TRANSCRIPT/VIDEO PART SIX: Three Hours With Warren Buffett - Live From Omaha

THIS IS PART SIX OF "THREE HOURS WITH WARREN BUFFETT - LIVE FROM OMAHA" ON CNBC'S SQUAWK BOX WITH BECKY QUICK, FRIDAY, AUGUST 22, 2008.

IT IS AN UNEDITED TRANSCRIPT AS PROVIDED BY BURRELLESLUCE.

GO TO PART ONE, PART TWO, PART THREE, PART FOUR, OR PART FIVE OF THE TRANSCRIPT

Announcer: This is a special edition of SQUAWK BOX live from the Holland Performing Arts Center in the heart of beautiful Omaha, Nebraska. Now, once again, here's Warren Buffett and Becky Quick.

BECKY QUICK, co-anchor (Omaha, Nebraska): Welcome back, everyone, to SQUAWK BOX here on CNBC, first in business worldwide. We are just one hour away from the opening bell right now. Again, we've been watching the futures higher through the morning. We've been spending a lot of time this morning with Warren Buffett and he's been answering questions from followers across the country. If you see right now, the Dow futures are, in fact, close to 100 points above fair value, but let's head back to California to get a question of--from one of you at home.

Unidentified Man #1: What are the odds that we could have a bank failure similar to the 1929 era?

QUICK: Warren, that question was, again, what are the odds that we could have a bank failure similar to what we saw in 1929?

WARREN BUFFETT (Berkshire Hathaway CEO): Well, that's quite unlikely, partly because of the FDIC. People--you had failures in the Great Depression where the failure of Bank A caused the failure of Bank B. When they saw a line at Bank A, everybody lined up at Bank B and then they lined up at Bank C. And the FDIC was one of the great ideas of the Depression. You've got terrific woman, Sheila Bair, running that. So we won't see failures simply because there's a wave of failures elsewhere. What we'll see here are failures where the banks were dumb in what they did and you will see a fair number of those. We had a huge number of bank failures in this Midwest area, including Nebraska, in the early 1980s when there was a farm bubble. Where there's been a real estate bubble and the bankers have participated big time, you'll see some bank failures, but you will not see any losses to anybody that--in terms of FDIC covered accounts of 100,000 or under, so nobody needs to worry about their $80,000 account at any bank, even though the bank may have been run in a dumb way.

QUICK: Although you've said it before that the financial system is much more intertwined and linked than it had been in the past, especially when you start looking at some of the investment banks and beyond. Do you worry about that?

BUFFETT: Well, that's why the Fed had to rush in on Bear Stearns.

QUICK: Right.

BUFFETT: I mean, they weren't--they weren't worried about Bear Stearns, they were worried about the consequences of Bear Stearns toppling and then the domino action following, which would've happened in my view. I think they made exactly the right decision. There's enormous interconnection and derivatives have accentuated that in a big way so that trouble spread. And even if you made sound loans getting 10 or 20 percent down, if the other guy made a bunch of dumb loans and that causes a huge supply of houses and house prices, appreciation, and even the better loans can get impaired to some degree. So nobody gets insulated from the problems of the economy. And if you're a bank, you feel some of those effects no matter how prudent you've been over time. But there's not going to be a wise--there's not going to be bank failures happening just because there's other banks fail.

QUICK: Could there be another Bear Stearns this time around, though?

BUFFETT: Sure. People--and I've said that you only find out who's been swimming naked when the tide goes out.

QUICK: Mm-hmm.

BUFFETT: Well, Wall Street has turned out to be a nudist beach. I mean, there's--there've been plenty of people that pushed balance sheets extremely hard. I mean, there was virtually no limit on credit. People, anything was going in the credit market and they were mispricing credit, they were--they were overleveraging and now the truth comes out as people start looking with, you know, some care at what's really on the liability side and the asset side of these banks. A long time ago there was a movie producer holding an annual meeting and one of his shareholders said in the film, you know, `I don't understand all these figures, Mr. Scurus,' or whatever his name was. `What do they mean?' And the CEO said, `Well,' he said, `I don't really understand them very well, either.' But he said, `But I can tell you this, the liabilities are good.' Well, that's what you find out in a period like this. The assets may not be so hot, but the liabilities are good and then that's when the trouble begins.

QUICK: When people start looking around to find the next potential Bear Stearns, Lehman Brothers is the name that comes up again and again. Should people be concerned about what's happening at Lehman?

BUFFETT: I don't think it's appropriate, really, to talk about financials.

QUICK: Financials, in particular, banks.

BUFFETT: No. I think that--I really think that's inappropriate to talk about them.

QUICK: Do you think that's caused...

BUFFETT: I have no problem talking about Fannie and Freddie because the government stands behind them.

QUICK: Do you think that's part of what caused the problems with Bear Stearns, though? Once the rumors get out, once the media picks up on it, once the names came back again and again? Is that...

BUFFETT: If you had a $400 billion balance sheet and 400 or so billion of stated equity underneath it, that means that you're dependent on the kindness of strangers every day.

QUICK: Mm-hmm.

BUFFETT: And you know, it--if the strangers aren't there, you don't have a way of paying back the 400 billion. And so if your name is bandied--if you--in the case of the kindness of strangers, if your virtue is questioned, you know, you've got a problem. And there is no bank, investment bank, that can pay all its liabilities tomorrow, and if people present those liabilities and say we don't want to have anything to do with you, even if you offer us a little more on the repos or something of the sort, the game is over and it's a--I think Jamie Dimon said, you know, `Anybody who spreads rumors about financial institutions ought to be--ought to be put in jail.' It's--you can cause trouble. If I were to say XYZ is in trouble, they are in trouble.

QUICK: Right.

BUFFETT: I mean, you create your own fire in this case.

QUICK: Do you agree with Jamie Dimon that people should be going after the people who are spreading rumors about these financial institutions?

BUFFETT: It's hard to do. I mean, to find out where a rumor starts or anything. But I mean, it is--it's very serious business to question the integrity of a financial institution when you can't possibly pay all your liabilities the next day or the next week. And a rung--or a question creates its own dynamic and you can do a lot of harm to a financial institutions just by spreading rumors. So there ought to be penalties attached.

QUICK: I know it's hard to prove, but would your gut tell you that that's partially what happened with Bear Stearns?

BUFFETT: Well, it's partially, but there--it isn't the whole story, but Bear Stearns, you know, they had problems and their balance sheet was too big and the assets were too illiquid and--but the rumors moved it along. I mean, and it comes like that.

QUICK: Mm-hmm.

BUFFETT: You know, I ran Salomon in 1991 for a little while and we could've been put out of business. As it was, our balance sheet was shrinking every day. There was a lot of pressure. But one big story in the paper that says, you know, Salomon did go out of business tomorrow or something of the sort would have meant we would have gone out of business. I mean, everybody would have pulled their lines from us.

QUICK: OK. OK. Warren, we're going to have a lot more coming up. We've got more questions from people back home and we've got more questions from right here as well. Again, folks, if you are just joining us we, are live with Warren Buffett from Omaha, Nebraska. We'll have more SQUAWK right after this.

TIME TO BUY THE HOMEBUILDERS?

QUICK: Welcome back, everybody. We are in Omaha, Nebraska. Last night it was the premiere of the "I.O.U.S.A." movie and after that debut we got the chance to moderate a town hall meeting right here with the men behind the movie, Blackstone's Pete Peterson and former US Comptroller General David Walker. Warren Buffett was also on that prestigious panel and in the movie and we had a chance to send people out to go around the country to get questions, Warren, from people around the country that they'd like to have come back to you. These are people who were at the "I.O.U.S.A." premiere, but right now we do have a question from Chicago. So why don't we listen to this.

Unidentified Man #2: Hi, Warren. Given the state of the US credit markets and the way that banks are withholding lending from retail customers essentially, how do you see the housing market playing out over the next 18 to 24 months?

QUICK: Hm. That's a great question. How do you see the housing market playing out, given how banks are lending right now?

BUFFETT: Hm. It will be pretty tough. The, you know, we had a very, very big bubble and we had a lot of people do things they shouldn't have done as borrowers in terms of either counting on making payments they couldn't make or lying about their financial circumstances. We had a lot of mortgage lenders that were doing bad things and we had a lot of investors that were doing stupid things. So you put all that together and you put it into an $11 trillion mortgage market and you've got lots of pain for the investors and you've got pain for the people that can't make their payments. Now the nice thing about borrowing on a house is if you make your payments, you keep it. And so if you signed up for payments you could handle, you're fine unless you lose your job or there's a divorce or death or something of that sort. But a lot of people speculated on houses and bought them with no down payments. And the consequences of that won't get washed out in the next month or two. They will last, in my view, a considerable period of time. But the good thing about it is we have--we have household formation growth in this country. We're not a stagnant economy and we will work our way out of it, but it took--with the farm crisis here in the early '80s, it took years to work our way out of it.

QUICK: There are people who will point to statistics like with housing starts that we saw earlier this week. People said, hey, it's still down, but the rate of decline is decreasing. Is that about the best thing people can find to say about this? Or is the best...

BUFFETT: Well, the best thing they could find is if there weren't any housing starts, then we would clear up the inventory much quicker.

QUICK: Right.

BUFFETT: I mean, in the end, housing starts work against the housing recovery. So it's going to--it will take time. I mean, there--the losses are huge with the home builders and then the losses of people losing homes but, again, only if they don't make the payments. And lenders are losing a lot of money. People are finding out they didn't have any idea what they were doing when they bought the CDOs and that sort of thing. And the rating agencies did not cover themselves with glory and frankly Wall Street didn't either. So it's--there's a lot of blame to go around and we probably shouldn't worry too much about that. We should--we should worry about really creating enough households so that the excess supply gets sopped up. There's a lot of vacant homes now. And the market won't really come back until you get a normal--a close to normal ratio of vacant homes, homes up for sale compared to current sales, and that's a ways off.

QUICK: We get anecdotal evidence all the time from people who say they are having a really tough time even though they have great credit. They can't get a mortgage. Other people saying I can't get a second mortgage, I can't find something for a second home. Is it your sense from what you know about lending right now that lending has gotten that much tighter?

BUFFETT: Well, I don't know about every area in the country.

QUICK: Mm-hmm.

BUFFETT: But I think if you have a significant down payment and you have a job and your income covers the payments by the old traditional yard sticks, I don't think there's a problem getting a loan. I mean, Wells Fargo is lending a lot of money.

QUICK: Mm-hmm.

BUFFETT: And they're looking for more loans. But they're not going to lend it to you for nothing down. They're not going to lend you so that you have payments that are 50 percent of your income and that stuff--you've got to get the bad practices out of the system and then we won't have these problems.

QUICK: Fair to say that since you think these problems could stick around for a long period of time that maybe the home builders don't look that cheap and you haven't been looking there for bargains?

BUFFETT: No. The home builders still have plenty of problems and that doesn't mean--you know, the time to buy the stocks is not necessarily when they've already--their business has already turned up.

QUICK: Sure.

BUFFETT: I don't look--I don't try to pick turns in any kind of an industry in terms of buying stocks. I just like to buy them when I think they're cheap relative to their long-term earning power and I don't happen to have that conviction about home builders now, but it very well may be the case. It's just I don't have the conviction.

QUICK: OK. Warren, we have more to come. It's been a long morning already but, hey, time is flying by.

BUFFETT: You're paying me by the hour. I mean, why should I complain?

QUICK: OK. We'll have much more with Warren Buffett when we return and more from Carl in Beijing. Stick around folks, SQUAWK BOX is coming right back.

WILL WARREN LEARN MANDARIN?

QUICK: No, it's not in his ear, folks. Welcome back, everybody. Let's get back to our conversation with Warren Buffett. Carl is also joining us right now from Beijing, and Carl, we've been chatting all through the morning talking about a lot of different things.

CARL QUINTANILLA, co-anchor (Beijing): Yes.

QUICK: But actually, we're going to have a conversation with Warren, too. One of the things he'd been wondering. Warren, do you want to toss out to Carl, what you've been thinking about?

BUFFETT: Well, I wonder what he enjoys the most over there. I mean, he has seen these terrific athletes. What one memory are you going to come back with, Carl?

QUINTANILLA: That's a good--that's a good question, Warren. You know, I was here last summer and we did a documentary about McDonald's and the city at the time was full of cranes, was very dirty, very polluted, and I still can't get over even 20 days later how the Chinese marshaled whatever resources they had to get the city to look like it does right now. They figured out some way to do big projects in a short amount of time and I think that's going to be interesting to see how they leverage that as they go west to all those big cities that we really have no idea what they look like, what the infrastructure's like there. Pictures that come in over the next year from there, I think, are going to be fascinating. My question to you is if you had to guess at this moment, how--what is your investment in China, if there is going to be one, going to look like? Is it going to be individual companies? Is it going to be currency plays, debt? Have you--have you sorted that out in your own mind?

BUFFETT: It will certainly be extensions of the businesses that we already have. We opened that plant in Dalian for Iscar almost a year ago. I was amazed when I saw what has been accomplished in Dalian at the time. But we will be there with our businesses. But I like buying securities and I like buying companies, and I'm open to doing either one. And I would be surprised if we don't do something in the next few years.

QUINTANILLA: Yeah.

QUICK: You would be surprised if you don't do something and then...

QUINTANILLA: I think it's interesting, too...

QUICK: Go ahead, Carl.

QUINTANILLA: In fact, I think it's interesting, Warren, you know, we walked in here and everyone worries about China slowing down as the global economy slows. You know, will their exports be bought? You know, is their economy dependent on exports? And the lesson we got from a lot of companies here was there is a self-contained economy here. There are Chinese businessmen doing business with other Chinese, and I wonder if you think that decoupling is significant or not?

BUFFETT: Well, I think their economy is going to do fine. Who knows whether it gets overheated or the inflation picks up or something, but it's like the United States. It really isn't important what happens in the next six months or a year. It's what's going to happen over the next 10 years. We're going to do well. The truth is, the Chinese will do better, because they're starting from a lower base, but they have learned a tremendous amount about business in the last 20 years, and about how to unleash the human potential, and that's something that our country learned earlier. And--but they're picking it up very, very, very fast.

QUICK: You know, Warren, we had Jim Chanos on the program several months ago, and he had said when we asked him, what's the one thing you worry about that you think could be the next big drop? He had pointed out, well, maybe you look at this endless infrastructure play when it comes to the Indias, the Chinas of the world. Maybe that is not going to be as strong as some people think. What do you think about that idea?

BUFFETT: I don't know whether it will be or not, but I know that 10 years from now, 20 years from now, China and India are going to be a long way ahead of where they are now. So I don't really--I don't worry too much about whether there's going to be a sudden interruption or something. I wouldn't be able to predict it anyway, and if I did, I still want to be in wonderful businesses bought at the right price and have them in the right place. So I don't--I don't worry about the things that I really am not going to understand anyway. I worry about what's important and knowable. And if I can find a few things that are important and knowable, I play in that box and I don't worry about what's unimportant and I don't worry about what's unknowable.

QUICK: Mm-hmm.

QUINTANILLA: Warren, are you--are you going to try to learn Mandarin at this stage of the game?

BUFFETT: No, no, I'm not even going to try to learn how to eat the food. I am--if I can't make a deal while eating at McDonald's, I'm in trouble.

QUICK: Hey, Warren, you have a little bit of insight into the Olympics, too, right? You were in Las Vegas just before the United States basketball team left to go over.

BUFFETT: Right.

QUICK: They were in Las Vegas at the same time. They were playing the Canadian team as they warmed up. What insight can you tell us about the Redeem Team?

BUFFETT: Well, they were--we had dinner, a good many of them. LeBron was there, it was on a Thursday night, I think, and they played the Canadians the next day. And they are--they were determined to win. I mean, enough of this being humiliated stuff. So, that was a team that I would have bet a lot of money on in terms of how they were going to do when they got there, and they're a remarkable group. I was a little disappointed. I went to the Canadian game, and they had me on the sidelines, so I thought this was going to be my big moment, right? No chance. So I left at the half. I mean, if they weren't going to put me in the game, the hell with it.

QUICK: The only guy who walked away from that game early. Hey, Carl, we just want to say thank you again for everything, all your coverage, all your hard work over the last few weeks, you and your entire team out there. I know you're on your way home. We want to make sure you have a safe trip, and I can't wait for you to come home. Hurry back, OK?

QUINTANILLA: It's going to be--it's going to be fun to be back at the desk, Beck. I'll see you next week.

QUICK: OK. Carl and the entire team who are out there in Beijing, we thank you all. When we come back, folks, we have a quick parting shot from Warren Buffett. Stay right here.

BUFFETT CHOICE FOR OBAMA'S VP

QUICK: Welcome back, everybody. We are in Omaha this morning with Warren Buffett. Warren, we are headed into the heavy, heavy political season. Next week you've got the Democratic National Convention, and Barack Obama is expected to name a vice presidential candidate to go along with him today, tomorrow, sometime coming up. Who would you like to see Barack Obama pick?

BUFFETT: My first choice would be Sam Nunn. I think he'd be absolutely terrific. I have no notion of who Barack's going to pick, but he's the man, that if anything should happen to Barack, would be president of the United States. So he'd be my pick.

QUICK: OK. We are also at the Holland Performing Arts Center. You point out an interesting note. This center was built with money from Dick Holland.

BUFFETT: Yeah. Dick Holland and Dick became a partner of mine in 1958 and he gave a very, very large contribution to the--to make this possible and my guess is that the stock that he gave, it was Berkshire Hathaway. It cost about $5,000.

QUICK: OK. Again, Warren, we'd like to thank you very much for being with us for these three hours. We have completely appreciated this time.

BUFFETT: It's been fun.

QUICK: OK. Folks, that does it for us today. Again, we've been here for three hours in Omaha. Make sure you join us on Monday, though. Joe's going to be back and we're all set for you to come in. SQUAWK ON THE STREET starts right now.

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