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CNBC Exclusive: CNBC's Becky Quick Sits Down with Billionaire Investor Warren Buffett on "Squawk Box" (Transcript Included)

Warren Buffett
AP
Warren Buffett

When: Today, Friday August 22
Where: CNBC's "Squawk Box"

Following are excerpts from the unofficial transcript of the CNBC EXCLUSIVE interview with billionaire investor Warren Buffett on CNBC's "Squawk Box."

All references must be sourced to CNBC.


BUFFETT ON I.O.U.S.A.:

QUICK: All right. That sounds perfect. You know, Carl, we're going to check back in with you in just a few minutes because we have a lot of things about the Olympics to talk about with Warren Buffett as well, everything from Coca-Cola to sponsorships.

But, folks, we are in Omaha today because last night there was a groundbreaking event in the world of finance and politics that took place right here. It was the world premiere of a documentary called "I.O.U.S.A." Now, the film takes a look at what it says are America's four key deficits. It explores the risks to the future of this country and of its citizens.

And, Warren, you were in the documentary, so let's take a look at one of the clips from that right now.

Mr. BUFFETT: Yes.

(Clip of "I.O.U.S.A." courtesy Roadside Attractions)

QUICK: The film premiered on hundreds of movie screens across the country last night, including right here in Omaha. After the debut, I got the chance to moderate a town hall meeting with the men who were behind the movie, Blackstone's Pete Peterson and former US Comptroller General David Walker.

Warren, this was a discussion with five of the brightest minds of people who are looking out there at the economy, and there is some debate as to how big of a problem this is.

Mr. BUFFETT: Yeah. There was a debate last night as a matter of fact.

QUICK: Right.

Mr. BUFFETT: And the film takes the position pretty universally throughout the film that it's an enormous problem, and I probably represented the group that thinks this is quite a bit less of a problem than the film portrayed. But I admire the people that did it in that there's so little thinking done beyond the next electoral event that there are important policy matters that do extend way out into the future and--whether it's energy, whether it's the question of weapons of mass destruction, certainly in terms of fiscal policies. So I admire the fact they tackled the subject. I don't--I don't agree with many of the conclusions in the movie.


BUFFETT ON THE ECONOMY 1:

QUICK: So again, Warren, we're thrilled to have you here this morning for three hours, and we do have a lot to talk about today. One of the things we'd like to get straight to, though, is what you see happening in the economy right now. We've been talking to you for some time about what you see as some significant problems in the economy. And, from your perspective, have things gotten any better? Have they gotten any worse?

Mr. BUFFETT: No, they've rippled out some, and that's what you'd expect. So the excesses in credit, the deleveraging that was required, the weak credits that are exposed, all that is--we're seeing manifestations out as the ripples go out, and I think I said one time that, you know, you only find out who's been swimming naked when the tide goes out. Well, we found out that Wall Street has been kind of a nudist beach. There's--it's just one discovery after another of firms that either didn't know what they were doing or that did things that they shouldn't have knowingly. And all of the troubles have not been revealed the first time around, usually, so there's considerable disillusionment that's set in in terms of are these guys telling us the truth now or maybe they just don't know what the truth is. So all of that's having an effect, and what we're seeing in business, in our retail businesses...

QUICK: Mm-hmm.

Mr. BUFFETT: ...certainly, anything to do with housing is even a further slowing down. I mean, June and July, both in terms of credit experience with people that first got into trouble of house payments and now on credit card payments and so on. And retail trade, it's not over by a long shot.

BUFFETT ON FANNIE & FREDDIE:

QUICK: Let's talk about Fannie Mae and Freddie Mac, specifically. These are two stocks that it seems like every time you turn around are touching new low levels. There's a lot of concern out there on the market about these two stocks right now. What's your general take on how they got here and what you think's going to happen next?

Mr. BUFFETT: Well, how they got here was they had two businesses, basically.

QUICK: Mm-hmm.

Mr. BUFFETT: They insured mortgages on a huge scale, trillions, and then they ran sort of a hedge fund, a carry trade where they bought mortgages and borrowed extensively against them. And because they had really the backing of the United States government--and everybody assumed they had the backing. I assumed it. And the truth is they do have the backing of the United States government in terms of their debt, not in terms of their equity--they were able to borrow without any normal restraints in terms of capital or margin requirements or anything of the sort. They had a by-check from the federal government.

QUICK: Mm-hmm.

Mr. BUFFETT: And they also had an added problem in that they had a dual mission. The government expected them to promote housing and the stockholders expected them to raise the earnings substantially every year. And as the years went by, they emphasized the latter more and more. They started talking about "steady Freddie," and Fannie Mae said, `We're going to increase the earnings at 15 percent a year.' Any large financial institution that tells you that sort of thing is giving you a line of baloney. I mean, they may do it for a while, but when they can't do it with operations, they do it with accounting and they cheat. And that's what happened at both those places on a huge, huge scale.

And we have this--they're so wound up with national housing policy, that they're a national problem and, with this dual situation, you know, Lincoln said a house divided against itself, you know, must fall. And they existed half-slave, half-free for a long time, and then the motivations became in conflict, and when they got on the 15 percent a year merry-go-round and said, you know, `We're going to deliver earnings up every quarter, and we'll meet them to the penny,' when they can't do it operationally, they do it with accounting.

QUICK: So what happens now? You mentioned that this is all tied up with the national housing situation now. Are they two big to fail, and what does that mean?

Mr. BUFFETT: Yeah, they're too big to fail.

QUICK: Yeah.

Mr. BUFFETT: So that doesn't mean that the equity can't get wiped out, and it almost has in the stock market, and in practical sense as institutions, they don't have any net worth. I mean, if you look at their obligations and look at the fact they have big deferred tax assets as assets. They would've been gone in any market where the government wasn't behind them long, long ago. But the government is behind them, and they will stay behind them, and people that own insured mortgages or who own their debt, I think--nothing's going to happen to them. The equity and the preferred stock is another question and I think you'll see some action fairly soon. You've already seen it in the fact that the Treasury has made pretty much explicit what was formerly implicit.

BUFFETT ON DERIVATIVES:

QUICK: You've come out and said derivatives are the weapons of financial mass destruction before. But you use derivatives, too.

Mr. BUFFETT: That's right. I don't say they're evil, per se.

QUICK: Yeah.

Mr. BUFFETT: I just say that once the genie opened the bottle on those many years ago, that their proliferation, their variation, their inability to be valued and their ability to allow institutions to pile up leverage like the world has never seen can cause great systemic problems. And that doesn't mean, you know--it's like gun powder or water. You can do damage with a lot of things, but these have systemic--they pose systemic risks. And incidentally, the government recognizes this. I mean, you've had a task force working on, you know, what do we do to prevent these things from causing a real problems? But they have caused problems so far. I don't think they're going to cause problems at Berkshire Hathaway. I know every single derivative contract we have. Now, when we bought Gen Re, they had 23,000 plus contracts.

QUICK: Mm-hmm.

Mr. BUFFETT: There was no way in the world I can get my mind around that. I mean, if I--if I had spent full time and had all kinds of assistants and everything, I never would've known what was in those contracts. We had one contract that was due in 100 years, so that meant that for 100 years some guy at our place put a mark on it every day and some guy at another place put a mark and they got their bonuses based on it. I mean, that is a system that is guaranteed to cause trouble. And so I got out of the business. It took me four years under benign market conditions, and we lost $400 some million in the process. So they are dangerous things. The ones we put on may be dangerous things, too, but I do know every contract, and I know what my gain-loss arrangement is and nobody else marks them. I mean, I keep track of it.


BUFFETT ON ECONOMY:

QUICK: What sort of insight does that give you?

Mr. BUFFETT: Well, it--obviously, I pay a lot of attention to what's happening. And we'll say at American Express--and Ken Chenault talked about that here a month ago--but they are experiencing credit deterioration and they're experiencing it sort of in all segments. So they're seeing the rich customers slow down in payments, slow down in purchases. And American Express can describe that rather than I, but I pay a lot of attention to that sort of thing. And incidentally, it will get cured at some time in the future, but right now the situation is getting worse and I would say I don't see any early end to that.

QUICK: We want to talk to you about...

Mr. BUFFETT: But I do see an end.

QUICK: You do see an end, but no early end. I mean, is that six months, is that 12 months, is that 18 months?

Mr. BUFFETT: I don't know.

QUICK: Can you put a time?

Mr. BUFFETT: Yeah, I don't know the answer to that. All I know is that it's not--I don't think it's going to be really soon. I think that--my candidate is Obama, so I think President Obama is going to have plenty on his plate in January.

BUFFETT ON OIL:

QUICK: ...just a month ago. But 120, you think that that's a comfortable price for oil?

Mr. BUFFETT: It's very hard to tell, but what you do know is that the situation in respect to supply and demand in oil has changed dramatically in the last five or six years from what has existed ever since World War II. I mean, ever since World War II we've always had a significant amount of producible capacity beyond the demand that existed. Now, maybe for one reason or another it wasn't being produced. The Texas Railroad Commission used to--which was kind of--kind of a domestic OPEC--used to shut down the wells in Texas because there was so much producing capacity and they didn't want to knock down the price, which was $3 a barrel then. So we've always had the situation post World War II where it's been a lot more supply could come on than there was demand. In the last 10 years, the first five years oil demand went up around four million barrels a day, and then in the next five years it went up another eight million barrels a day. That's 12 million barrels a day. We did not bring on, in the world, anything like that in terms of productive capacity. So at 86 million barrels a day, which is the present demand, roughly...

QUICK: Mm-hmm.

Mr. BUFFETT: ...the world that has no real buffer stock in terms of the-you can't turn the tap on and get 90 or 95. And that means that prices have been and will be quite volatile and probably--well, they have been at a-certainly at a higher level. It is a different world in terms of supply and demand on oil than existed five years ago.

QUICK: What's your thought as to what the nation needs to be doing right now? I know you've spoken with Boone Pickens about his plan.

Mr. BUFFETT: Yeah. Well, Boone's on the right track. And then one way or another, you know, we're using 20 million barrels or so a day of oil, we're using a quarter of the oil, roughly, in the world. We and the world cannot certainly keep increasing our demand for oil. If we--if we required another 10 million or 12 million barrels a day in the next 10 years, I'm not sure where it would come from or at what price it would come from. We just don't have that. The tar sands would actually--will increase some, but oil depletes, production of oil depletes.

QUICK: Hm.

Mr. BUFFETT: And so one way or another, we're going to have to learn to use a lot less oil. And my guess is we're using less oil right now in the United States because of price factors.

QUICK: Yes.

Mr. BUFFETT: But I'm not sure that the world demand is--maybe it's decreased a million barrels a day or something like that, but that isn't going to do it over 10 years. We're going to have to use less oil.


BUFFETT ON THE FED:

QUICK: Do you think the Federal Reserve has gotten inflation under control? Do you think that they've focused a fair amount on the economy?

Mr. BUFFETT: No, they've got a tough problem. I mean, with these dual goals of essentially stimulating growth and at the same time containing inflation, they're in direct conflict. And the temptation is, since the lack of growth is apparent today and the inflation tends to kick in later on, to ignore the inflation aspects. It's a very tough balancing act and it can't be done perfectly. And like I say, I couldn't do it perfectly and I don't think anybody can, but I admire the people that take on the job. I admire Bernanke, I admire Greenspan. That doesn't mean I think they were always right. It's--I think they're thought to have more power than they really do have. I mean, Ben Bernanke does not have any magic wand that's going to create-enable people that have borrowed too much money on their homes or people who've lent unwisely or the banks that are too leveraged, that doesn't go away easily.

BUFFETT ON FANNIE & FREDDIE 2:

QUICK: You own shares of Fannie Mae, Berkshire Hathaway did, up until when, about 2001?

Mr. BUFFETT: We were the largest shareholders of Freddie Mac in the--in the United States, and around 2000 or 2001...

QUICK: Yeah.

Mr. BUFFETT: ...it became so apparent to me that they were intent on trying to report quarterly gains to please Wall Street, and there are all--if you've got the government behind you and you can borrow money in unlimited amounts, you can report earnings for any given quarter that you want to. I mean, the chickens don't come home to roost till later. And the management was intent on that. They started doing things on the asset side they shouldn't have done, they made promises they shouldn't have made, and so we got out.


BUFFETT ON INFLATION:

QUICK: Warren, you couldn't hear what Steve had just been talking about, but he did say that one point coming out of Jackson Hole is that this rise we've seen again in the dollar--rise that we've seen again in oil is clear evidence that the Fed does not have everything under control when it comes to inflation. What do you think about that?

Mr. BUFFETT: Well, the Fed doesn't have--but even without that fact, I mean, the Fed's got real problems with inflation and have got it in commodity prices. I--every business we have, but some of them in a dramatic way, are getting cost increases thrown at us. I just was looking at the reports for July on certain businesses, and we're trying to push through price increases ourselves. And our margins are getting squeezed in certain major businesses simply because we don't get price increases as fast as we're getting them. But we're pushing up prices.

QUICK: So you see it going right through? Which...

Mr. BUFFETT: Sure it's going to go through.

QUICK: Which businesses are the toughest to get them through?

Mr. BUFFETT: Well, it's tough, and we're in various things connected with residential housing.


BUFFETT ON FENWAY:

QUICK: Warren, we teased earlier that we were going to mention something nobody had heard about just yet. We know that you're a huge baseball fan, but you also have a big day coming up. What is that big day?

Mr. BUFFETT: It's a--it's a huge day for all of baseball, actually. On September 9th in Fenway Park I will be starting. And--but more important than that--because I've thrown out the first pitch other times--but this time I brought my secret weapon.

QUICK: Which is?

Mr. BUFFETT: Jack Welch is going to be my catcher.

QUICK: Jack Welch is your catcher.

Mr. BUFFETT: Yeah. I mean, can you imagine being able to pitch with Jack calling the pitches? And, I mean, anything he calls for. I've got--I've got a fastball, a curve, a sinker, you know, a spitball, a knuckleball, a sidearm delivery. And if Jack calls for any pitch, including the ball that bounces four or five times before it gets to the plate, I'm going to throw it.

QUICK: You're going to throw exactly what he calls for.

Mr. BUFFETT: So if I--if that's the pitch, it's because Jack called it.

QUICK: All right, we'll all be watching that. That's coming up, again, you said September 9th.

Mr. BUFFETT: September 9th, right.

BUFFETT ON BARGAINS:

QUICK: All right. So let's talk about that. Are there bargains out there right now?

Mr. BUFFETT: Well, there are certainly things that are a lot cheaper than they were a few years ago, and the businesses are better. Now, that doesn't mean they're doing better today, but they are fundamentally worth more money than they were a couple of years ago, and people are just looking at the glass being half empty rather than half full now.


BUFFETT ON FINANCIALS:

QUICK: A lot of people recently have been talking about the financials, which, once again, people are saying, `Hey, they are reaching levels that inherently make these stocks cheap.' You own some of the financials.

Mr. BUFFETT: Yeah, we own--we own some businesses that we think are good businesses and that if the stock market closed for the next three years I'd be happy owning. That's the real test. I mean, if you guy buy a farm, you don't get a quote on it every day. If you buy an apartment house, you don't get a quote on it every day. You look to the rents or you looked at the crop in the case of the farm. We look to the business. So if I buy stock in a financial, what I'm--what I'm looking at is where I think they'll be in five or 10 years, and I can't pick bottoms. I don't think anybody can. I do want to stay away from the ones that I think are kind of dumbly managed.

QUICK: American Express, Wells Fargo, those are two of your big holdings...

Mr. BUFFETT: Right.

QUICK: ...in the financial arena. If you see prices come down and something you've already decided you like this business, if the prices come down, do you buy more?

Mr. BUFFETT: Sure.

QUICK: Are you buying more?

Mr. BUFFETT: Well, I bought more of one of those, you know, in recent-in recent months.




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