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CNBC TRANSCRIPT: CNBC'S BECKY QUICK SITS DOWN WITH BILLIONAIRE INVESTOR WARREN BUFFETT TODAY ON CNBC'S "SQUAWK BOX"

Warren Buffett
CNBC.com
Warren Buffett

WHEN: Today, March 9th

WHERE: CNBC's "Squawk Box"

Following is the unofficial transcript of a CNBC interview with billionaire investor Warren Buffett today on CNBC's "Squawk Box."

PLEASE NOTE: The transcript below is the 6AM-7AM ET hour. Transcripts for the 7AM & 8AM ET to follow.

All references must be sourced to CNBC.

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Announcer: This is a special presentation of SQUAWK BOX: ASK WARREN BUFFETT. The legendary investor will answer your e-mails, fixing the economy, restoring trust, searching for value. Your chance to connect with the "Oracle of Omaha." SQUAWK BOX begins right now.

Becky Quick, co-anchor: Good morning, everybody, and welcome to SQUAWK BOX right here on CNBC. I'm Becky Quick along with Joe Kernen. Carl's off today, but Joe, we have a very special guest with us this morning. We are talking about Warren Buffett. He's here with us, and he is here with us for the next three hours. We are very excited to be spending this time. We are here at the Nebraska Furniture Mart. And, Warren, it's great to have you here. Thank you very much for joining us this morning.

Mr. WARREN BUFFETT: I enjoy everything about it except the hour.

QUICK: "Except the hour," and we do appreciate your getting up extra early. We should point out it's 5 AM here in Omaha, so you are quite the trooper for coming out.

Mr. BUFFETT: Thanks.

QUICK: I know we've got the next three hours to spend with you, and, in most instances, I might think, three hours is an incredibly long time, but I have to tell you, given everything with the state of the economy right now, three hours may not be enough time. So, again, we appreciate your time with us today.

Mr. BUFFETT: Thanks. Mm-hmm.

QUICK: Warren, why don't we start off talking right away about the economy? Because that's what people are wondering right now. What's happening with the economy? We hear all the time from people who are very concerned and, frankly, quite frightened about what's happening right now.

Mr. BUFFETT: Yeah. Well, when we talked in September.

JOE KERNEN, co-anchor: Warren, hold on.

Mr. BUFFETT: Yeah?

KERNEN: I'm sorry to break in. Merck and Schering-Plough are merging, Warren.

QUICK: Whoa.

Mr. BUFFETT: Hm.

QUICK: All right.

KERNEN: I'm sorry.

QUICK: Merck and Schering-Plough merging. We thought we already had enough to talk about with you this morning, Warren, but why don't we start off with some news?

KERNEN: I would never presume to jump in like that on the Oracle; but, I'm sorry, board of directors unanimously approving a definitive merger under which the companies will combine under the name Merck in a stock and cash transaction. Schering-Plough shareholders will receive .5767 shares of Merck and $10.50 in cash for each share of Schering-Plough. Each Merck share will obviously be a--become a share of the combined company. Richard Clark, the chairman, president and CEO of Merck will lead the combined company. This is--this is a real blockbuster and right at 6 AM on a Monday. And I think you'd have to say, Warren, as far as animal spirits, this could be--you know, this may not--this may not solve all of our problems, but it certainly is an endorsement of American business and--in that M&A is alive and well.

Mr. BUFFETT: Yeah. Animals spirits are always there. The only question is who has the funds to kind of carry out the ideas that the animal spirits come up with? But, particularly in pharma, they have good balance sheets, generally, and they can make deals.

KERNEN: I...

QUICK: Are you surprised to see a deal of this size right now, though?

Mr. BUFFETT: Well, I'm surprised at any deal this size even now, sure. That's true. It's very hard to make deals for companies in most industries.

KERNEN: Guys...

QUICK: Joe?

KERNEN: Yeah. Schering-Plough closed at $17.63, and, at current values, this is $23.61 for Schering-Plough for a total of $41.1 billion for this deal. I guess you'd also have to say that the whole Vioxx controversy. We can lay that to rest now for the them to be feeling comfortable enough to acquire Schering-Plough for $41 billion, but...

Mr. BUFFETT: Yep.

KERNEN: ...this is a pleasant, pleasant ride. And, Warren, you own--you're all over the place with--you own foreign drug companies, you own stakes in--stakes in foreign drug companies and in some domestic companies as well. It's always been one of your favorites.

Mr. BUFFETT: But we don't own any Schering, that's why you see these tears coming down my face.

QUICK: What about Merck? Do you own any Merck either?

Mr. BUFFETT: No, not any Merck.

QUICK: Not in your private account either?

Mr. BUFFETT: No.

QUICK: OK. What is...

KERNEN: What's your biggest holding? You do have some--I know you--what are your foreign drug company that you have stakes in, Warren?

Mr. BUFFETT: Sanofi and the biggest one is Sanofi-Aventis, and we have J&J domestically.

KERNEN: Right. OK. All right, Beck.

QUICK: OK. So, Warren, we're going to talk more about this merger and what this means. I mean, do you expect to see other deals that would come as a result of this?

Mr. BUFFETT: Well, every deal does tend to brew another deal, I mean.

QUICK: Hm.

Mr. BUFFETT: Particularly with people in the industry. If, you know, if Coca-Cola buys something, Pepsi thinks about something in the same arena.

QUICK: Hm.

Mr. BUFFETT: I've been in enough board meetings to hear that. There's a--there's a lot of--every CEO has, you know, has a little bit of that `all the other kids are doing it,' you know.

QUICK: Right. We'll talk a lot more about this, but let's get back to the state of the economy...

Mr. BUFFETT: Sure.

QUICK: ...in general as well. What do you see right now? You spooked a lot of people last week when you talked about how the economy was in tatters and would be there for quite some time.

Mr. BUFFETT: Yeah. The economy, ever since we talked in September, we talked about it being an economic Pearl Harbor and how--what was happening in the financial world would move over to the real world very quickly. It's fallen off a cliff, and not only has the economy slowed down a lot, people have really changed their behavior like nothing I've ever seen. Luxury goods and that sort of thing have just sort of stopped, and that's why Walmart is doing well and you know, and I won't name the ones that are doing poorly. But there's been a reset in people's minds, and we see that in something like Geico where year after year after year we say you can save some money insuring with Geico, and year after year there's been a certain number of people who have said, `You know, I've got this pal, Rotary Joe, and I've been insuring with him and for 100 bucks, why should I shift?' Every week we're just seeing it build and build. More and more people are calling. Our price differentials haven't widened, our advertising isn't that much different, but the American public really has changed their buying habits. On the reverse side, our jewelry stores just get killed in a period like this. And high end gets hurt the most, next down gets hurt the second most, and the lowest people get hurt the least.

QUICK: What's happening? What--you knew--you told us a while ago, you told us this was an economic Pearl Harbor about six months ago, but did this happen more quickly or more severely than even you expected?

Mr. BUFFETT: It certainly happened close to the worst case. I mean, you never know what's going to happen, but I would not have--I would not have thought there could've been a much worse case than what has happened. Although, I will say this, the Fed did some things in September when it happened...

QUICK: Mm-hmm.

Mr. BUFFETT: ...that were vital in keeping the place going. I mean, when the--if they hadn't have insured money market accounts and, in effect, commercial paper, you know, you and I would be meeting at McDonald's this morning.

QUICK: Instead.

Mr. BUFFETT: Yeah. Right.

QUICK: So why do you think consumers have gotten as frightened as they have?

Mr. BUFFETT: Well...

QUICK: The fear doesn't like too strong of a word.

Mr. BUFFETT: No. They're scared, and fear is very contagious.

QUICK: Hm.

Mr. BUFFETT: And I've never seen the consumer or the Americans just generally more fearful than this. And they're also confused. And you can get fearful very quickly, but you don't get confident, you know, in five minutes. You can get fearful in five minutes, but you won't get confident for some time. And government is going to play an enormous factor in how fast it comes back. And if you're confused and fearful, you don't get over being fearful till you aren't confused. I mean, the message has to be very, very clear as to what government will be doing. And I think we've had--and it's the nature of the political process, somewhat, but we've had muddled messages, and the American public does not know what--they feel that they don't know what's going on and their reaction, then, is to absolutely pull back.

QUICK: So there've been a lot of fingers of blame that have pointed in a lot of different directions. But you're saying the message from Washington has been confused or...

Mr. BUFFETT: Well, I think it's the nature of things.

QUICK: Right.

Mr. BUFFETT: I mean, I think people watch 535 members of Congress each give their view of what every player is doing and all of that sort of thing, and I think that, you know, you had a change of administrations and you're dealing with things that people don't understand. I mean, when you first brought up the term SIV or something like that or when you talk about credit default swaps or you talk about--it's--when the public hears that, they just, they think something's wrong and they don't understand it.

QUICK: And still, this is the worst case scenario from what you had imagined. What went wrong? Why did we wind up in that worst case scenario?

Mr. BUFFETT: Well, we went wrong originally because we had a belief that--and everybody had the belief. I had it, the government had it, mortgage lenders had it, borrowers had it, media had it, everybody thought house prices could go nothing but up and--or at least they couldn't go down a lot. And once you had that belief--and it was nationwide--it didn't make any difference what you lent on the house because if the guy couldn't pay, you'd sell it at a profit anyway or you wouldn't lose much money. So you had 11 trillion of residential mortgage debt built on this theory that who was borrowing it, what their income was really wasn't that important because the house itself had to go up in price. And when that tumbled and houses which might've been worth 22 trillion at the peak are worth maybe four or five trillion less, A, it's a huge amount out of people's net worth. It's the biggest asset most people have. And then secondarily, all of these instruments that were built on it, which people didn't understand too well, started toppling to various degrees in value and then that exposed other things. I mean, it was like, you know, some kid saying, `The emperor has no clothes.' And then after he says that, he said, `On top of that, the emperor doesn't have any underwear either.' You know. I mean, various layers have been--and they interact. When people get scared, they change their buying habits. When they quit buying as much, people lay off. We are in a very, very vicious negative feedback cycle. It will end, but, believe me, I mean, I don't want this to be the last line of the movie, the last line of my annual report that America's best days lie ahead. And we can talk about why that is, but--and that is the final answer. But how fast we get there depends enormously on not only the wisdom of government policy, but the degree in which it's communicated properly. People--when you have a Pearl Harbor, you have to know the nation is going to be united on December 8th to take care of whatever comes up. And we have little squabbles, otherwise we put them aside and everybody goes to work on defense plans, we start building planes, we start building ships, even though they're not going to be ready tomorrow, people join. The Army doesn't blame the Navy because there were too many ships in Pearl Harbor, and it shouldn't have happened. The Army doesn't say, `Well, it was your fault, so we're not going to send our troops.' None of that sort of thing. We got united, and we really need that now.

QUICK: Do you think that there has not been that to that extent? There's not enough of the united front right now?

Mr. BUFFETT: Yeah, I think--and I can understand why because, economically--Pearl Harbor itself, you knew exactly what had happened and we wiped out a good bit of the fleet and all of that and people knew in a general way what had to be done and they knew who they had to respond to a leader who was unquestionably the commander and chief. And so you didn't have--start congressional hearings on December 8th, you know, that were going to last for weeks while all of the commanders and the various people were in various ways pilloried or taunted or whatever about `Why in the world did they let this happen?' and the Republicans didn't say, `You Democrats have been in since 1933, and it's all your fault.' None of that. I mean, people said, `We've got to get something done.' And they--and they trusted their leadership to do it and put aside mostly the partisan stuff and the--and we went--and everybody, incidentally, felt we'd win the war, even though we, you know, for the first six months, we were--Corregidor fell and we had the death march of Bataan, all kinds of--there was terrible, terrible news, but we knew that if we stuck together and we followed leadership, we would--we would prevail.

QUICK: We're going to have a lot more time to talk about solutions this morning, but in terms of the economy, where do you think it goes from here? What's the best case scenario and the worst case scenario?

Mr. BUFFETT: Well, it can't turn around on a dime. That doesn't happen. I mean, it--a lot of stuff works this way. When 600,000 more people become unemployed last month, that not only affects those 600,000, it affects them terribly, but it affects everybody else. They get scared about losing their jobs. The percentage of people are scared about losing their jobs in this country is way higher than the actual numbers that are going to lose them, but they're behaving in an entirely different manner. I mean, they are not--they are not going to go into a--even at Costco or Walmart, their jewelry departments are way down, but other departments are up. People, they started saving money. For years we told them to save money, and now they're saving money, and that's a double whammy. So we've had this great economic machine like nothing the world's ever seen, and it started sputtering a little, and we said, `Well, maybe we should kind of slow it down and see what happens.' And it sputters more. And what we may not realize is that there's interaction, that the slower you run the machine at, the more it sputters. So it's a job to get it working again, and it won't happen fast, Becky, I mean--and unemployment will lag at the end, the actual turn around.

QUICK: We're already talking about unemployment at 8 percent. Where do you see it headed?

Mr. BUFFETT: I can't name a number because, frankly, it depends to an extent on the wisdom of government policies. It's going to go higher. It's probably going to go a fair amount higher, but on the other hand, five years from now I can guarantee you that the machine will be running fine, but I'd like to get there a lot faster than five years. And we can.

QUICK: And, Joe, did you want to jump in here, too?

KERNEN: I want to--you just said something interesting, Mr. Buffett, and that is it depends on the wisdom of our policies. And I understand, you know, in a time of war everyone rallying behind the commander and chief. But, obviously, there are differences on what the wisdom of our polices should be from here on out. Now, the "loyal opposition" is going to be about, as it's called, will be behind the president, but certainly you could see that if we--if people think there's some wrong-minded policies that are being rushed into law at this point because of the crisis, I mean, that's--it's the loyal opposition's duty to say what they feel, right?

Mr. BUFFETT: Right. And, Joe, it--if you're in a war, and we really are on an economic war, there's a obligation to the majority to behave in ways that don't go around inflaming the minority. If on December 8th when--maybe it's December 7th, when Roosevelt convened Congress to have a vote on the war, he didn't say, `I'm throwing in about 10 of my pet projects,' and you didn't have congress people putting on 8,000 earmarks onto the declaration of war in 1941.

Mr. BUFFETT: So I think--I think that the minority has--they really do have an obligation to support things that in general are clearly designed to fight the war in a big way. And I don't think you should--I don't think before D-Day on June--on June 5th you ought to have--or June 1st, maybe, have a congressional hearing and have 535 people give their opinion about where the troops should land and, you know, what the weather should be and how many troops should land and all of that. And I think after June 6th you don't--you don't have another hearing that says, `Gee, if we'd just landed a mile north.'

KERNEN: Yeah, but you might--might not have fixed...

Mr. BUFFETT: But I say...

KERNEN: You might not--you might not have fixed global warming the day after--the day after D-Day, Warren.

Mr. BUFFETT: Absolutely. And I think that the--I think that the Republicans have an obligation to regard this as an economic war and to realize you need one leader and, in general, support of that. But I think that the--I think that the Democrats--and I voted for Obama and I strongly support him, and I think he's the right guy--but I think they should not use this--when they're calling for unity on a question this important, they should not use it to roll the Republicans all.

KERNEN: Hm.

Mr. BUFFETT: I think--I think a lot of things should be--job one is to win the war, job--the economic war, job two is to win the economic war, and job three. And you can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat. So I would--I would absolutely say for the--for the interim, till we get this one solved, I would not be pushing a lot of things that are--you know are contentious, and I also--I also would do no finger-pointing whatsoever. I would--you know, I would not say, you know, `George'--`the previous administration got us into this.' Forget it. I mean, you know, the Navy made a mistake at Pearl Harbor and had too many ships there. But the idea that we'd spend our time after that, you know, pointing fingers at the Navy, we needed the Navy. So I would--I would--I would--no finger-pointing, no vengeance, none of that stuff. Just look forward.

KERNEN: All right.

QUICK: And, obviously, we've gotten thousands and thousands of e-mails that have come in here. Joe, we're going to be getting to that in just a moment, as well.

KERNEN: Great. And we'll have more, Becky and Warren, on this Merck/Schering-Plough merger. We've got some details about when it's going to be accretive. You know, Merck's paying about a 7 percent dividend. What do they think about the combined company, whether that dividend holds, we'll get to that when we come back. And you watch us ask guests questions every morning; today it's your turn. Warren Buffett is fielding your e-mails. Log on, write in, askwarren@cnbc.com, as you can see, is the e-mail address down there at the bottom. We'll have his answers when we return.

KERNEN: If you're just tuning in this morning, it's merger Monday. Well, that's something we haven't heard in a while. Merck and Schering-Plough announcing a $41 billion deal. Merck is acquiring Schering for cash and stock value. And Schering-Plough at $23.61, pretty nice premium there, and that would set a new high for Schering-Plough for the last 52 weeks; although, you remember, it had been up around 30. There's a lot going on here. It's 10.50 cash from Merck, plus .5767 shares. Remember that Merck and Schering-Plough collaborate on Vytorin, which is Zocor and Zetia. So this makes a lot of sense. President and CEO Richard Clark will lead the combined company. He's the Merck chairman and CEO. Remember Fred Hassan, also dressed up, I believe it was Pharmacia and sold that company as well, and for years people thought that Schering-Plough could be getting dressed up for sale. It will be accretive, slightly, after the first full year of the merger, which they expect to close in the fourth quarter. That dividend of $1.52 that Merck pays for that 6.7 percent yield, the company says it's going to try to continue to pay that dividend. They intend on paying that dividend for 2009. They're confirming--or reaffirming that nongap 315 to 330 for the year, which is vs. a 326 estimate. So that's pretty exciting this morning. I'll get a market check when we can on Merck, see how that looks this morning, Becky; 2274 is the close. We'll see what--I don't have a bid and an ask yet on how Merck's going to trade.

QUICK: OK, we'll keep an eye on that. And meantime, we are back with Warren Buffett. We've got a lot of viewer e-mails that have been coming in. We've got thousands of them, so we're going to get to those right away. But, Warren, you had one thing you wanted to clarify?

Mr. BUFFETT: Well, I was going to mention to Joe that you've heard this comment recently from some Democrats recently that a `crisis is a terrible thing to waste.'

QUICK: Yeah.

Mr. BUFFETT: Now, just rephrase that and since it's, in my view, it's an economic war, and--I don't think anybody on December 7th would have said a `war is a terrible thing to waste, and therefore we're going to try and ram through a whole bunch of things and--but we expect to--expect the other party to unite behind us on the--on the big problem.' It's just a mistake, I think, when you've got one overriding objective, to try and muddle it up with a bunch of other things.

QUICK: OK, so that's your point...

KERNEN: Great.

QUICK: ...is that on both sides people should be coming back in and...

KERNEN: Yeah.

Mr. BUFFETT: Absolutely. We need them. We need them.

QUICK: OK. Let's get to some of these viewer e-mails, because we do have a lot of them that have come in. Steve from Minneapolis writes in, and his question is, "Do you believe that the following statement is still true today? `So far as I can discover, paper money systems have always wound up with collapse and economic chaos.'" By the way, that was a statement from Congressman Howard Buffett, your father.

Mr. BUFFETT: Sounds like my dad, yeah.

QUICK: Yeah.

Mr. BUFFETT: I heard that every night at the dinner table for a long time. Well, I would say this. It's going to be a very, very rare paper money that appreciates over time. I mean, the--and we are doing things now that are potentially very inflationary. I mean, that--it's the nature of fighting the war we're in. And, incidentally, when we fought World War II it was very, very inflationary, and we--and we took all kinds of activities to try and minimize that impact. But, you know, if you--if you look at this bill that--and I didn't know Steve was going to ask you that. But, you know, on the back it says, "In God we trust," right?

QUICK: Yeah, right.

Mr. BUFFETT: And on the front it says, `In the Federal Reserve, we trust,' basically.

QUICK: Right.

Mr. BUFFETT: It's a Federal Reserve note. Now, if you go down to the Federal Reserve bank and you say, `I'd like to exchange this for something else,' the nice lady there will say, `Would you--would you like,' what is it? Two 10s or four 5s?

QUICK: Right.

Mr. BUFFETT: I mean, you--it just--it is paper money, and if you keep issuing more of it--and M2 has been growing very rapidly if you go to the Federal Reserve site and see that, and should be in a period like this. But that is inflationary. The more of these you have out compared to the economic activity, the less it's worth.

QUICK: All right. Well, let me jump ahead based on that...

Mr. BUFFETT: I'd better get this off the table before you grab it. Yeah.

QUICK: Yeah, before I take it from you. Let's jump ahead. Guys in the control room, this may throw you off a little bit. We're going to go to number 33. This is from Joey in Brooklyn, New York, and I want to ask this question because it plays into what you just talked about. He asks, "Do you think that the inflation of the late 1970s was worse than the inflation we are about to have? Why or why not?"

Mr. BUFFETT: Well, it--again, it depends on the wisdom of federal policies. But--because what we do with the money supply and different--and how we behave later in relation to what we're creating now will determine the answer to that. It certainly has the potential of being worse. We are going--we are fighting a big war, and there--we're using--we're going to use money to fight it. And the whole world is leveraging down. The only party that can leverage up is the US government. They have the ability to take on anything because they can print money as long as people will do business in US dollars. So it could be--it could be worse. And, you know, in economics there's no free lunch.

QUICK: Right.

Mr. BUFFETT: There still are lunches it's better to have even if you're going to pay later. I mean, it's better than no lunch if--even if you have to pay for the lunch. And we are having--we're--we are going to attempt to have a lunch; to some extent we're going to pay for it later.

QUICK: All right. We have more questions from people wondering what all that inflation means. We'll get to that in the next hour, and what that means for the markets and some of their investments. But, meantime, Carmen from New York writes in, he says, "Do you believe that the ratings agencies could have single-handedly prevented the current financial turmoil by refusing to rate the exotic products coming out of Wall Street that they apparently did not understand?"

Mr. BUFFETT: It would have helped a lot. And--but the rating agencies were populated by people who believed exactly what you and I did, you know, all of the people that come to the Nebraska Furniture Mart and the people that are in Washington and the--you know, when Congress was urging Fannie and Freddie to expand their activities. Everybody believed house prices were not--would never take a real tumble. And that got built into what the rating agencies did as well. But there's no question that if somebody there had taken a stand for some reason, they would have been--they would have been derided for that stand. But if they'd taken a stand, said, `We're going to assume that house prices can fall 25 or 30 percent, and therefore we have to rate this stuff all differently,' it would have--it would have been--they probably would have gone to the other rating agencies and got it anyway. People wouldn't have accepted it. But they did make a--they made a mistake in rating them the way that they did.

QUICK: All right. T. Tidwell from Louisville, Kentucky, writes in and wants to know, "What one thing have you resigned yourself to be a `shocking probable truth' in 2009 that investors would certainly be surprised about now?"

Mr. BUFFETT: Hm.

QUICK: That's a tough one.

Mr. BUFFETT: I wish I knew. I mean, it was--I'd be acting on it now. No, I think most people's expectations about 2009--well, I would say this. I would say to the extent that--I think we already have the policies in place, but to the extent they get communicated better it will help. But the banking system, if properly handled, is not going to--that's not going to be the problem for the economy. Fear that the banking system may be a problem enters into how the economy behaves. But we have a system that can take care of the banks, and most of the banks are in pretty good shape.

QUICK: So would the one shocking truth potentially be things wind up being better than people expect?

Mr. BUFFETT: Well, that...

QUICK: Or you wouldn't go that far?

Mr. BUFFETT: No, I won't go that far.

QUICK: OK. All right, we're going to have much more with Warren Buffett when we return. We have many more e-mails that we've got to get to. We'll also be getting this morning's top stories. And, again, we will have Warren Buffett's unique take on them, what's been happening this morning, what's happening with the economy and with the markets. Plus, the Oracle of Omaha is just getting started on your e-mail questions. Keep writing in, we're still going through these. The address, again, is askwarren@cnbc.com. We are live at the Nebraska Furniture Mart. We'll be back with more right after this.

QUICK: The front page of the Journal today, Warren, says that some of the progress we've made in the credit markets has been backsliding. It's been going away. LIBOR rates have been inching higher once again. Have you seen that as well in the credit markets?

Mr. BUFFETT: Yeah, I've seen that. It's not like it got a worse of the situation in September, but when people lose confidence, yeah, I don't care whether they're big shots, you know, running big companies, or big banks, or whether they're the guy on the street, they behave exactly the same way. I mean, this goes back to the human--you know, the "Naked Ape" type of thing, reaction. The fear or flight stuff comes in and where they flee is something this government guaranteed. And you've seen it, yeah, and you'll continue to see it. They have--people have to be confident. The system doesn't work without confidence and they are--they're not confident now and they are confused and the government has to speak with real clarity. Government's done a lot of good things in terms of the banking system...

QUICK: Mm-hmm.

Mr. BUFFETT: ...but frankly when you have changes of administration, when you have--when you have 535 members of Congress criticizing maybe various policies and maybe taunting even people, the reaction of the public to that is, you know, `I'm going to go to something this government guaranteed,' and the world won't work if that continues to be the case.

QUICK: Well, let's get back to that, though. How could the administration possibly rein in 535 members of Congress, not to mention it's a 24-hour news cycle and we put just about anybody and everybody on to spout their views?

Mr. BUFFETT: Well, I think that the first--you have to recognize that it is an economic Pearl Harbor. If you don't believe that, then why should members of Congress not, you know, why shouldn't they throw in 8,000 earmarks or do what they've been doing? Congress, and I think I said this six months ago, I mean, they're a patriotic group of people. I don't think maybe they understood fully, some of them, the gravity of the situation and what is required. What is required is a commander in chief that is looked at as being the commander in chief in a time of war and the support that generally he needs and other things that have to be given up. When we get all this solved and go back to yelling at each other, you know, and putting in pet projects and doing all that sort of thing. But for the time being we should put that, as much as we can, aside and then frankly, nobody but the president now will be believable to the American people. I mean, you can't--people have heard--they don't--names like Paulson, Geithner, Bernanke, those--that's just a muddle to them. The only authoritative voice in the United States who says, `This is what we're going to do, this is what we're not going to do,' and very specifically, is the president of the United States.

QUICK: Joe:

KERNEN: Yeah, I--really quickly on that--on that Merck dividend I want to--I said they're going to try. They're committed to maintaining it. I'm hearing from work--or from Merck. They're committed to maintaining that dividend. So it's about 6.7 percent. I want to get back quickly, Mr. Buffett, we were talking about this article in the Journal. Look at your Berkshire AAA bonds, look at General Electric, which is still AAA. Look at those bonds. Look at Goldman Sachs bonds. The thrust of this piece is that when you're not sure what the government's going to do eventually to fix things, even senior debt holders aren't sure that they'd end up with the assets of the firm. How do you expect this to work itself out? What does the government need to do? You--Mr.--or President Obama needs to speak for the government obviously, but we're not really sure how--you know, what steps are going to be taken in the financial system.

Mr. BUFFETT: Well, if I've got just a minute, I'll back up a little. In the 19th century you had at least six huge financial panics. They were--and they caused in many cases by people losing confidence in banks. So if somebody lost confidence in a bank in Omaha they got in a line and as soon as somebody got in the line at the First National there was a line at the Second National and so on. We learn time after time--and they called them panics. The reason they called them panics was because if you went to the bank and couldn't get your money out you panicked. And that same situation will continue to exist forever. People, if they've got their money someplace and they get worried about it they want to get it out fast and if they see other people wanting to get it out, they want to do the same thing. So along came the 20th century. We put in the Fed and we thought that would calm down people. But when the '30s came along, we recognized that without faith in the banking system this economy was never going to get well. So we formed the FDIC. Now, this is an interesting group of pages here. This has 3600 banks that the FDIC has assisted. Three thousand six hundred. There's only about 7,000 banks in the United States, another 1400 savings institutions. No depositor of an insured deposit has ever lost a penny since 1934. It was a huge factor in making this economy work to be one of the greatest--well, the greatest economy that's ever existed. Thirty-six hundred times the FDIC has come in. In the last year, they have moved, I think, something close to 8 percent of the deposits in the United States. It hasn't cost the taxpayer one dime, no depositor has lost one dime. Now, what the American people have to be sure of is that when organizations as big as the ones that have been in the news, like a Citigroup...

QUICK: Right.

Mr. BUFFETT: ...where people know the FDIC can't come over and move it to the Second National Bank of Omaha or something overnight, they have to be sure that all deposits, really, all debt liabilities of Citigroup are going be met. There's--and the truth is we're going to do that. People say they're too big to fail, but you really need somebody that's totally authoritative who can say, `Just forget about the problems of ever worrying about having your money or actually a debt instrument of a bank.' It's too important that--to be left ambiguous on that subject. And all of the--the FDIC's raising more money now. But the FDIC will take care of banks. They talk about nationalizing banks, they nationalized for a nanosecond 20 banks this year, roughly 20 last year. They moved it overnight, it's all working fine. Nobody loses a dime. And people have to feel that way about the entire banking system. And if they don't, we will have--you'll have more articles like the one you talked about in the Journal.

QUICK: Yesterday, Senator Richard Shelby and Senator John McCain both made comments on the morning news programs and said things to the extent that they should let some of these banks fail. "Close them down, get them out of the business. If they're dead they ought to be buried," Shelby was commenting.

Mr. BUFFETT: Here's 3600. Not all of these got--but overwhelmingly these did die and get buried. And we have had--we had one over the weekend in Georgia, I believe. We had about 20 this year, we had 20 last year. The peak year we had over 500 and the country went on fine because they didn't panic about banks. So there's no question that a bank that's going to go broke should be allowed to go broke. You know, the thing you have to make sure of is that the people that gave their money to that bank--the shareholders can get wiped out. The shareholders have gotten wiped out of thousands of banks over the years. That--but...

QUICK: Shelby also said those Citi has also been--has always been a problem child. Can you do that with a bank the size of Citigroup?

Mr. BUFFETT: Well, Citi is--Citi's probably going to keep shrinking, but in the end nobody should be worried about having their money in Citi. On the other hand, there's really no moral hazard to that. When your stock goes from $50 to $1, I don't think you create way more moral hazard than when it goes from $50 to zero. I mean, you know, we have a system that penalizes enormously the shareholders of banks where the management screw up. But we have to make it very clear, you know, no Fed-speak type stuff or anything. We have to make it very clear that people are not going to lose money. That doesn't say they're not going to fail. We're going--we're going to have--we'll have more pages of this stuff as we go along. It's the nature. But we provided for it.

QUICK: All right. And when we return, we will have much more from our viewers who are squawking about this this morning as well. A lot of questions out there, Warren is listening. Up next, he's going to be fielding your e-mail questions live. Write in. The address again is AskWarren@CNBC.com.

QUICK: Welcome back to this special edition of SQUAWK BOX. We are live at the Nebraska Furniture Mart with Warren Buffett and we've been getting thousands and thousands of e-mails from our viewers. Warren, we'd like to start with one that echoes a theme we heard again and again. This comes from Terry in San Antonio, Texas, who asks, "Will everything be all right?"

Mr. BUFFETT: Everything will be all right. We do have the greatest economic machine that man has ever created, I believe. We started with four million people back in 1790 and look where we've come and it wasn't because we were smarter than other people, it wasn't because our land was more fertile or we had more minerals or our climate was more favorable. We had a system that worked. It unleashed the human potential. Didn't work every year, we had six panics in the 19th century, in the 20th century we had the Great Depression and World Wars, all kinds of things. But we have a system, largely free market, rule of law, equality of opportunity, all of those things that cause the potential of humans to get unleashed, and we're far from done. So I think your kids will live better than mine, your grandchildren will live better than your kids. There's no question about that. But the machine gets gummed up from time to time and it's--if you take the bulk of those centuries, probably 15 years were bad years, but we go forward.

QUICK: Which brings us to another question. A lot of people have been trying to figure out is this different from what we saw back in the Great Depression. I'm going to jump ahead to one from Dan from Shohola, Pennsylvania, who asks a question very pointedly about this. "How is the market better off today than when we were in the 1929 to 1933 period?"

Mr. BUFFETT: Well, we certainly--it's different. I mean, there's a lot of similarities between all recessions or in this case depressions or call them panics like they did back in the 19th century, and there's always differences. One key similarity is that there was a paralysis of confidence in banks and--which is silly now because of the FDIC. I mean, we--but if you went back, my dad, on August 15th, 1931, worked at a bank and he went there and it was closed and he had no job and he had his savings--small savings in there. I mean, if you don't trust where you have your money, the world stops. And they recognized that, but it was a little belatedly. They didn't put in deposit insurance until it was started in 1934 in the Glass-Steagall Act. We have a system that's far better organized to deal with that. The trouble is that a lot of people don't believe in the system. It needs to be clarified. Actually, the head of the New York Fed, Mr. Dudley, on Friday, you can go to their Web site and read it, he describes it perfectly. But nobody's going to listen to Mr. Dudley very much throughout the United States. The people coming to Furniture Mart today don't know who he is and they're not going to go to his Web site. You really need--you need the president of the United States enunciating it.

QUICK: Enunciating it. It seems like Barack Obama talks pretty frequently about what he sees, what he'd like to have happen. What's wrong with the message that he's put out to this point?

Mr. BUFFETT: Well, I don't think there's anything wrong with the message at all and I think he's--he speak wonderfully, but I think--and I think there should be--there's a necessity that Congress takes the attitude that this is a war and that he is the commander and chief and that--and that a lot of the normal things that go on in Washington are really inappropriate in this setting. But I think--I think basically that it has to be as clear as possibly can be made, and I think only the president can do it, that no one, and, you know, the FDIC limit is $250,000, but I think--I think absolutely that no one should be worried about having their money in a bank in the United States or actually owning their debt.

QUICK: OK. You talk about how this was an economic Pearl Harbor. Dan from Spring Lake Heights in New Jersey writes in, he wants to know was our financial system just hours, days away from collapse?

Mr. BUFFETT: In September, I think it was. If there was a week where 200 billion, as I remember, in the first three days or so poured out of the money market funds, which had about 3 trillion in them, the money was just gushing out when Reserve broke the buck. That meant that the commercial paper market was disappearing. You know, the blood was being drained from the American economic body and we had some very prompt, wise, action. Chairman Bernanke, the Fed, I mean, they stepped in and said the commercial paper market is going to work. That made a huge difference. People came in and said the money market funds, you know, you weren't going to lose money in money market funds. They said the same thing about money market funds we should now say about the whole banking system. And actually, we've said it in various ways. If you read that Federal Reserve New York chairman speech, it says it, but it doesn't say it the way the American people will get it. The president of the United States has to say it very clearly that you just don't have to worry about that.

QUICK: Joe?

KERNEN: Yeah, thanks. Returning for one second, Warren, you know, when you speak, the wires just start hitting. I'm going to read two of them to you. One is "Buffett says that the parties need to unite behind Obama." Then the next one is, "Dems should--Buffett says that the Democrats should keep pet projects out of the economic rescue efforts." It just seems like it's nice to say we all need to get along, but we're right back where we started. Who's more at fault here? Is it 50/50?

Mr. BUFFETT: Well...

KERNEN: Did the Dems put too much in or is it just more partisanship from the Republicans?

Mr. BUFFETT: Well, I have--I have taken a vow not to point fingers at anybody. I have taken a few--I have taken a few swipes in the past. I will just say that patriotic Democrats, patriotic Americans will realize that this is a war and if they didn't realize it immediately, I can understand it. It's not--it's not as dramatic as a physical war where the news comes over and you know you're under attack. But it is--it is virtually as serious and I think that once the degree of that seriousness becomes apparent to both parties, I think they will--I think overwhelmingly they will behave well. But that does mean that the Democrats have to behave just as well as the--you can't ask the Republicans to cooperate in the spirit of this and then at the same time try and steamroll them on a whole bunch of other things. You ought to agree that this is the job to get done and when we get done, that doesn't mean you don't do anything else in government. But in terms of the contentious things, just let them wait until we get the economy working. Because if we don't get the economy working...

KERNEN: Yeah.

Mr. BUFFETT: ...just forget about the other things.

KERNEN: There's the rub. There's the rub, though, Warren. You know, there's where we need details on what is absolutely essential and what isn't. And that's where the contentiousness comes in, unfortunately. We--can you just go down...

Mr. BUFFETT: Well...

KERNEN: Can you go down the list of things and say we need this, we don't need this, we need this, we don't need this, we need this and then we can send it to...

Mr. BUFFETT: Right.

KERNEN: We can send it to Washington so I can say Warren Buffett says this?

Mr. BUFFETT: We need clarity on the financial system, on exact--on what will be done. And bank--incidentally, regulators hate that. When I ran Salomon, I told everybody, don't ever say we're too big to fail. I mean, it's like waving about 12 red flags in front of a bull to say that to a regulator. He doesn't want to be told he doesn't have any choice. So it's a--it's a phrase they hate to use. I can understand that. But the answer is, the American banking system, overall, is too big to fail and you have to apply that. And incidentally, we have quasi-banks that have very large liabilities and where they would impact the system dramatically if left alone. It may be unfortunate we have them, it may be that we need corrective legislation so it doesn't come up again, but we have to deal with the situation we have now. And frankly, that was recognized in AIG. I mean, everybody hates, you know, what they had to do in that, but the problems they would've had if they just said, `Well, this isn't a bank and the hell with them, they made their mistakes,' that's crazy. We have to deal with all large quasi-financial institutions as well as all of the banks and people can't be worried about them and we can't have a contagion like we almost had in September. I mean, the world did come almost to a stop in September.

QUICK: One person wrote in and this e-mail is one we had prepared for later, but somebody asked about Glass-Steagall. Should it be brought back?

Mr. BUFFETT: Well, I think there--you need legislation. I mean, whether it's exactly Glass-Steagall. Glass-Steagall brought in the FDIC. It was a wonderful thing. We need banks to get back to banking. I mean, we have learned that handing these people, you know, exotic instruments and all kinds of ability to do things off balance sheet and this desire to improve your earnings a little every quarter, you can't run a financial institution and show nice, smooth growth and earnings. One way or another, you're going to cheat. And there was a lot of that that went on and we need--we need banks to get back to banking. But we need to get through this situation. We should not be giving lectures to people. And incidentally, the one thing that's very important now is banks--and this may come as a surprise to you. Banking has never been better in one sense. I mean, the banks are getting their money very cheaply, deposits are coming in, spreads have never been wider, all the new business they're doing is terrific. They will earn their way out of it, in most cases, overwhelming number of cases. And they should not be spooked by the idea they're going to have to issue tons of stock at some very low price under the circumstances where the very actions of--that that may be coming keep pushing down the price. So that's spooking, you know, people in the banking business. But the banks can earn their way out of this. I mean, the average cost of funds for Wells Fargo, for example, the fourth quarter last year, was 1.44 percent. I can earn money with money at 1.44 percent. I mean, it's cheap. It's abundant and the spreads are terrific.

QUICK: But Warren, you say that as a way of reassuring shareholders, people who should be looking at the financial system, people who are worried about it. But how do you say that without stoking populist anger, that the banks are making money hand over fist? Why should we keep helping them out?

Mr. BUFFETT: Yeah. Well, the ship builders made money during World War II. I mean, you know, I--nobody went around saying Henry Kaiser's making too much money because he's turning out all these ships, or Curtiss-Wright's making too much money because they're turning out plane. They did put in excess profits taxes and all that thing. That was fine. But the focus was on what do we need to do? And if that's kept in mind and Joe asked me about these comments, I am--I am going to take no shots at anybody. It just isn't important. The important thing is we do the right thing going forward.

QUICK: All right. Let's hold that thought, and Joe, we'll be back in just a moment with more.

KERNEN: All right, good.

QUICK: Joe.

KERNEN: Thanks, Beck. We're going to have more on Merck Schering-Plough merger. We'll get a price check on Merck. We now have an indication, it's a little bit lower. Schering-Plough, of course, higher. But you get to watch us ask guest questions every morning. Today, it's your turn. Ask Warren.





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