TRANSCRIPT & VIDEO: Warren Buffett Tells CNBC Treasury "Did Exactly the Right Thing" on Fannie/Freddie

In a live interview this morning on CNBC's Squawk Box, Warren Buffett told our Becky Quick that Treasury Secretary Henry Paulson "did exactly the right thing" when the government took control of Fannie Mae and Freddie Mac over the weekend.

Here are a video clip and transcript of the entire on-air telephone coversation.

Becky Quick: Mr. Buffett, thank you for joining us this morning. I want to get your thoughts on this plan for Fannie Mae and Freddie Mac.

Warren Buffett: Well, I think the Secretary (Paulson) did exactly the right thing. I don't think there was an alternative that was anywhere close to this one in terms of calming the markets, in terms of providing an ongoing function for the two that makes any change less abrupt, the changes that are going to occur with the two companies. So I couldn't, I wouldn't have changed anything in the plan myself.

Becky: There are some people who would say, 'Why not wash out the common shareholders, at least? Why put the taxpayers at risk?' What would you say to that?

Buffett: Well, the common shareholders are going to get nothing until the Treasury gets paid back, and even then, as I understand it, the Treasury is getting a warrant at a nominal sum for 79.9 percent of the resulting common, so assuming there is anything left for the common four or five years down the road, the Treasury will get 80 percent of it, so they're getting paid very well for stepping in. And like I say, the question of whether the common gets anything is problematical. The common is an option at this point.

Becky: Earlier this morning, Steve Liesman was talking to the Secretary of the Treasury, and pushed him on that point, trying to figure out how much taxpayers would be on the line for. I guess there's no way to really know that. But do you have concerns about the taxpayer?

Buffett: Well, the Treasury, in effect, for them to lose anything the preferred and the common have to get wiped out. And that may very well occur. So the Treasury is on the hook for something but this is the best solution. I mean, I think they committed up to a 100 billion to each company. But as a practical matter, they're going to have to be in this picture until Freddie and Fannie have shrunk considerably in terms of their portfolio and really have gotten into a profit-making position. And, it's, how far the housing decline goes will determine how

much, if anything, the Treasury loses. But whatever they lose from this plan, if they hadn't acted there were going to be greater losses down the road. Freddie and Fannie had played out the string, as it were, and the government was on the hook. I mean, they got into this position many, many decades ago when they got into, sort of, half-slave, half-free position where they said, 'We don't guarantee Freddie and Fannie's obligations," and wink-wink. So the whole world assumed it, and in the last six months or so, the spreads on the mortgage-backed debts of Freddie and Fannie that are out there started to widen out. So people were, you had this ambiguous situation and this clears up all the ambiguity.

Becky: You've spoken with the Secretary, with Secretary Paulson about this?

Buffett: Just yesterday he called me. We had a very short conversation. But it was fait-accompli. I had nothing to do with this proposal at all.

Becky: Paulson has also expressed some concern that there two programs, both Fannie and Freddie, are just too big. Did you agree that the portfolios should be scaled back?

Buffett: Well, I would probably go even further. They're talking about scaling them back to 250 billion each. The portfolios are what really got them into the trouble. The portfolios were the ways that the managements of Freddie and Fannie tried to juice up the earnings, basically, because the insurance guaranteed that they were given that mortgage. I always thought that made a lot of sense. But the portfolio operations enabled both of those entities to use, in effect, government-related borrowing costs and sort of unlimited credit, to set up the biggest hedge fund in the world. And as they started responding more and more to the desires of Wall Street for steady and increasing earnings, they first expanded the portfolios to run an enormous carry trade and then they started playing games with the derivatives involved to report figures that weren't really accurate. So the portfolios are poison. They aren't really needed to carry out the function of Freddie and Fannie. The government guarantee of mortgages turns them, into effect, government bond-type instruments, and those guarantees insure an enormous market world-wide, weren't made explicit as they have now, so I don't see that the portfolio activities are necessary. In fact, I think they can be quite mischievous.

Becky: In the past, you've owned major stakes in Freddie Mac.

Buffett: Berkshire was the largest shareholder in Freddie Mac in 1999.

Becky: But you got out. Is this the type of thing that would tempt you to get back in?

Buffett: (Laughs.) No, I don't think there's much to get back into. We were with them, like I say, I think we owned 8-1/2 percent or so of Freddie Mac in 1999, but they unfortunately followed the course of Mae West when she said, 'I was Snow White, but I drifted.' (Laughter.) Both Freddie and Fannie not only drifted, I mean, they were blown away.

Becky: Joe and Carl?

Joe Kernen: I did have one. Mr Buffett, I know that the size of Fannie and Freddie, you've made comments that the only entity that could help would be probably the U.S. government. Let's just say that you were the U.S. government here. The terms of the deal, would Warren Buffett be happy if he was the government right now? Is there anything that you would have done differently to protect taxpayers at this point? Is it a good deal?

Buffett: It's the best deal, and the most sensible deal available now. You can argue that there should have been some different rules put in decades ago in terms of what these companies have done, and it wouldn't have come to this, but those rules weren't put in by this Administration, or this Congress or this Treasury Secretary, and they face the problem of, in effect, five trillion plus of a combination of portfolio and insurance out there, and, really, chaos in the housing and mortgage markets. So, I would have made exactly, I would have, insisted on something like that, really 80 percent interest at a nominal price to get in there in case the common did have value at some point. And I would have insisted on the priority of common over preferred. I think they made the right deal. It may cost them some money, but it's going to cost a lot less than anything else they would have done.

Joe: You could argue about Bear Stearns, Warren, about whether the systemic risk of Bear Stearns would have affected securities world-wide. Hard to argue with this one. I would say, being Berkshire Holdings, I mean, you're probably breathing a sigh of relief. You've got some derivatives, you've got across the board a lot of different securities that could have been affected very negatively, I guess, if this hadn't been done. You must be breathing a sigh of relief as well, right?

Buffett: Well, I suppose you could say that, although Joe, I would say that if there is chaos in the market, if would probably net as good for us over a long period of time. But you're quite correct that, if Bear Stearns was an 8.5 on the Richter, the financial Richter scale, this was about a 9.9 or something of the sort. It would, the government really had no choice but to do something, and the question is, is what they did the most sensible thing, and they did do that.

Carl Quintanilla: Warren, you've been on this show more than a couple times telling people that the economic correction we're in is going to be harder, deeper, more severe than a lot of people expect. Has the move by Treasury done anything to alter your macro view?

Buffett: Well, they've certainly done the right thing. So, where it would have been without doing this, I think, would have been worse than having done this. Now it doesn't solve all our problems or anything of the sort, but it's a big, big step in the right direction.

Becky: Warren, I want to thank you very much, Mr. Buffett, for joining us this morning. We do appreciate it. We appreciate your weighing in.

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