black, or red, or on blackjack. And if you lost it, the taxpayers lost it, and you didn't care, but if you made it you got to keep it. That's basically what too big to fail institutions are able to do, and to leave, you know, to leave with taxpayer money, with the profits. And I see why Occupy Wall Street is—has a problem with that, although I'm not sure that they understand it. Can we have enough regulations for these big institutions to keep them honest, Warren, or do we need to break them up?
BUFFETT: Well, I would, I would use this example what happened is that some of these—the people you refer to went to Las Vegas and they didn't go with taxpayer money, they went with shareholder money, and they were making a bunch of bets where heads they won and tails the shareholders lost. And if the shareholders lost all of their money, one of the reasons they could make those bets was because people felt the government would come in to back up those shareholders. But they were losing the shareholders money. As a matter of fact as you know on the banks, on TARP, the government will a profit. Now, they didn't—you know, it didn't have to turn out that way, but it did turn out that way. But the shareholders still lost tons of money.
BUFFETT: And I say the guy who goes to Las Vegas and loses the money should leave broke himself, and—but I don't think—it isn't that everybody got off light.
BUFFETT: The owners of the bank got killed.
JOE: But you have a vested interest in too big to fail, Warren, I mean you were able to you knew—go, you were able to buy Goldman Sachs, you were able to buy GE, you were able buy Bank of America recently, so it implied you've almost got a put there with some of your purchases.
BUFFETT: No, I'm a shareholder—I'm a shareholder. The shareholders got wiped out at WaMu, Wakovia, Freddie, Fannie, almost at Citi, almost at AIG, going down the line, I mean the—so as a shareholder I'm not protected.
BUFFETT: If I were—if I were the CEO, I might be protected but not as a shareholder.
JOE: OK, but it's not fixed yet, is it?
BUFFETT: No, there's parts of it that are definitely not fixed, and I've written about that. I think—I think you've got to—you've got to make it so the CEO of an institution that requires society to bail out its institution, that CEO goes away broke and his wife goes away broke.
JOE: But we still have...
BUFFETT: And the directors pay...
BUFFETT: The directors pay a big penalty, too.
JOE: That still might not help, though. If they're that big and that systemically important, then they're still going to get bailed out. And you know, that's the problem. All right, I mean, we need to make it so that they're not that systemically important because they're still going to get bailed out at this point.
BUFFETT: Well, the ones that—actually if you look at the—if you look at the banks, you know, they have not cost the taxpayer anything.
JOE: No, I know.
BUFFETT: Now, Freddie and Fannie have cost—Freddie and Fannie have cost the taxpayer plenty.
JOE: But, yeah. But it's still—the moral has it that's been built up. Who knows how badly that damages some of the decisions that are being made right now even though we got our money back?
BUFFETT: Well, I would say this, when I—when we buy our BofA preferred, we do not expect the government ever to pay off our preferred. We do expect the government to pay off depositors.
BUFFETT: But we do not expect the government to pay off our preferred.
JOE: OK. Andrew:
ANDREW: Hey, Warren one other question, and it—and it evolves from the financial crisis and the too big to fail issue. It goes back to the question about derivatives...
ANDREW: ...and their impact on the crisis, but also their role going forward. You've called derivatives weapons of mass destruction. And, as I was looking through the earnings report from last quarter, however, Berkshire lost $2 billion in part because of derivatives. Is there a way to square that circle for you?
BUFFETT: Well, yeah, we have entered in about 200 plus derivative contracts, I have, and I expect we will make money on those. We have the use of substantial amounts of money, and they are—they are very, very small compared to either our assets or our earning power. I mean we could handle any of those, any transaction we have without any, any discomfort whatsoever, and very few of them require any collateral, but even if they did we would have the collateral so we...
ANDREW: That's what I was going to ask, do you have to post collateral for the $2 billion loss in the third quarter...
ANDREW: ...do you have to post $2 billion...
BUFFETT: No, no.
ANDREW: No? OK.
BUFFETT: No, no.
ANDREW: And why is that?
BUFFETT: No, no we won't—we won't—we won't enter into any contract that we think could cause me to lose five minutes of sleep if the DOW would go down 2,000 points tomorrow.
BECKY: Those contracts, though, those derivative contracts are long-term bets that several of the major stock indexes, like the S&P 500, will go up over the course of 10, 12 years.
BUFFETT: For the—what the—really they're bets that they won't go down a lot.
BECKY: That they won't go down a lot.
BUFFETT: Over that time. And we get the whole—we're holding $4 1/2 billion that we've had the use of now for five years, and we have the use of for another 10 or so years, which we get to make money with, and if we settle the contracts today at the levels of the index, they would be settled for a whole lot less than the liability that we show.
BUFFETT: I'm happy with all the contracts.
BECKY: And the earliest contract is it 2018?
BUFFETT: But that's not the late—I mean, they go out to 2026, I think.
BECKY: Is there—do you think there's a chance that the indices could go down from where they are today because the Europe problems are still overhanging in six years?
BUFFETT: Oh, sure they can go down, but they can go up, too.
BUFFETT: Yeah, and if they stay the same, our liability would be quite a bit less than we show on our balance sheet.
BECKY: OK. Why don't we talk a little bit more about some of the earnings. You mentioned already the strength of some of those businesses that you've seen and how strong the American economy is as a result. You also spent a lot of time in the last quarter buying equities, $7 billion.
BUFFETT: You noticed.
BECKY: Yeah, we did notice.
BECKY: A lot of people have been paying attention to this.
BECKY: You've got a file with the SEC today...
BUFFETT: Tonight, tonight.
BECKY: ...tonight to say what you were buying in the last quarter.
BECKY: Can you tell us now what you were buying?
BUFFETT: Yeah, but I would like to make interesting. And Joe and Andrew and you are always torturing me with these quizzes that you give. You know, you send Scott Cohn out some place and have him issue some enigmatic word or something, and I'm supposed to figure out where he is in all that. So I would like, you mentioned movies.
BUFFETT: If you remember in "The Graduate" when Mr. McGuire called Benjamin into the work—into his—at the party very early, and he said, `Now just one word.'
BUFFETT: Put his arm around him, "Plastics." So I'm going to say one word, and I want you to figure out where we put all that money and the word is Harold.
BUFFETT: Harold. Think about it. Harold.
ANDREW: Harold the name or?
BUFFETT: That's what Benjamin—Benjamin, Benjamin didn't do...
BECKY: Yeah, Harold the name or H-E-R-A-L-D?
BUFFETT: Yeah, Harold the name. H-A-R-O-L-D. It's like plastics.
JOE: OK, now, OK.
ANDREW: Look I'm on Google, so I'm going...
JOE: No, no, Harold and Kumar that's a...
BUFFETT: Yeah, now the only thing I—Joe and Andrew, I'm attaching one condition to this. You can't look at the emails that are coming because some of your viewers are going to...
JOE: No, I'm not. But Harold and Kumar, they're making the sequel, what studio is that? Are you—are you investing in a movie studio? Is that what you're talking about?
BUFFETT: Now, just think about it. Harold just think about it, OK.
BECKY: Harold and Kumar that's...
BUFFETT: And I will—we'll talk, I'll give you a little time on this one, but billions...
ANDREW: Oh, boy.
BUFFETT: ...and billions of dollars are riding on this, so, now.
JOE: All right, I'm looking this up.
BECKY: Billions and billions of dollars that you invested in the last quarter, and the clue is Harold.
BUFFETT: Write it.
ANDREW: I'm looking at.
BUFFETT: Not plastics. Is it any...
BECKY: I think.
BUFFETT: ...how much older do you think Mrs. Robinson actually was, Ann Bancroft, than Dustin Hoffman.
JOE: Oh, I know that. It's six years.
BECKY: I know the answer, too, she was like 35 right?
JOE: Thirty-seven, I think.
BECKY: Or was she, 37?
BUFFETT: She was—she was six years older than he was.
JOE: He was 31, yeah.
BECKY: Dustin Hoffman.
BUFFETT: But not—but if you looked in that hotel room, you thought there were more numbers than that.
BUFFETT: I actually started laughing uncontrollably during that to the point where my family practically led me out of the theater.
BECKY: Wait a second, back to Harold, can you give us another clue?
BUFFETT: I've given you multiple clues.
JOE: I can't imagine you'd buy into a movie company, Warren, would you? Is that Lionsgate who's doing that?
ANDREW: I'm looking here.
BECKY: I always think of consumer products. Is it—is it...
BUFFETT: Well, we can talk about something else while you think about it. Or whatever you'd like to do.
BECKY: Oh, no.
ANDREW: OK, give us, give us a little bit of time, Warren.
BECKY: Will you really tell us if we guess it?
BUFFETT: Oh, I'll tell you.
ANDREW: We're literally...
BUFFETT: I'll bet—I'll bet...
ANDREW: We're working the computers here.
BECKY: You'll tell us.
BUFFETT: Oh, I'm going to tell you.
ANDREW: Hold on, hold on. Does it have anything to—no.
BUFFETT: But I'm—but I'm sitting here with three people with IQs of least 450 in aggregate.
ANDREW: Is this?
BUFFETT: I won't, I won't give you a—I won't give you the subdivision how I...
BECKY: The breakdown.
BUFFETT: I won't give you the breakdown, no.
ANDREW: Is it Southwestern Energy?
BECKY: Are you using Google to look up Harold?
ANDREW: Yes, I am. I am. Is that—is that an OK guess?
ANDREW: No, OK, OK, I'm trying.
BECKY: Can you give us another hint?
BUFFETT: I've given you a lot—I've given you multiple hints.
BECKY: What's the other hint?
ANDREW: Multiple? You gave us one and I got.
JOE: Multiple? You gave us Harold.
BUFFETT: And that you have to figure out, too.
BECKY: Is it...
ANDREW: I don't.
BECKY: Harold and the Graduate is that the other hint?
ANDREW: Does "The Graduate" have anything to do with it?
JOE: What about Time Warner?
BUFFETT: It sort of—sort of indirectly.
BECKY: Time Warner, Joeses?
JOE: You don't—you wouldn't buy—you wouldn't buy Time Warner stock, would you?
ANDREW: Where are you getting Harold from with Time Warner?
JOE: Because it's a Time Warner—it's a Warner Brothers, Harold and Kumar.
BECKY: Oh Harold and Kumar is a—is a Warner Brothers movie. That's a good guess.
JOE: As soon as he sad it is, all I know about Harold is Harold and Kumar.
ANDREW: McGraw Hill?
ANDREW: OK, we're going to think about it during the break.
BECKY: All right.
BUFFETT: Are you ready for it?
BECKY: Are you going to tell us?
BUFFETT: I'll tell you if you like.
JOE: OK. After the break, after the break.
ANDREW: Hold on, why don't you tell us after the break?
BECKY: After the break, OK, all right we're going to keep this going around. Can we look at the viewer email over the—over the break?
BUFFETT: OK, you can you look at the viewer email over the break. I'll bet somebody sent it in already.
BECKY: OK. We're going to keep working away at this. We've got a quick two minute break to try and figure this out. When we come back, you'll tell us?
BECKY: All right, when we come back, go ahead, send us your guesses on this to email@example.com or you can tweet us @squawkcnbc. Hopefully, we'll figure this out before the end of the break. But when we come back, we'll get the answer from Warren Buffet. Stick around we've got plenty more to come this morning. SQUAWK BOX will be right back.
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