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

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 7AM-8AM ET hour. The transcript for the 8AM ET hour to follow.

All references must be sourced to CNBC.

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KERNEN: Good morning, and welcome back to SQUAWK BOX here on CNBC. I'm Joe Kernen along with Becky Quick, who is not in studio. She's in Omaha this morning for a very special edition of SQUAWK BOX. She's with legendary investor Warren Buffett, and he's actually answering your e-mails. How often do you get to do this, Beck?

QUICK: Yeah, not often enough. We do have thousands of e-mails that have been coming in, Warren, so we're going to ask you some of these e-mails just right off the bat. There have been a lot of concerns about what's happened with the stock market. We've also heard about some major scams, and that has shaken people's confidence. One investor wrote in--his name is Bruce, he's from Cincinnati, Ohio--and he says, "How do we know that you are not another Bernie Madoff?"

Mr. BUFFETT: Well, that's a good question. I would say this. I--it is a problem with investment advisers. I mean, it--there are going to be a certain number of crooks in the world. And sometimes they're smooth-talking, and the best ones are the ones that kind of don't look like crooks. So I would say I'm saving up for my big score, if I'm doing it, because I've been doing this for a long, long time. I haven't run off yet, you know, to South America. But it is a problem who you put your trust in.

QUICK: Yeah. And on a serious note, there are people who look at the stock market and wonder how do they know the whole thing's not a Ponzi scheme?

Mr. BUFFETT: Well, the whole thing's not a Ponzi scheme.

QUICK: What--how do they know who to trust?

Mr. BUFFETT: We're talking about, you know--we're talking about American businesses that employ, just the ones on the stock market, tens and tens and tens of millions of people. They're real companies. Nebraska Furniture Mart will do 400 million in business this year. Owning--you've got a choice in this world. You can own some real estate directly, you can own a farm directly, you can own apartment house, you can have your money in a savings account, you can have your money in government bonds, you can have it in American business. American business has been a very, very good place overall. People have made mistakes on individual stocks. But in the 20th century, the Dow went from 66 to 11,000, you know, 400. And we had all kinds of problems during that period. Business works overall. It doesn't work every day or every week or every month, and sometimes it really gets gummed up. And then you need government invention sometimes to get the machines back working smoothly. But the machine works.

KERNEN: Warren...

Mr. BUFFETT: And equities, over time, are the way to do it.

KERNEN: Warren, do you think that--you made a couple of points just now, and one, I think, is that you can't catch--regulations can't necessarily catch every one of these guys. And I just thought it was funny, because you said that the guy would be very smooth-talking and he won't look like a crook. And I was looking at you, thinking, `Wow, you're very smooth and you don't look like'--and I was thinking, `Wow, he said'--but no, you see what I'm saying? You can't use--you can't use regulations...

Mr. BUFFETT: No.

KERNEN: ...necessarily. And do you worry that in this environment that, once again, we're going to overshoot?

Mr. BUFFETT: Well, I think that's--we're going to overshoot in some ways. But we need--we need to shoot anyway.

KERNEN: Yeah.

Mr. BUFFETT: And, you know, and my partner Charlie Munger says we will get conned some day by a guy that goes to work on the bus and carries a little lunch sack. We'll never--the guy with the suede shoes and all that will not take us. But crooks do come in different--in different forms and, you know, you're protected with CPIC if you've got your securities with a brokerage firm, up to an extent. I think that for the duration you ought to be--I think you ought to be protected for all deposits at all banks. I mean, I just think that's a move to take, just like we needed to do it for $2500 in 1934. We can't have people worried basically about banks. And we--and--but, you know, overwhelmingly people are honest, but you should guard against the one that's--that isn't. I mean, you should--you should--you should have your own possession of your own security. I mean, that's one good way to do it.

KERNEN: Mm-hmm.

Mr. BUFFETT: I still--I still have a safety deposit box with my securities in it. There's only one or two securities, just a few securities in it. But we'll always have crooks.

QUICK: You know, Warren, right now the Dow is sitting just above 6600, 6626. Five months ago you wrote an opinion piece for The New York Times where you told people--or least the headline said, "Buy American. I Am."

Mr. BUFFETT: Yeah.

QUICK: People now look at that and think, OK, market's come down significantly since then. Do you wish that you'd held off on writing that op-ed?

(Graphic on screen)

The New York Times

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So... I've been buying American stocks.

Mr. BUFFETT: Well, I wish I could pick the bottom, but I didn't write the headline.

QUICK: Yeah.

Mr. BUFFETT: I'm responsible for everything but the headlines. And within the body of that article I said things are--I started off saying things are a mess and they're going to get worse in the economy and all of that. But I did say--and I said I can't predict the stock market. I don't know the bottom. I mean, if I knew the bottom, you know, I wouldn't have to look up 10-Ks and do all that stuff, I'd just buy the S&P 500 at the bottoms . So I have no idea what the stock market's going to do tomorrow or next week or next month or next year. And I actually said it twice in the article, and the editor said, `You're not supposed to say things twice.' I said, `I want to say this twice.' But what I did say, and I'd say it absolutely today, is that you will--over a10-year period you will do considerably better owning a group of equities and don't--not just one stock, but a group of equities than you will either owning short-term Treasuries and rolling them, in which case you get virtually nothing, or owning a 10-year Treasury that gets a few percent.

(Graphic on screen)

The New York Times

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month--or a year--from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Warren Buffett Op-Ed Oct. 17, 2008

Mr. BUFFETT: I mean, equities will do better than that. I don't know whether they'll do better than that over a year. And I didn't know then, and that's been proven. But that's not my game. And, overall, equities are going to do far better than US government bonds at these prices. The US government bond is guaranteed to lose purchasing power. I mean, it--there's no way we follow the policies we're following without money becoming worth less over time. That's been true of governments every place, you know, forever. So I stand by the article; I just wish I'd run it a few months later.

QUICK: Well, they're--a very smart person asked me, they said you knew that the economy was going to get worse.

Mr. BUFFETT: Sure.

QUICK: So why did you make the major investments you made in a General Electric, in a Goldman Sachs at the time that you did instead of waiting? Why buy then?

Mr. BUFFETT: Well, both--in those cases, I got 10 percent preferred that I don't think I could get now. So, I mean, actually--I don't think Goldman would issue me a 10 percent preferred now. Although they--if they did and there were warrants attached, the warrants would be cheaper. But that was a time when both of those companies wanted money immediately and we could structure a preferred that was attractive. But the fact that business is going to get worse does not mean you should wait to buy stocks. I mean, if...

KERNEN: But, Warren, I...

Mr. BUFFETT: It doesn't--it doesn't--go ahead, Joe. I'm sorry.

KERNEN: I was thinking about, you know, you did and that was the attractiveness, I guess, the 10 percent yield. But I think a lot of your long-term--your long-term holdings--for example, American Express you can now pick up almost for single digits.

Mr. BUFFETT: Right.

KERNEN: Wells Fargo, one of your favorites, is single digits, 8.60. Goldman Sachs, you liked it, you said it's going to be around; GE, you like it, you say it's going to be--I can't remember, maybe 100 years or it's going to be a great company. That's at $7. It would seem to me that maybe by the end of this quarter we're going to hear that you were buying a lot of these things.

Mr. BUFFETT: Well, I'm glad you know, Joe, because...

KERNEN: But if you liked them--if you like these things and you've held American Express for $50 or whatever for a long time, that would give us a lot of confidence if you saw it at 10 and decided I'm going to--I'm going to buy a lot more here and just lower my average price.

Mr. BUFFETT: Yeah. American Express is a special case, Joe, because it's a--it has become a bank holding company. And if you own over--we own over 10 percent of American Express. If you own over 10 percent of it--if you own over 9.9 something percent of a bank holding company, you need the permission, I believe, of the Federal Reserve to buy another share. So they--they're becoming a bank holding company I believe. As I understand the law, it precludes us buying another share of that because we are at that percentage already.

(Graphic on screen)

Berkshire Hathaway Investment

As of 12/31/08

Am. Express 151,610,700 shares

Coca-Cola Co. 200,000,000 shares

ConocoPhillips 84,896,273 shares

Kraft Foods 130,272,500 shares

Source: Berkshire Hathaway Annual Report

KERNEN: But...

Mr. BUFFETT: But I would--American Express, for example, you know, it's very clear that American Express' losses in 2009 on their receivables will be, you know, considerably higher than last year. And their earnings will suffer to some degree accordingly. But that doesn't mean that American Express isn't a hell of a buy at $10. American Express is going to be around forever. They've got the cream of cardholders. Unfortunately, they have some cardholders that aren't the cream, too.

KERNEN: But you're not--you're not a 10 percent in GE, I don't think, yet.

Mr. BUFFETT: No. No, I--and--no. And we--but we bought the preferred of GE. You know, we--there are things I like to buy, but I also want to be absolutely sure--I mean, my job is to be sure that Berkshire does not need the help of anybody in getting through the toughest of times. So we keep a lot of cash. But I don't like to keep more cash than's necessary, but I regard necessary as always way more than other people regard as necessary because I always think in terms of worst cases.

QUICK: In the past, you've said $10 billion you like to keep around. Is that still there?

Mr. BUFFETT: Well, $10 billion is an absolute minimum. So if I'm going--I'm going to say $10 billion is a minimum, I always have to have quite a bit more than that to be sure that I don't go below that. Because we could have a hurricane tomorrow or something of the sort in our insurance business or, you know, who knows? So I leave--I leave a cushion above that.

QUICK: Is the cushion bigger than it used to be, or is...

Mr. BUFFETT: No.

QUICK: ...this the same as always?

Mr. BUFFETT: The cushion--what is--what has changed is that we will do less cat insure--catastrophe insurance business this year than we would have done in a year when we had way--even way more cash. I look in--you know, I look, I say to myself if there's a 9.0 earthquake in Los Angeles or San Francisco or the Pacific Northwest or something, I want to be prepared to have a lot of money afterwards. And, you know, it--I have to err on the side of caution. But that doesn't mean I go into a cave either. And when we got the chance to buy, we did the Wrigley deal, we did GE, we did--we did--we did Goldman, a lot of money went out then. In fact, when we did the GE deal I actually simultaneously made a deal with a base price on selling a couple billion dollars' worth of J&J. I didn't want to sell J&J. I mean, I like J&J. But I just, you know, I didn't--I didn't want to--I didn't want to commit that much money without having a couple billion coming in at the same time. And that's my job, though, is to be--I don't want--we can't depend on anybody.

QUICK: There's a question that came in from Kevin in Tifton, Georgia. He says, "I keep hearing people like Doug Kass say that your style of buy and hold investing is dead. Do you think that's true?"

Mr. BUFFETT: Well, it depends what you buy and hold. It's--if you buy the right businesses at the right price--you know, we own 70 businesses. We own See's Candy.

QUICK: Right.

Mr. BUFFETT: So we have bought and hold See's Candy since 1972. It's a very good business. Now, does that mean that if it's stock was quoted every day I couldn't have danced in and out with 100 shares or 500 shares? But if you're in the right business--Coca-Cola, 1886 or something like that, you know. Per capita's probably gone up of their products virtually every year. So, if we own a good business--if some another guy can buy one stock today, sell another--sell it tomorrow, buy another stock--if you--he may be able to make more money doing that than I can do with buy and hold. All I know is if I buy the right businesses, I'll do very well.

QUICK: All right. We will have more with Mr. Buffett in just a moment. But, Joe, I know you have some of the other news of the morning as well.

KERNEN: Yes, Beck.

(Joe Kernen reports on Merck/Schering-Plough merger)

KERNEN: Comments, questions for Warren Buffett, e-mail us here at askwarren@cnbc.com and we will have more SQUAWK BOX right after the break.

Announcer: Up next, as the market struggles to make sense of what's going on in Washington, Warren Buffett is looking to make money. The legendary investor answers more of your e-mails on the economy, stocks, bonds and much more. Send your questions to askwarren@cnbc.com now and get the answers you've been looking for. We're live in Omaha with Warren Buffett when we return on SQUAWK BOX. Time now for today's Aflac trivia question: What city was the center of gold mining in the United States before a discovery at Sutter's Mill in 1848 triggered the California gold rush? The answer when CNBC's SQUAWK BOX continues.

Announcer: Now the answer to today's Aflac trivia question. What city was the center of gold mining in the United States before a discovery at Sutter's Mill in 1848 triggered the California gold rush? The answer: Charlotte, North Carolina.

KERNEN: That's weird, North Carolina. Welcome back to this special edition of SQUAWK BOX on CNBC. Becky Quick is in Omaha, Nebraska, this morning with legendary investor Warren Buffett. Did you know there was gold in Charlotte, North Carolina, Beck? We are--we are answering your...

QUICK: No.

KERNEN: We are answering your e-mails, you can send--I was thinking, like, Colorado somewhere. All these...

QUICK: Yeah, that'd make more sense.

KERNEN: ...the--but Charlotte. Charlotte.

QUICK: Out where Carl is.

KERNEN: Yeah, all right.

QUICK: Yeah.

KERNEN: Anyway, send them to warren at cnbc.com. We have to go immediately, Becky, so let's get to some more questions.

QUICK: OK, let's get to some more questions right now. Joe's right, we have had thousands that have been coming in, Warren, so we'd like to get you back to one from Adam in Springfield, Virginia. He writes and he wants to know, "If you could take back one investment you've made in the last year, what would it be and why?"

Mr. BUFFETT: Well, there'd be quite a few in terms--well, I mentioned in the annual report that, you know, I bought ConocoPhillips when oil was selling well above 100, and I was wrong about oil and therefore that made me wrong about that stock big time. I bought a couple of--smaller, but I bought a couple stocks in the--stocks in a couple banks in Ireland. I did not do my homework sufficiently on that, and I was just dead wrong. So I make plenty of mistakes. The interesting thing is--and I'll make plenty more mistakes, too. That's part of the game. You just got to make sure that the right things overcome the wrong ones.

QUICK: We're trying to focus this hour on your investment strategy. And Doug Kass of Seabreeze Partners has written in in the past, he's been critical of your investment style recently, and he had a question for you as well. He says, "Mr. Buffett, your long-held investment philosophy has been importantly based on one, successfully identifying companies whose business franchises were protected by moats, and two, holding--a holding period of forever. So do you think the moats of your financial holdings have been flooded, and in light of a business world that's now changing more rapidly than the past, do you plan to alter your holding period of forever to a lesser period of time?"

Mr. BUFFETT: Yeah, well, I--in terms of our businesses, the ones we buy, like See's Candy or those, we really do plan to hold them forever. I mean, our stocks we plan to hold a very long time. Washington Post stock we've held since 1973, I believe, and Coke's been long time. But overall I like to buy them with the idea of owning forever. And the quotes don't make much difference. I own three things outside stocks. I own--I own--I own a quarter of the baseball team here in town. I don't get a quote on it every day. I've had it 15 years. I own a farm near here, bought it 20 years--I don't get a quote on it every day. I look to the performance of the asset. Now, if I looked at the performance of Wells Fargo, we'll say, I see that, you know, in a couple years--and management doesn't have anything to do with what I'm saying here. I--these are not from them. But I would expect $40 billion a year pre-provision income. And under normal conditions I would expect maybe 10 to $12 billion a year of losses. I mean, you lose money in banking, you just try not to lose too much. So, you know, you get to very interesting figures. I mean, the spreads are enormous on what they're doing. They're getting the money at bargain rates. So I--if there were no quote on Wells Fargo and I just owned it like I own my farm, I would look at the way the business is developing, and I would say, you know, it's--`These are a couple of tough years for losses in the banking business, but you expect a couple tough years every now and then.' And that the earning power is never--is going to be greater by far than it's ever been when you get all through with it. The only worry in that is the government will force you to sell shares at some terribly low price. And I hope they're wise enough not to do that. That would--that's what--that's what's spooking the banking market to a big extent.

QUICK: You worry about that, too.

Mr. BUFFETT: Yeah, sure.

QUICK: That's why you'd like some clarity out of Washington on what they're planning to do...

Mr. BUFFETT: I--that's one of the reasons. I particular--I think clarity is a good thing for the whole country on a--on a lot of--any issue to do with people's money, clarity's important. People want to be clear about their money. But I would say that if--if we own US Bancorp, which we do, or Wells Fargo, their prospects three years out have been better than ever.

QUICK: Mm-hmm.

Mr. BUFFETT: And if they weren't quoted, you know, people would feel fine owning the business and I think they would say that, you know, they're going to lose more--way more money than usual that--maybe this year and the next year, but they've built the provisions and all that sort of thing. They're going to come out fine unless they have to issue a ton more shares.

QUICK: But the back and forth in the administration right now has been which plan to follow. There's been a lot of confusion. There was this idea that the TARP money was going to be used to take the toxic assets off of their hands.

Mr. BUFFETT: Sure.

QUICK: There was the idea that maybe they should just be buying shares outright. There's the idea of nationalization out there. What's the right answer?

Mr. BUFFETT: The right answer--the right answer for me is the president to clarify things as only he can, because you have heard so many different things. And, you know, they're doing their best to communicate, but the person that the people of the United States gave their trust to not that long ago was Barack Obama. He speaks very well. He has--he is the commander in chief on this, and it has to be clarified. Like I say, the head of the New York Fed gave a talk, explained a lot of it, but nobody's going to pay that much attention to what he says. You need the president of the United States to make it very clear. Because if people aren't clear, they're going to be confused. And if they're going to be confused, they are going to be scared stiff. And that has to end.

QUICK: Does that--you make it sound almost like it doesn't matter what he says, as long as he picks one of those.

Mr. BUFFETT: Well, it matters...

QUICK: That's--you've got to--you've got to be leaning one direction.

Mr. BUFFETT: It matters somewhat. But we know that the Battle of Midway was the, you know, the important battle, you know, or that, you know, in terms of when the Philippines fell, all the--I mean, you've got to--you've got to assume that you need a commander in chief. They'll be intelligent, they've got the interests of the country at heart. And then you can't expect to agree with them on every point. And if you don't, you still get behind the effort.

QUICK: Joe.

KERNEN: Hey, Warren, you're talking about some of the investments maybe you regret. This wasn't made last year, but your what was it, a sale of puts, a long-term bet on the S&P that I think you have to mark at least a little bit to market once in a while, and it's up in the billions now. Do you regret that? Is that going to work out in the future? How long do you have now, where does the S&P have to end up?

Mr. BUFFETT: Well, the S&P has to end up 15 or 20 years from the time we did the deals at the price at which we did them. Although, if the S&P actually ends up, you know, 15 percent below or so, we still break even and we've had the use of the money for 15 or 20 years. So we're holding about $4.8 billion. The first one comes due in the latter part of 2019. And obviously I would rather put those positions on now than having put them on a few years ago. But if you--if you gave me the choice of not having the positions at all, and not being able to put them on or sticking with the positions we have, I would stick with the positions we have. I think--I think we will--the odds are good we will make money. And the thing I know for sure is we'll hold almost $5 billion for between 15 and 20 years in conjunction with it.

KERNEN: Hm.

Mr. BUFFETT: So I like...

KERNEN: Those are derivatives. You don't like derivatives, but you used them in that case, right?

Mr. BUFFETT: I--well, we've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous.

KERNEN: Yeah.

Mr. BUFFETT: But I mean, every American wants to have one. You know, the--a lot of things can be dangerous, but generally we regulate how they're used. I mean, there was a--there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used.

KERNEN: Hm.

Mr. BUFFETT: We tell the cars how fast they can go.

KERNEN: Yeah, yeah. Good. Well...

QUICK: David--go ahead, Joe.

KERNEN: Well, hopefully, Beck, we'll have a chance to talk about, you know, AIG and what we need to do...

QUICK: Mm-hmm.

KERNEN: ...because to be able to, you know, to write that many insurance contracts, Warren, and not put up any collateral, that's got to be something that regulators at this point, right? I mean, that is--that's why we're in this mess right now.

Mr. BUFFETT: I wrote--I wrote Congressman Dingell in 1981 about it, when they--you know, these are--they are dangerous.

QUICK: About AIG, or about derivatives in general?

Mr. BUFFETT: Oh, they were--it was--well, it was actually about trading the S&P 500 and what--the dangers you get into when you allow people to leverage up like crazy, which derivatives allow you to do. We put margin requirements in in the United States after 1929. We said that '29 was a terrible crash, it was partly brought on by the stock market and that was partly brought on by the fact that people were buying stocks with very little down payments. So the United States Congress said to the Fed, `You regulate this thing.' That's been 75 years ago. They still regulate it, but derivatives enable people entirely to get around margin regulations. They made them meaningless. And so we leveraged up the system and we are now feeling the pain and the spread out of the pain to people who had nothing to do with it from the deleveraging the system. And it's massive. So we do need--we need something new.

QUICK: Part of the reason AIG was able to do that was because its high credit rating at that point.

Mr. BUFFETT: Absolutely. Yeah.

QUICK: You're not suggesting necessarily they change the rules on how much people have to put down based on their credit ratings, right? Because you benefit from your AAA credit rating.

Mr. BUFFETT: Yeah. Although we benefit less these days than before. But AIG had this AIG financial products. I--when I bought Gen Re, they had something called GenRe financial products.

QUICK: Right.

Mr. BUFFETT: They had 23,800 contracts. Hell, I, you know, I couldn't understand 22,000 of them, probably. I spent--and I know I couldn't get my mind around it. You--that--and people recorded profit every--you know, that section made a profit every year, supposedly, and the guy that ran it made a lot of money and everything. You know, it probably would have busted the company if they--if they'd kept it around. Anything where you use the credit of a great institution to go out and start doing all kinds of things that--enormous leverage gets you in trouble. Citigroup could do SIVs because everybody trusted Citigroup, you know, and nobody knew that, you know, all this stuff was off balance sheet. It was a way of getting around capital requirements. You have to watch people that had all big sums of money.

QUICK: OK. Well, we have a lot more to talk about this morning. In fact, when we return on SQUAWK BOX we will be back inside the mind of one of the greatest investors of all time. Of course, we're talking about Warren Buffett. He is here with us live for the entire program this morning. He's answering your e-mails. He's giving us his thoughts on the markets. And we will be back with more right after this.

KERNEN: Let's get back to Becky Quick who's live in Omaha this morning with the legendary investor Warren Buffett. Becky:

QUICK: You know, Joe, one of the other big stories of the morning is what's been happening with the Big Three in Detroit. A lot of questions there and President Obama's car czars are meeting there today to try and get a handle on whether or not they're going to be loaning more money to GM and to Chrysler. There were some comments made over the weekend, Warren. Senator McCain, again, on the Sunday morning talk shows, talked a little bit about GM and his opinion was to let GM go bankrupt. This is a huge question. What would you do if you were in President Obama's shoes right now with GM?

Mr. BUFFETT: Can I use a lifeline? Phone a friend...

QUICK: Phone a friend at this point?

Mr. BUFFETT: ...that's a tough one. I mean, that is very tough.

QUICK: Yeah.

Mr. BUFFETT: But you have this situation where we have 250 million cars and light trucks on the road. Year after year we produce maybe 15 million or something like that because there's a lifetime to the 250 million, sort of a normal cycle. But we got down last month, you know, a little over nine million. So you are in a terrible, terrible, terrible period for the--for the carmakers every place. GM has a lot of--or the auto industry, the domestic auto industry has a lot of legacy costs. They did some dumb things in the past because they had a business model in mind that doesn't exist anymore. The union bargained for those things, you know, they feel entitled to them, they made a deal, you know, and they've got hundreds of thousands of retirees dependent on it and all sorts of things. So you need a new business model somewhat. You also need a recovery. It isn't just the business model. And I would say net I would come down on--if they modify the business model to adapt to the reality of a 13 million car a year and we'll do better than that in the future in some years. If they adapt, have a business model that works with that I would get them through this period. I would not expect to have a business model that works at nine million units because it isn't going to work at nine million. On the other hand, we are going to sell 13, 14, 15 million units a year sometime in the future.

QUICK: But you think you can get that business model, one that works without going into bankruptcy?

Mr. BUFFETT: That's the tough thing, and that's the challenge of the administration, the management and the unions working together. And I understand--the present managements didn't get us into this situation. There's no use getting mad at, you know, at the people now running the Big Three. There's no use getting mad at the union. They bargained for what they've got and, you know, these people, they counted on it. It won't work going forward and there have to be modifications made and people at all levels have to have a stake in that if--they should--they should try to accomplish it outside of bankruptcy. I mean, the American people do not need, you know, America's sort of hometown industry going into bankruptcy now. But I--they need a--they need a new business plan. It shouldn't have to be a business plan that works at nine or 10 or even 11 million units. It has to be a business plan that works at 13 million. We'll get back to that. It's the same thing as in housing, Becky.

QUICK: Mm-hmm.

Mr. BUFFETT: You know, we have a million and a half too many houses around now, you know. You own--you have household formation over here creating demand for houses, and you have people building houses. For a while we were building a million and three-quarters or something like that and household formation was a million three, and two-thirds of the people that form houses want to live in their own house so maybe you had demand for a million, and guess what happened? We had too many houses. Now we've got the housing construction down to 500,000 new permits or something like that. We're using up the million and a half units. But we have to work our way out of it and we have to work our way out of the car situation.

QUICK: Well, you bring--you bring up the housing situation. And Bob from Seattle, Washington, wrote in. He's got a question where he says, "Do you believe that the American economy of the last 10 to 15 years has been a house of cards? Won't the cries for more lending and more borrowing just rebuild that same house?"

Mr. BUFFETT: It was--it was not a house of cards, but it was an economy that was benefiting from leverage--leveraging up.

QUICK: Right.

Mr. BUFFETT: And when you leverage up, it's very pleasant. I mean, you can build more houses than people are buying, you know, and--or the natural demand is for and you'll get people speculating in them and you'll get people lying in order to get into houses they can't afford. And so the percentage of people besides the American households that lived in their own house went a little bit and it went up a little bit because those people really didn't have the income to do it. Now it has to go down. But it was not a house of cards at all. I mean, we have an economy that really works. We're were in a store where a woman walked out of Russia, you know, 90 years ago almost and she came to the United States, saved $500--it took her 16 years to do it--this is the largest home furnishing store in the United States, it does $400 million. Nobody walked out of the United States to go to Russia and ended up with a $400 million store with $500. This woman couldn't read or write, but she worked within the American system. She gave better--people better deals, she worked harder than anybody else, she was smart and she built an enormous success that employs thousands of people. America works, and America was--has been working the last 10 years, but we just did some very dumb things in terms of leveraging up.

QUICK: You're talking about Rose Blumkin who built the Nebraska Furniture Market.

Mr. BUFFETT: Yeah, market--yeah. Nobody walks out of the United States to go to Russia.

QUICK: Let's talk a a little bit about the housing industry itself. There are people who say this entire crisis started because of the housing industry.

Mr. BUFFETT: I agree.

QUICK: David Paterson, the governor of New York, wrote an opinion piece in The Wall Street Journal over the weekend, and he said, "The mortgage plan that the president has proposed is the right one." Do you agree with that?

Mr. BUFFETT: Well, I don't even know all the details, but I would say that the administration ought to be willing to listen to very prompt suggestions on ways to make it a little bit better. But--and I don't know that he even needs it, but I'm just saying they ought to be open-minded about that. But they ought to have a plan. And the idea that it benefits some people that maybe shouldn't be benefited, you know, to me that's, again, like after Pearl Harbor saying it was the Navy's fault so the Army and the Marines and all aren't going to join in and help, and the American people shouldn't do it because the Navy should stew in their own juice or something like that. We need to get the housing situation straightened out. Now the biggest--the big problem is we've got about a million and a half too many houses sitting around now. And the vacancy rate is up a couple percentage points on that and 2 percent of 80 million homes is a million six or something like that. We have to work through that. And we will work through it, but we'll work through it--we can't--we can't create a lot more households. We can't tell the 14 year olds to all get married and start having children so we can have more households. So we got to--got to sort of work with the normal demographics here. But we will have a million three hundred thousand households for them. Nine hundred thousand of those will want to move into their own houses netting everything out and we'll have some housing destroyed. So we can sop up the demand. We're lucky we have population growth. When Japan gets--got in trouble, they didn't have population growth. We have population growth. There's going to be demand, there's going to be more houses in the United State five years from now than now. There'll be more in 10 years than five years. So we can sop it up. But we can't do it in a week or a month or a year. It just doesn't happen. We--and I think that having a mortgage plan somehow gets payments for those who can make them down to a reasonable percentage of their income, which is where it should have been in the first place, is not crazy. I mean, we have an interest in solving that particular problem. And we shouldn't finger-point.

QUICK: Does that mean we're not the next Japan? We're not talking about 20 years of a stagnant market?

Mr. BUFFETT: Not 20 years at all, no.

QUICK: Are we talking about 10 years? What...

Mr. BUFFETT: Well, it just--it depends. Frankly, the best thing that could happen--I'm in the brick business, I'm been in the carpet business, I'm in all these businesses which are getting hurt by the lack of new construction. But the lack of new construction is an important ingredient to this. If you've got too many houses and you've got a certain growth and demand--if demand is going to grow by X per year, and if you...(unintelligible)...the next houses you're going to--you're going to improve the situation and we--you got a choice. You can either--you can either blow up a billion and a half houses or you can create few houses than natural demand sops up. And I would say that, you know, you can work your way out of it in a couple of years probably, two to three years.

QUICK: Two to three years, which is very different than what...

Mr. BUFFETT: Don't--well, it just depends how many are constructed. We really...

QUICK: Yeah.

Mr. BUFFETT: ...the new housing starts have really gone down. I think the last figure's around 500,000 or something like that annual. And that makes a big difference. That didn't happen for a while. I mean, it was--they had to slow down the machine.

QUICK: Joe, I'm sorry, did you want to a question in here?

KERNEN: Yeah, I want to go back to something Warren said quickly, Becky, and that was that--and we don't hear this enough--that in the past 10 years, Warren, you said that things basically did work in the economy. That the free-market economy--we seem to look back now and think that over the past 10 years that every step we made was a misstep that led to this crisis where we are right now. And I know you weren't a big fan of the Bush tax cuts, but you can't throw out the baby with the bathwater, can you, in terms of--maybe there needed to be more regulation, but overall why are we in this mess right now?

Mr. BUFFETT: Well, we're--the biggest reason we're in the mess, you know, is we did leverage up the country and we essentially made a huge bet on housing, but that led to all kinds of other instruments. And--but net over the 10 years a lot of things were--happened that were right and over the next 10 years a lot of things will happen that are right. The--this machine is gummed up right now and it's gummed up by a lack of confidence and that makes people scared and, I mean, it feeds back and forth and it's a vicious cycle.

KERNEN: Did...

Mr. BUFFETT: That will be broken--that will be broken. I'll guarantee it'll be broken, Joe. I think it'll just be broken...

KERNEN: Doesn't...

Mr. BUFFETT: ...sooner if...

KERNEN: Doesn't the freedom inherent in a free market give you enough rope to hang yourself a lot of times? And maybe we can look at it that way? I mean, how do we make sure that greed--greed has been involved with every bubble that we've had over the past 500 years and we've had a lot of them. And if...

Mr. BUFFETT: Yes.

KERNEN: ...you're in a free market, you're going to have enough rope to hang yourself, no?

Mr. BUFFETT: Yeah. Well, you--yeah, you want me to have enough free rope to hang myself, you just don't want me to have enough rope to hang the whole country. And...

KERNEN: Right.

Mr. BUFFETT: ...we'll always--I mean, failure is part of the American system. But you don't want to create conditions where failure becomes--of such large institutions becomes contagious, produces fear, all of those sort of things. But that'll happen occasionally. There's no question about it. Free markets overshoot, they do some things that are wrong. They work better than anything else, but they have to--in certain arenas they have to be looked at because there are areas where people--where what you--what you do that's stupid can be contagious throughout an economy.

KERNEN: Hm.

Mr. BUFFETT: You don't--you don't--you don't want--I have no desire to leave the market system at all. But you do need government and you particularly need government at a time like this.

KERNEN: Hm. All right. All right, Beck, we go to--I guess it's stocks to watch is sponsor, I think. Anyway, we got to--we got to take a break. Coming up, stocks to watch and maybe the animal orchestra, I don't know, maybe not on Buffett day. A merger Monday and more of your e-mails to the oracle. Squawk Box will be right back

KERNEN: So we've got that going for us today, Becky, and we've got the oracle.

QUICK: That's right, we do. We also have questions from lots and lots of viewers so we'd like to get back to some of those e-mails. They've been coming in all morning long. And Warren, I'd like to start with one right now from Tom in Vero Beach, Florida. His question is, "Given that Berkshire Hathaway primarily buys stocks, if you felt the Dow was going to slide to 2,000 would you state your thoughts publicly, or would you feel an obligation to keep those thoughts private?"

Mr. BUFFETT: I would never have a feeling that the Dow is going to go to 2,000 or 12,000 or 4300 or 20,200. I don't--I know over time it will go higher. I mean, American business will be worth more over time. The dollar will be worth less. They'll be retained earnings that build up values. There will be more people in this country and they'll have more buying power. Stocks will be worth more over time. I have no idea where they'll go in between. For all I know, that farm I bought, you know, 20 years ago, it may have bobbed around 8, you know, $1800 an acre, 1200, I don't even know anything about that. I just know that the farm, over time, will produce 120 bushels of corn, you know, per acre, etc. So I've never tried to predict stock prices.

QUICK: You know, it was interesting. I made a comment earlier that the Dow was at 6626 and when I did, you made a comment about it, too.

Mr. BUFFETT: Yeah. When it was at 6626, at the start of 19--the last century, 1900, it was at 66. So it's gone up 100 for one. And we had the Great Depression, two world wars, the flu epidemic, the nuclear bomb, the cold war. I mean, you name it. At least 15 years in that 100 years looked terrible and five or six of them looked, you know, almost disastrous. And in the end, this system works extremely well. And--but it doesn't work well every day or every week or every month and there are times when government needs to be a very big factor to make sure it starts getting back on the tracks. But it will work. I will guarantee you that the Dow will be a lot higher. I'll have no idea about the numbers or anything else, 10 or 20 years from now. I have no idea. You know, 2,000, 8,000, they're all numbers.

QUICK: A lot of viewers wrote in and had specific questions about your investments. David wrote in and says, "You've committed financing for Dow Chemical's acquisition of Rohm and Haas Company. What are your thought on the upcoming lawsuit and whether or not the deal should continue to move forward?"

Mr. BUFFETT: Yeah. Well, I can't comment on that. The lawsuit will either happen or it won't happen. I guess they're going to decide pretty soon on that. I mean, any deal that was made last summer, you know, like they say in golf, every putt makes someone happy. But all of the sellers are happy and all of the buyers are unhappy. And you know, the deal would not be at the same terms now and incidentally, we committed to buy $3 billion worth of preferred. That is not a good commitment. I mean, it's good in the sense that we're going to do it, as I've told the CEO of Dow, I said, you know, our 3 billion will be there if Ben Bernanke runs off to South America with Paris Hilton. I mean, they'll have the money. I mean, but the--was that--is that a smart deal today? No. No. But conditions have changed and conditions change for Dow and Rohm and Haas in a huge way. And what looked like a deal that was--they liked at Dow and that it could be financed reasonably well and the Kuwaitis were going to enter into a partnership with Dow, all kinds of things. But the world has changed like nobody ever believed it would and so obviously, it's not only, you know, not only not a good deal now, I mean, it may not be a doable deal now. Our commitment, which was--looked smart at the time, looks dumb at the present time. But that's the way the world is.

QUICK: OK. One of the changes in the world has been what we've seen in the treasury markets and K. Hart writes in and says, "If the much talked about bubble in the Treasury market burst, would money market accounts, which are exposed to Treasuries, be adversely affected?"

Mr. BUFFETT: No. The--you'll always--you'll get your dollar back, it just won't buy as much and if we get enough dollars out there and you can go to a Web site and look at what is happening with M1 and M2, they don't talk about it anymore, but the--we are going--we are doing things that are going to put a lot of inflationary pressure on at some later date and we're going to do more things like that and that's the right thing to do, actually. I wish we didn't have to do it, but it's the right thing to do and--but in economics, you can never just do one thing. I mean, if you do something, it has consequences and that's why they always say you never get a free lunch. But it's better to have the lunch we're having now even if we pay later than have no lunch at all.

QUICK: All right. Brian from Santa Rosa, California, writes in. He says, "I'm a 33-year-old lawyer who has never taken a business class in my life. Nevertheless, am I crazy to think that many, if not most, blue chip stocks at current valuations represent the opportunity of a lifetime?"

Mr. BUFFETT: Well, I don't know if I would say the opportunity of a lifetime, but I would say that most people who buy companies, believe they're well capitalized. You don't want to buy somebody that's leveraged to the hilt in this situation because they may not to get to play out their hand.

QUICK: Mm-hmm.

Mr. BUFFETT: But if you buy a cross section of good equities, generally well capitalized companies, you'll make money over 10 or 20 years. I haven't the faintest idea where you'll be in 10 months, but it really doesn't make any difference. When I bought that farm, I have not gotten a quote on it yet. I bought a quarter of interest in the Omaha Royals, I've never got a quote on it. I look at the attendance figures, I look at see if the billboards have ads on them and all that sort of thing, but I took to the performance of the Omaha Royals or the farm to determine whether I made a decent investment. That's the way people really ought to look at stocks. They have a hard time doing it because they get these quotes thrown at them every day. Forget the quotes. Look at the business.

QUICK: Although right now a lot of people are facing--focusing on those quotes.

Mr. BUFFETT: Sure.

QUICK: Richard from New York City writes in. He says, "In the annual report for 2008, you say that `Now our book value far understates Berkshire's intrinsic value.'" He wants to know, "would you care to be more specific how `far understates' should be interpreted?" For example, do you mean 30 percent?

Mr. BUFFETT: Do we have a number? Yeah. Well, the answer is I won't give you a number, but I will tell you, for example, that here's See's Candy that we bought in 1972 and we paid $25 million for it.

QUICK: Mm-hmm.

Mr. BUFFETT: It's worth a lot more than 25 million. But in terms of knowing numbers on different businesses, you know, Geico's worth far more than we paid for it, but others aren't worth far more. On balance, book value does understate intrinsic value, but I--who knows how much?

QUICK: OK. Harold from Williamsville, New York, writes in. He says, "You said recently that Treasury Bonds and cash equivalents are going to have very bad times in the not too distant future. Does that imply that you like gold and silver and the equities underlying them?"

Mr. BUFFETT: No. It applies I like good businesses.

QUICK: Mm-hmm.

Mr. BUFFETT: You know, if the dollar becomes way--worth way less, we will sell See's Candy for more money. I mean, it won't be more real dollars, but we--if somebody's willing to give up 15 minutes of their labor or half to buy a pound of this or to buy six cans of this, they'll do the same thing and it won't make any difference whether shark's teeth are being used for money, basically. So the best--well, the best assets you can have during inflation is your abilities. I mean, because if you're the best doctor in town or the best lawyer in town or the best broadcaster in town or whatever it may be, you will always command a certain percentage of the resources of society. So your own talents are the most important thing. But if you don't have any talent like I do, you try to buy into other people's talents. And you know, this is the best candy. This is the best soft drink, as far as I'm concerned, and it will be that way 10 years from now. And whatever the value currency is, we'll get our share in that--in terms of that value at that time.

QUICK: You mentioned before when we were talking about the mortgage plan that it may help some people that it shouldn't.

Mr. BUFFETT: Of course.

QUICK: But that's something we need to suck up and understand at this point. But it does lead to other people who have questions about whether they're being penalized for doing the right thing. In fact, Bob and Lani in Rapid City, South Dakota, write in. They say, "We are conservative South Dakotans. We are now saving more, but the government wants us to spend more. Are you `short' or `long' on our strategy to `pay all your personal bills promptly and always live within your means'?"

Mr. BUFFETT: Well, I've always followed that myself, so I'm with them 100 percent on that. But in terms of 100 percent, I mean, you don't want to get behind the eight ball. I mean, if you are, you've got to work your way out, but it's always better. You know, Ben Franklin wrote that, you know, hundreds of years ago, the--you know, earn a dollar, spend 99 cents, result happiness, you know. Earn 99 cents, spend a dollar, result misery. And--but in terms of the inequities, if I were a--had been a client of Bernie Madoff's and fortunately I never heard of him, but let's say I was a client of Bernie Madoff's. I'm in the middle of Lake Michigan with him. We're in a boat together. Bernie's at the other end. I've just lost all my net worth. I see this hole spring up at his end of the boat. Am I supposed to cheer? No. I mean, in the end, you know, I want to save Bernie, too. I mean, not because I really want to save him, but I--you know, there is no way to divorce myself from what's happening on the other end of the boat. And this thing is covering--going to cover the whole boat. There's no question about it. So the people who have behaved well are going to find themselves taking care, to some extent, of the people who didn't behave well.

QUICK: Right.

Mr. BUFFETT: And in Pearl Harbor, the Army, you know, undoubtedly was not as responsible for those boats being in the harbor there all exposed to an attack and kind of sleeping through it as the Navy. But does that mean the Army holds back? No. You've got to be in there.

KERNEN: Hey, hey, Warren, Becky's really, you know, she's nice and deferential to you and everything. I just want to let you know that there are times she gets really mad because she's been one of the people that have paid her mortgage and she always points out she's never bought new bedroom furniture because she...

QUICK: Oh, stop already.

KERNEN: And you're in a furniture store! You and Warren are...

Mr. BUFFETT: We're not going to last--we've locked the doors, Joe.

KERNEN: You can...

Mr. BUFFETT: We've locked the doors, Joe. She is not getting out of here until we clean her out.

KERNEN: Becky, tell Warren you're mad that you've done all the right things and all these other people are going to get bailed out.

QUICK: Oh. I'm not nearly as mad as is as many times you've complained for me. But yes.

Mr. BUFFETT: There's nothing wrong with being mad, Joe. It's just you can't--there's times when you're made about something that you've got to overcome the emotion because...

KERNEN: Give her a deal on a new bedroom set and then we won't have to hear it anymore. You're in a furniture store.

Mr. BUFFETT: We give deals to everybody, even including guys named Joe Kernen.

KERNEN: All right.

Mr. BUFFETT: We'll open an account for you.

KERNEN: All right. Thank you.

QUICK: All right. We will have more coming up with Mr. Buffett. In fact, coming up, we're going to be talking about fixing the economy and restoring confidence. We're going to search for solutions to the one and only--solutions for all these problems with the one and only Warren Buffett. Plus, we have more of your e-mail questions for legendary investors. Squawk Box will be right back.

Announcer: This is a special presentation of Squawk Box live from Omaha, Nebraska, with Warren Buffett. He's fielding your questions live, so e-mail us at askwarren@cnbc.com.





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