CNBC Transcript: Warren Buffett on Osama Bin Laden, the U.S. Economy, and the Sokol Scandal

Shareholders Meeting 2011: CNBC Transcript and Video
Shareholders Meeting 2011: CNBC Transcript and Video

This is a transcript of Warren Buffett's live interview, his first since this weekend's Berkshire Hathaway shareholders meeting, on CNBC's Squawk Box on Monday, May 2, 2011. He discussed his reaction to the death of Osama Bin Laden, the state of the U.S. economy, and the continued fallout from the David Sokol scandal.

BECKY QUICK: Right now we'd actually like to get some more reaction to last night's developments. We're in Omaha, where Berkshire Hathaway held its annual meeting this weekend. Joining us right now is Warren Buffett himself. Also on the phone, calling in, is Jack Welch. Both these gentlemen appeared on "60 Minutes" on September 16th, 2001. That was the day before the United States markets reopened following those 9/11 attacks. At that time they were talking about the economic and investing impact of those infamous acts of terror. And, gentlemen, we want to thank both of you for joining us here this morning to talk about what's happened.


JACK WELCH (Author, "Winning" and "Straight From the Gut"): Thank you.

BECKY: Morning, Jack. We thank you, Jack. We often come to you two when we need a little bit of historic perspective, when we're trying to put events in some sort of perspective. And, Warren, when you heard the news about Osama bin Laden last night, what did you think?

BUFFETT: It felt good. It was joy. And my thoughts went back to 9/11, and I was actually watching CNBC, Mark Haines was on. I had a charity golf tournament going on, and ironically, I'd arranged for a number of the people who had come in from around the country, including the woman that ran Fiduciary Trust, to be at Strategic Air Command headquarters that morning. So they learned of the attack at SAC. And of course, later that day President Bush flew in there. So it was—it was originally shock, you know, anger, and then determination that I think hit every American at that point in sequence.

BECKY: Mm-hmm. And, Jack, I know that that was a day we'd been expecting to talk to you that morning, as well. What did you start thinking about as you heard the news coming out about Osama bin Laden?

WELCH: Well, today was a great thrill. I—to watch this morning, to see the people reciting the Pledge of Allegiance at ground zero puts chills through your body. It's such a great thing to see the spirit of the American people rising. You know, this has been a tremendous 72 hours for the West. If you think of the economic problems the British had, and they're going through these austerity measures, and to see the people in Trafalgar Square cheering last Friday, and the spirits of the flag of Britain all over the streets; and to see Americans in the streets now, it's a wonderful thing for the West to see this confidence, this ability to rally. And it's an exciting moment for all of us.

BECKY: Mm-hmm. Warren, Jack brings up a good point. We've had a lot of bad news that has hit us recently, a lot of troubling times, from the gulf oil spill, from the financial crisis, the economic collapse of this nation. Seeing something like this gives us all a little bit of hope.

BUFFETT: Yeah. Well, it's always been a mistake to bet against America, since 1776. And, you know, we take our body blows from time to time, but this country always comes through. And when we get united, get out of the way. It—and we are—at moments like this you particularly see that. And of course, after 9/11 we saw it. But I've always had enormous faith in this country to do anything, whether it's in economics or whether it's in liberating people or whatever it may be. And this is just one more dramatic illustration of when the United States sets out to do something, it gets it done.

BECKY: Mm-hmm. Jack, there are some people who have pointed back to the death of Hitler and how this made them feel at that time, and how they're looking at this through that prism.

WELCH: Well, I'm—you know, I think these may be true. But I don't think that the death of bin Laden is quite going to be the end of things, as it was with Hitler.

BECKY: Yeah.

WELCH: Let's face it, there are a lot of cells all over the—all over the world today. The splinter groups that have been formed as a result of this. And somebody was talking a little earlier on your show about the fact that the uprisings in—for democracy in the—in the East are symbolic to—in some ways with this. Well, I'm not so sure of that. I'm not so sure that we know what we're going to get from some of these uprisings. We're not sure who's taking over in what—in what area. I want to enjoy this moment. I'm thrilled for America. I believe in America as much as anybody alive. I'm so proud of the people that have worked in intelligence, you know. Very often when we're out on a Friday night enjoying ourselves, we'll—I'll say to my wife, Suzy, you know, just think, somebody's doing something right now to make this all possible for us. And we don't know their names, we don't know what they're doing. They're breaking up a cell in the UK, they're doing something somewhere else. We have to celebrate all the people that work so hard in intelligence to keep our way of life going. But I don't think that this is a moment like Hitler. I think Hitler was a period behind the sentence. I don't think this is a period behind a sentence. I think it's a great moment, but I'm worried about all the other splinter groups that are out there, Becky.

BECKY: Warren, do you think this is the end of something, or the beginning of something new?

BUFFETT: No. I—it's—a mass murderer of almost incomprehensible dimensions has been eliminated, just as was the case with Hitler. But there are lots of people in the world that are going to have evil intent toward this country, and—as well as other people, and they're not going to go away. And they're going to continue to seek ways to hurt us, disrupt us, and I think our government has done really quite an amazing job. We don't know what actions they've taken, but at the time of 9/11 I can tell you that a significant portion of the country was expecting another attack within a very short period. And being in the insurance business, I thought plenty about it, in addition to being a citizen. And I really thought we were going to get hit again. And the reason we haven't been hit again, you know, we won't know all the reasons. But somebody has done a lot of things right and—over the years, both administrations, to keep that from happening. But the desire to do us harm exists in the hearts of too many people around the world, and they're looking for new ways to do it, and we need an ever-vigilant government, and I think we have one.

BECKY: Jack, we saw the aftereffects of what this did to the economy. We saw how people stopped spending, people were afraid to do things. We saw something called the terror premium that got put into the trading markets. Where have we come since that time? How much do you think that still exists? Have we become immune to it, or is it still very much an everyday part of our lives?

WELCH: Well, I think it's an everyday part of our lives. But I think—I think to see moments like this, moments like these last 72 hours of victory, if you will, do wonders for the spirit, and they do build confidence. And people that have been battered by a loss of a house or are having problems with jobs feel better, they feel—they'll have a quicker step in their—in their behavior. They'll be—they'll feel prouder to be an American and they'll—it always helps, it always helps. Being in the winning locker room is a lot better than being in the losing locker room. And these people today and for the next days and the next weeks will feel a certain positive attitude that has to be helpful.

BECKY: Absolutely, Jack, couldn't agree with you more on that. Warren, you see what happened—what's happening with the economy. We have seen things turning up and picking up. What have you see recently, let's say over the last several weeks, maybe even the last month or two?

BUFFETT: Well, the economy since the fall of 2009—and we see it from a lot of—through a lot of prisms—has been getting slowly but steadily better, and—not in residential construction, but in almost every other area of the economy we've seen fairly steady improvement. And the mood about that improvement has swung around quite volatily. Sometimes we were really quite good about the pace at which the recovery was going, and other times they got very discouraged. To me, it's looked fairly steady, much more steady than the mood, and right up to the present, you know, we are seeing gains in the overwhelming majority of our businesses, but not in residential construction. And that has fallout beyond a bunch of people out building a house. I mean, that affects the carpet business and the insulation business and all of that. But this—I think the economy, considering the body blow that it took in the fall of 2008, has been doing quite well, and I think it will show up in the employment figures more dramatically than most people may feel when residential construction comes back, because it isn't just going to be the people out building houses. You know, we're going to feel it at our Furniture Mart, we're going to feel it in our carpet business, we're going—there'll be—there'll be a lot more thousands of people coming back when residential construction comes back, and I think it's generally anticipated.

BECKY: OK. Joe, I know you have some questions, as well.

JOE: Well, I'll stay—I was going to ask Jack something about Pakistan. But as long as we're on this subject, Jack's got all these—he knows what's happening at Clayton and all the companies they own, as well. And, Jack, 1.8 percent, is that temporary? Were you—were you surprised that GDP was down there? And do you think that's a temporary low? How are the businesses performing that you know about?

WELCH: Well, look, Joe, we—there's no question, you know, over the last month the gasoline prices and food inflation have clearly hit some of our very short cycle businesses. Now, how much of this is permanent and how much of this is just a shocked. But there's no question that dollars have been sucked out of the economy, $100 billion, in the—in the first quarter came out, for gasoline. And that's a big number. And so the consumer in some of our restaurant businesses and some of our other businesses have felt this. And our numbers reflected, in the last half of the first quarter, a slowdown in several businesses.

JOE: Yeah. Knowing you as I do, I'll get back to Pakistan. But I don't know, it just—he was in a mansion, Jack, and it was right in the middle of town, and there's army guys around. And I just can't believe they didn't know, and I don't know what to do with Pakistan at this point. But I envisioned him in a cave, you know, eating grubs or worms or something. That's not the case, and it makes me angry. I don't know what we do with Pakistan.

WELCH: Well, I think your last—at the top of the show you had a gentleman up in Washington who made the comment, it would be like having somebody in a—in a mansion around the corner from West Point. That analogy is pretty damning.

JOE: Yeah. I—it's just frustrating but, you know, I don't know what you do. You can't—you know, Pakistan we need more than we need to alienate them, I guess, and that's what foreign policy is all about. But I thought maybe you'd have a Jack Welch rant about that. But we got to...

WELCH: Not today.

JOE: All right.

BECKY: Warren, what do you think about Pakistan and about the cooperation we've gotten to this point?

BUFFETT: I think we're—we have to deal with Pakistan over the years in a way that's in the national interest.

JOE: Yeah.

BUFFETT: And I don't pretend to know all the nuances of day to day or year to year activities. But they are a player in the international scene, and they have weapons, and it's up to the United States to figure out what's in our interests and how to, in effect, deal with Pakistan in a way that's consistent with our national interests over time. And I have no great insights into it myself as to how you play out that game.

BECKY: Mm-hmm.

BUFFETT: But that—I'm sure that people in Washington think about that daily and have way better information than I do.

BECKY: Warren, Jack mentioned that gas prices, gasoline prices are hurting the consumer. I think he cited $100 million that have been taken out of the consumer's pocket over the quarter.

(Welch clears throat)

BECKY: What was that, Jack?

WELCH: No, go ahead.

BECKY: OK. But he talked about how that was really hurting consumers and how they're seeing that in their consumer businesses. Are you seeing it in yours, too, a pullback from the consumer, an unwillingness to pay up?

BUFFETT: Well, you have seen some. And bear in mind, you know, we talk in this country and we say, you know, how unwise it would be to have a tax increase at this point in the economy. Well, this is a tax increase. I mean, when you—when you raise the price of gasoline, it's a tax increase; the only difference is the tax goes to OPEC instead of to Washington. But it has exactly the same impact on the consumer as would a very major tax increase. And it hits—it's regressive in the sense that it hits the bottom layer disproportionately. So we are sending tens and tens of billions of dollars—if the price, you know, goes up $20 a barrel and you're importing, you know, 10 million barrels plus, and it's a couple hundred million dollars a day, that is—they've just voted a tax increase on us at OPEC, and the money doesn't go to the federal government. So it has an impact, there's no question about that.

BECKY: Jack, is there anything that can be done about that? I mean, if you look at it from the government's perspective, kind of hard to push back on oil prices. In the past, anything they've tried to do has not been successful.

WELCH: Well, I certainly don't think that the suggestion that we kill the oil companies' tax breaks for domestic drilling is going to do anything about lowering prices; in fact, it'll raise prices as I see it.

BECKY: Warren, you agree with that?

BUFFETT: Yeah, I agree with that, mm-hmm.

BECKY: So the idea of a windfall profits tax is not one that you think actually helps for the United States?

BUFFETT: Oh, I—the real answer is to use—is to use less oil over time. And there are lots of initiatives in that direction. But we do not want to be paying a huge tax, I mean really huge tax daily, to OPEC, other producing countries and, you know, having our citizens forking out, you know, at the gas station. They're just—they're just—they're just—it's like filling out a 1040 for an American. And the way they—the way they get off that is to use less oil.

BECKY: Mm-hmm. Jack, you mentioned that this is something that makes Americans feel good, and when Americans feel good they tend to reflect that in the polls. This is very likely something that's going to help President Obama's polls, do you think?

WELCH: Yeah, there's no question that there'll be a short-term impact on the polls. Of course, the Obama administration has to look at history, and I'm sure they are. George Bush, after Desert Storm, had a 91 percent approval rating. Eighteen months later, Bill Clinton became the president. So these things, unless the whole thing comes together over a sustained period of time—if unemployment doesn't come down, if housing doesn't recover at all, if all these things happen, despite this tremendous accomplishment by the president, he'll be measured 18 months from now on how people feel about themselves and their lives and their family's lives.

JOE: All right. I...

BECKY: That's a great—go ahead, Joe.

JOE: Beck, I know we're going to touch on—with Warren, I think Jack's not going to be with us for the whole hour. I'm not directing these to Jack for just to talk to him. But—and I actually want to hear from Warren, too, on this one. But we saw Bernanke last week, I know Warren already was—had enough of QE2, I think. I don't know if I've ever asked you directly, Jack, about that, but I don't know whether the benefits at this point are worth the costs of QE2. Did he convince you last week, Jack, that it...

WELCH: Not me.

JOE: Well, what do you think? I mean...

WELCH: Look. I just think free money in the hands of very smart people for too long is going to create something that's not very pleasant. And I don't know what it exactly is, but every time we give free money to lots of people who are very, very smart and know how to use it, you'll end up with a bubble or a problem that we don't quite see in front of us. Some people do, but I never have.

JOE: And Warren, there's never—it's—we always use the "Airplane" analogy. I've picked a bad day to quit smoking. The more that oil prices go up to hurt the economy, and some of them would tie the commodity inflation to QE2, the more that that causes us not to come out of this, you know, this slow period, the more they need to keep their foot on the gas. It almost seems like they're, you know, like it's a self—almost a circular. Like it's self-fulfilling that they have to keep the pedal to the metal.

BUFFETT: They—I'm with Jack. I have—I've got a lot of admiration for Bernanke and I particularly have admiration for what he did in the fall of 2008.

WELCH: Me, too.

BUFFETT: But yeah. But I'm—on this one, I think—I think this is a medicine that's being applied in huge dosages that may not be that effective and which can have a lot of side effects that will be hard to recover from.

BECKY: What would you rather see, Warren? Would you prefer if they were to take some action at this point, that the Fed wind down its balance sheet? Or that it actually raised rates? What's more effective?


BUFFETT: Well, I don't—winding down the balance sheet's going to be interesting to watch.


BUFFETT: It's one thing to buy 600 billion of securities, it's another thing to sell it, you know. To whom is the line of Wall Street goes.


BUFFETT: But the—you know, I think we have done—made huge efforts on both the fiscal policy and monetary policy side.

BECKY: Mm-hmm.

BUFFETT: We're running a federal budget deficit of 10 percent of GDP. That's fiscal stimulus. It may not have come through something called a stimulus bill, but a dollar spent that the government didn't raise except through borrowing or printing money is stimulus, by any other name. And with monetary policy, we, you know, we've had it close to zero rates now for a long time.

BECKY: Mm-hmm.

BUFFETT: I think the normal regenerative capacity of capitalism is vastly overrated.

(Note: Buffett almost certainly meant to say the regenerative capacity of capitalism is underrated, not overrated.)

I mean, we had—we've had 15 or so recessions in this country, and probably half of them are panics, as they used to be called in the 19th century and half of them occurred when nobody knew what fiscal or monetary policy was. But millions of people out there thinking about how to do things better tomorrow. I mean, when Jack was at GE every day, he was thinking about how all the divisions could be doing something better, more efficiently, the next day, new products and all of that. And that is what really moves this economy and I think it's—I think it's moving it right now.

BECKY: Mm-hmm.

BUFFETT: So I do not think—I do not think that—I don't think fiscal and monetary policy—I think if you do them wrong, you can really mess things up. But I think the big factor in the continuation of the recovery will be the Steve Jobs of the world coming up with new products that nobody thought of before.

BECKY: Mm-hmm.

BUFFETT: And millions of Americans doing what people before them have done, trying to think of ways to do them more efficiently, new products. And capitalism works and I think we're seeing it work.

BECKY: Jack, though, we still have that huge problem, you mentioned, of unemployment, that stubbornly high unemployment level. The government has done everything it probably could do from a fiscal perspective. The Fed has done everything it could do from a monetary perspective. So what needs to happen to try and attack that jobless rate?

WELCH: We need to get consumer confidence back. This thing that just happened yesterday is going to—is going to help. But we also need—Warren mentioned Steve Jobs. Innovation is the key to our growing our way out of this thing. We're going to have to find ways to do things better because people have found ways during this recession to do more with less. There's no question about that. We're able to with productivity and other things, to do a lot more with fewer people. Now what we need and we always need, are innovative products that the world needs. It—innovative products are not coming from developing countries. Our lower cost products are coming from developing countries, but innovative products are not coming from those countries. Our job is to innovate, innovate, innovate in everything that we are doing. Look at Caterpillar's results now from the stuff that they're putting out. Look at—look at Jobs and this—he can't make them fast enough. We need more of that and we're going to get it. The American spirit on innovation has never been higher. The drive has never been stronger. On the other hand, there is this ability to do a lot more with fewer people. So without it, we don't have a prayer. Without innovation.

BECKY: And Jack, just your final—your final thoughts on, again, last night hearing that Osama bin Laden was dead and had been killed by US forces.

WELCH: Look, I'll get out of this conversation and you can get on with Warren. I'm—I am absolutely proud to be an American. I always am. I'm never prouder in moments like that. The president gave a great speech. He deserves all the credit in the world for what he—for what's happened on his watch. And I hope it's the beginnings of the kindling wood starting to burn and the American spirit after some real beatings since 2008 fights its way back and we're all better off for it, so thanks for having me on.

BECKY: Jack, we want to thank you for calling in this morning. We truly appreciate it. Again, that's been Jack Welch with us on the phone.

And we're going to sneak in a quick break at this point. When we come back, we have more on our conversation with Warren Buffett. We are live in Omaha just after the annual meeting for Berkshire Hathaway shareholders finishes up. We've got a lot of questions for him coming up right after this. SQUAWK BOX will be right back.


BECKY: Let's get back to our conversation with Warren Buffett. We've been talking about this news on Osama bin Laden, what he thinks about that. But we are also here today because we went to the Berkshire annual meeting over the weekend here in Omaha. And Warren, we want to thank you again for your time joining us this morning.

BUFFETT: Delighted.

BECKY: There were a lot of questions that came up at the annual meeting. Many questions shareholders had going in and you spend some time talking to those 40,000 shareholders and explaining some of the events, but a lot of people still haven't heard what you had to say. And I think many people still have a basic question, what did you think about those trades that David Sokol made in Lubrizol before Berkshire's purchase of it?

BUFFETT: Well, I thought they were wrong. And we did put up a transcript of everything that took place at the annual meeting at the Berkshire Hathaway Web site. So word for word you can hear the questions and answers that took place. That's why I put them in the press—put it in the press release when he—when I handed him his resignation and it's why the—when we issued the press release, our lawyers called the head of enforcement at the SEC and laid out the facts for them because clearly it was a big mistake. Whether it was illegal or not is another question and I'm not the one to express an opinion on that.

BECKY: Although you did say in the press release that you didn't think...

BUFFETT: Yeah, I said based on...

BECKY: You did not think it was illegal.

BUFFETT: Yeah. Based on what I knew then and it turned out, although Dave had approved or confirmed the accuracy of what was in the press release twice, and of course he went on your show the next day and did not deny any aspect of the press release, there was a statement about whether he knew that Lubrizol might have an interest. And I had read the Lubrizol recent proxy statement where it says that on December 17th that he was aware that Lubrizol had at least some interest in Mr. Hambrick, the CEO, was going to take it to the Lubrizol board and if that was the case, that does change the facts that I thought I knew and that Dave affirmed about that were in the press release.

BECKY: You said, though, that you thought his actions were wrong, whether they were unlawful or not, when you put out that original press release, about his stepping down.


BECKY: There are many people have wondered why you didn't show more or a sense of outrage, more ruthlessness, more anger, if that were the case.

BUFFETT: Yeah. People—there's no question about it, people feel that I did not show anger. And that I thought, actually, by saying this time I did not make any attempt to talk him into staying after he'd resigned twice earlier and I had some time earlier. And that we laid out all of the facts on that we knew at the time about this trading, which I think anybody that read—was reading the press release, would think, you know, this is really something that shouldn't have happened.

BECKY: Mm-hmm.

BUFFETT: I thought we'd done the job, but obviously I should've—in terms of public reaction, I should've expressed some anger. But I thought the facts sort of spoke for themselves.

BECKY: Looking back, is there anything else that you wish you'd done differently? The press release is one thing, but do you think you'd asked him more when he mentioned to you that he owned a stake in Lubrizol?

BUFFETT: Well, obviously, I wish I had because it would've not only saved Berkshire a lot of trouble, it would've saved him a lot of trouble. But when he—when he talked to me on January 14th or 15th and said that Berkshire ought to take a look at Lubrizol and it might be a company that would fit us and I said, `How come?' He said, `Well, I've owned the stock and I've followed it and it looks like our kind of company.' Now, if any member of Berkshire's management or board had said that to me, I would not have assumed that they bought a lot of stock a few days before. I mean, it's just not consistent with that. But I, you know, if I'd simply asked the question, I would've saved Dave a lot of trouble, would've saved us a lot of trouble.

BECKY: His lawyer put out another statement on Saturday after the annual meeting and he says within this, he's deeply saddened that Mr. Buffett, whom he considered a friend and a mentor, would disparage him as he had done today. He said that Buffett and the audit committee at Berkshire had requested that neither of you had requested to speak nor has spoken to Mr. Sokol since his resignation was made public on March 30th.

BUFFETT: Yeah. Well, I haven't, but our lawyers interviewed him three times while I was over in Asia actually. And I think—I think they all took place in sort of that time frame. And then they requested, this lawyer that—apparently that—I don't know whether it was a specific one at that firm, but they requested that Dave be made available and nothing happened. So believe me, the audit committee would love to talk to Dave this afternoon. So it's an open invitation.

BECKY: Mm-hmm.

BUFFETT: But his lawyer in terms of talking about the facts of the case all I can say is his lawyer was not there.

BECKY: Yeah, his lawyer says that there were many inaccuracies or the audit committee report, he says, contains errors and omissions.


BECKY: Do you know what he's referring to there?

BUFFETT: No I don't, and like I say the lawyer wasn't there.

BECKY: OK. He also goes on to say that at no time did Mr. Sokol violate the law or any Berkshire policy.

BUFFETT: Yeah. Well, the question whether he violated the law is up to other people to determine. And there has been this additional fact that Lubrizol uncovered and put in their final proxy statement. In terms of violating the policies of Berkshire Hathaway, though, our audit committee report is on our Web site and there's item after item and there—I don't think anybody could read those words and then look at the acts and not conclude that the policies were violated.

BECKY: We should point out that we have invited Barry Levine, who is Sokol's lawyer, along with Sokol himself to come on the program and explain more themselves. We do hope to have one or both of them on the program again. We also should point out that many shareholders have said, `OK, this is particularly concerning because Dave Sokol was someone a lot of people considered as the lead contender, if not a lead contender, for your job after you leave that position.' Some people have said there need to be more controls as a result. What do you say?

BUFFETT: Well, I think if you look at our code of ethics, insider trading rules, and you know, IBM had a problem here with somebody in the Galleon case, Intel had a problem there at Deloitte & Touche two years ago with the 38-year veteran who was vice chairman who happened to be in charge of the Berkshire account was cited by the SEC for nine insider trading violations. And I don't know whether anybody's ever looked at their codes, but if you compared them with ours I bet they're quite similar.

I don't think—if somebody wants to break the rules, you know, it can be done. Now ironically you would think if somebody were breaking the rules intentionally they might do it through their cousin's name or some neighbor, of a neighbor and all that. To my knowledge, Dave did all this in his own name. So I said the other day it was inexplicable and inexcusable and I really come down that way.

In terms of disparaging him, Dave did a number of good things for Berkshire and for MidAmerican that he ran. And I think it probably infuriated some people that I mention that, but the truth is he did do those and he did an extraordinary thing when he diverted $12 and a half million of his own compensation to his number two person because he just felt that that was a more fair division. I mean, that's pretty—I haven't had a lot of—our executives do it, I haven't seen a lot of that in corporate America. So he—I've seen him behave in honorable ways, I've seen him behave in very effective ways as a manager and then unfortunately this happened.

BECKY: OK. And, Joe, I know you have a question as well.

JOE: Yeah, Warren, when we had Dave Sokol on he mentioned the BYD investment that Charlie Munger made and we—you've talked about that, Charlie's talked about it. It was—you know, it was done long before he recused himself of any decisions when you were actually looking at BYD. So I'm not sure it's similar, and I understand that. But at this point I guess the—Dave was trying to imply that maybe that this is something that might have happened before. Do you know with absolute certainty that nothing that has the perception of front-running ever occurred before at Berkshire by one of your officers or employees? Did you go back 10 years, 20 years? Can we say that with certainty?

BUFFETT: I've never seen it. I mean, and I have no evidence of it. Interestingly enough, with all the acquisitions we've done in public companies, if you take the week of trading before the announcement I think you will see—you'll see no indication that things ran up or anything of the sort. I mean, when you say absolute certainty, I mean, you know, I can't quite get there, but I can—I can certainly say I have never—we don't know of any, I've never seen any indication of it in market behavior of the securities involved and transactions that Berkshire was involved in. So it's as close to absolute certainty as I can get, Joe.

JOE: I know how much you...

BECKY: Can you—OK.

JOE: I'm sorry.

BECKY: Go ahead, Joe.

JOE: I know how much you keep up on everything that's written about Berkshire and how important reputation is, so I know you've seen what some individuals are saying at this point and that is that after this situation, that standards and—I'm quoting a New York Times piece, and I don't agree with this columnist, I never agree with him but I'm going to quote this anyway, "Standards and practices have to change." He's quoting someone. "And that they no longer can Berkshire can corporate governance in rules be based on one, the greatest investor of all time, and what he thinks is a way that it should be done. That it has to be tightened up and there has to be more scrutiny." Will that be done and is that a fair criticism?

BUFFETT: Well, I invite him to look at our code of conduct, our insider trading rules and compare them with—you know, whether it's IBM or Intel or Deloitte & Touche or other people who've had problems with somebody with insider trading. And if they can be improved after you're looking at these other examples, you know, our audit committee will be delighted to hear about it. But I think—I don't think you'll find that the problem is in the rules, the problem is in people breaking the rules.

And I would say this, I was on the audit committee of Coca-Cola and Coca-Cola had about one-fifth as many employees as Berkshire and every meeting of the audit committee there would be eight or 10 code violations. I mean, people break rules. We sent a fellow to jail that was a vice president of one of our subsidiaries for breaking the rules some years ago. The guy was a friend of mine. So people—if you have 260,000 people working for you, somebody is breaking rules and the job is to find them. We have internal audit at the parent company, we have internal audits at the various subsidiaries, we have the rules that you can read on the Internet. And, you know, I hope our incidents of violations is less than average. But it won't be zero going forward, I can guarantee you that.

BECKY: Warren, you said that—you've said, and Charlie Munger, we asked him specifically about this. When Dave Sokol was on our air, he said that he didn't think he'd done anything wrong and didn't think it was any different than Charlie Munger owning a position in BYD before Berkshire's MidAmerican bought a 10 percent stake in it.


BECKY: Can you tell me what's different about those two situations?

BUFFETT: Charlie was in an investment partnership with a fellow named Li Lu and they had take—they had a position, large position for the partnership in BYD and I'd known about that for a long, long time. And then I think three—through Li Lu the management of BYD indicated that they would be agreeable to a direct investment by Berkshire and about 10 percent of the company.

BECKY: Mm-hmm.

BUFFETT: That was brought to me by Charlie and I knew of his interest in it. But it was a longtime interest. And it really was a plus that—to Berkshire that he'd had this longtime investment...

BECKY: Mm-hmm.

BUFFETT: ...and we got the opportunity to buy directly from the company and not in the open market. And, you know, if somebody—if another director at Berkshire or a manager came and said, `Listen, I've owned this stock for a couple of years'—that's what I thought Dave was saying—`I've owned this stock for a couple of years and I really think that Berkshire ought to do something, there would not be a problem with that. I would—we actually bought the BYD stock in MidAmerican and we had a couple of other shareholders in Walter Scott and Greg Abel. And we took it to the board of MidAmerican and they know Charlie through this partnership, had an interest, and we really thought it was a good opportunity. It was an opportunity that was literally brought to us because of, fortunately, the fact that Li Lu had established this contact some years earlier.

JOE: Warren, about—talk about board culpability a little bit. I'm trying to figure it out when—whether they would have even had a chance to know about this situation and what the protocol was because when they finally did hear about it that was a scathing report from the board and from the audit committee. I guess the criticism you're going to hear is that like so many boards you've got Warren Buffett, the most iconic American investor of all time, you wonder whether the board would rubber stamp things for you or maybe that's not the case. Maybe they didn't have any idea about this situation and when they did finally have an idea they came out with obviously that report, which was much tougher than your initial assessment of the situation.


JOE: How did that work? The time line of when the board knew anything?

BUFFETT: The board—the board knew of the release, which I guess went out on March 30th. They received that earlier in the day and then we had a board meeting about that release. Prior to that they did not know of Dave's connection with Citigroup in this situation. I have been totally surprised about that when I learned about it on March 14th when we announced the deal with Lubrizol and I got a call from a fellow that handles our equity trading at Citigroup, and he congratulated me on this Lubrizol purchase and was proud of the part that the investment banking group at Citigroup had taken. And I'd heard nothing about that from Dave at all. So at that point the next day, that's when we started questioning him about when he bought the stock, what his connection with Citigroup was and the story unfolded at that point.

So the board—the board—well, actually I was off to Asia then and then I came back on the 26th and the board really started finding out about it when we called a board meeting for Wednesday, the 30th, and we went through the events of the purchases. And then the audit committee, I think they first may have convened on April 6th, but that's in their report. And they've been very active garnering the facts. Now they don't have the right of subpoena and Dave did not appear before them. Like I said, they'd be delighted to hear from him this afternoon and they would be glad, I'm sure, if he brought new facts to their attention to have an amended report.

JOE: Yeah.

BUFFETT: But—so he's got an open invitation.

JOE: Are you—are you—are you ready to hang it up yet, Warren, after this? This is not nothing that you—that you wanted, I know. And I think about the Godfather that when the Turk says to Tom Hagen would—could they have gotten to the godfather 10 years ago? Would you—is there any way you could have gotten on—and I'm wondering, were you—could this have happened—weren't you more—when you said you'd be ruthless at Salomon Brothers, would you have been more ruthless 10, 15, 20 years ago?

BUFFETT: Well, you know, nobody—it's a hypothetical. But I would say this. I really—I would say that Dave probably thought that that press release was ruthless. The rest of the world may not have thought of it. But in effect we were laying out a case with definitive facts. We called the head of the enforcement division of the SEC with those facts. He was gone, he was gone under circumstances which gave him the least compensation and no extra, which he—if we'd fired him the question would have been whether we fired him for cause or not for cause and that could have been litigated and if it was determined that he was fired without cause, then who knows how a lawsuit comes out. It would have cost us considerably more money. So I think he probably felt it was pretty ruthless. In fact, to read his attorney's comments, I think that the—at least his attorney thinks it's pretty ruthless even though his attorney really wasn't there when any of this happened. So I—but I plead guilty to not having that tone come through in the press release. I can assure you that in terms of the board meeting that was Wednesday the 30th I think the board felt that we were taking prompt and decisive action and—but again, I wrote the press release so if it—if it came off badly it's my fault.

BECKY: Warren, we only have a few minutes left and I'd like to get to some of the other news that was mentioned this weekend at the Berkshire meeting. One of the things you said is that catastrophic losses at Berkshire for the reinsurance might actually come in at a loss this time for the first time in nine years. That's a result of the Japanese earthquake but also what happened in New Zealand?

BUFFETT: Yeah. I mentioned that our insurance underwriting for the year could end up in a loss position. In fact, I would say it's most likely to end up in a loss position and that'll be the first time in—I mean, there have been eight consecutive years of underwriting profit. And it will do that from time to time when we have unusual catastrophes. And the first quarter I think will be the second worst quarter in the history of the insurance industry for catastrophes. Not only the Japanese quake and tsunami, but the New Zealand quake was quite severe and then there were Australian floods and the cyclone and so on. So I would think it's considerably more likely than not that we have an underwriting loss for the first time in nine years. But we expect them periodically. We are in the business of insuring catastrophes.

BECKY: You also talked a little bit about the European banks this weekend. We've been watching with great interest and surprisingly the dollar's been weaker every single day despite the issues that have been happening in Europe. How big of a problem do you think the European banks are at this point? What do you think ultimately happens?

BUFFETT: Well, the European banks problems will be proportional to the problems of the—of the European Monetary Union. And, you know, the—that can be a huge, huge problem. I said in our annual meeting, the auditor—Jamie Dimon's analysis in the JPMorgan report is very insightful on it. But having 17 countries that do not have similar fiscal policies and do not have similar cultures but have to have a similar currency by signing up for it can place strains on that I don't think we've seen even the full effect of yet.

BECKY: Mm-hmm. We watch again though with the dollar weaker every day. Would you be—in the past, a few years ago, you did make a big bet against the US dollar. Would you do that again?

BUFFETT: Well, I wouldn't bet on it against other currencies. The—you know, on the back of the US dollar it says "in God we trust." And if Elizabeth Warren were in charge of the government printing office I think it would have to say "in government we trust" because that is all there is behind paper money. And governments can take actions that decrease the value of money and sometimes at a very, very rapid clip. And I think that's what many people are worried about in this country and that's why the price of gold and silver probably is a big part of the reason they've gone up.

BECKY: Mm-hmm. We have also been watching Washington and things have gotten much more contentious, especially with the national debt ceiling approaching. What do you think if one side or the other, if there was a—if there was not an extension of the debt ceiling how big of a problem would that be?

BUFFETT: It would be crazy. And the debt ceiling will get changed. I don't think there should be a debt ceiling, to start with, but it—it's enormously—I mean, it leads to posturing and wasting of time and all sorts of things they go through. In the end they're going to have to increase the debt ceiling and it would be absolutely insane not to do it. The good thing in Washington at least is that both sides agree that the deficit is a big, big problem. They may differ in their solutions, but at least you've got a commonality of interest in the fact that it is a huge problem.

BECKY: Mm-hmm. Joe, we only have a few minutes left, so if you do have another question you want to get in I want to make sure you get the opportunity for that.

JOE: I do. And I just want to—Warren, when you say—you said it to shareholders, I made a—that's good enough for me. I wanted to hear you say it to our viewers, too, because a lot of them weren't at the—and I—and I understand that rules—if you can't trust a longtime employee, rules don't mean anything. But then I think about Ronald Reagan trust and verify, I guess. I guess there's no one that can be trusted. But all that aside, the next question I had was something that John Malone said last week, Warren, and that was QE2's been great for financial assets. Stock market's doing great, but compared to an American's buying power with the dollar we haven't gone—we haven't gone anywhere. He's in—he's in land, he's in gold. Will this work itself out? Will we—are we really 13,000 on the Dow, or have we not gone anywhere because we've debased our currency so much?

BUFFETT: Well, look. We're better off at 13,000 than we would have been by having the same currency problems and it being a lot lower. But they—but John, that was a terrific interview with John. He's a very smart guy. And there's no question that if you keep interest rates at very close to zero, it drives people into other assets. I mean, people finally—it gets to them finally if their money market fund is playing zero—paying zero. And it is true that we measure oil or gold in terms of dollars, but in terms of—in terms of other currencies they have not appreciated to the same extent. Government will determine the value of that piece of paper in your pocket and recent actions I would say caused some—they cause a fellow like John Malone to worry and they cause me to worry a little bit, too.

BECKY: And Warren, just going back to the economy again, you did mention where you think things have been going. You talked about the tax on consumers from these higher energy prices. But what about housing?

BUFFETT: Mm-hmm.

BECKY: You had said in your annual report that you think residential housing could potentially see signs of picking up by the end of this year.

BUFFETT: Yeah. It certainly hasn't shown any signs yet, so I may be wrong about my prediction on that, but I will—the economy is getting better and I think you will see measured progress when residential housing picks up And you'll see it in a whole lot of other places besides direct construction. And we just built a couple of million, maybe three million too many houses a few years back when we were building two million houses and household formation was a million. And we have an inventory of too many houses, which we're working off. And that 500,000 we're working it off and I don't know when the lines cross, but I know every day we're getting closer to when the lines cross. So we will have residential construction come back. That's the reason we bought a brick plant in Alabama.

BECKY: Mm-hmm.

BUFFETT: It's not because we're selling any brick now.

BECKY: Mm-hmm.

BUFFETT: And that will happen when it happens, you will see, I think, significant change in employment.

JOE: Mm-hmm.

BECKY: Hey, Joe?

JOE: Hey, Warren, last week, doing strategy session, we also looked at periods in the past where Berkshire has underperformed the averages and it was classic because one was the financial stock bubble, the other one was the Internet stock bubble, and now we show gold and commodities and now you're underperforming again. Those other two things ended really badly and you didn't have to finally rush in and try to follow the crowd. I'm just wondering if we're seeing a replay of that now, what your feelings are.

BUFFETT: Well, it's always possible when you get a big asset class that moves on price that after a while, people forget about what the asset class represents and just get entranced with the fact that it went up a lot last week or last month and that their neighbor, who's dumber than they are, had made a lot of money and now their wife is telling them, you know, why aren't you in gold or whatever it may be that's—or Internet stocks that are moving. So that phenomenon will occur periodically in markets and we don't try to profit from bubbles, we just try to avoid going broke from them and so far we've been OK.

JOE: Hey, Warren, one last thing while I've got you here because I don't know if, you know, while we have you in—with all these mea culpas, have you ever released a long form birth certificate? Have we seen that from you or I'm just wondering.

BUFFETT: I was worried you were going to bring that up and I really have no memories of my birth and I—it may turn out I'm ineligible to be president of the United States, but I don't think anybody will cry over that.

JOE: My favorite line that you said was you want to be remembered—I love this, I'm going to use this—you want to be remembered as someone who was very, very old. And that is the greatest line of the—the only other line that's better is if you can pick to know when you're going to die or where you're going to die, which would you pick? And I'd pick where because I'm just not going to go there.

BUFFETT: That's exactly right. And if Forbes would put a list of the 400 oldest Americans and I was on that one, that's the list I really want to be on.

JOE: That's right. That's exactly right. Want to be remembered as very, very old. Thank you very much for your time today, Warren.

BECKY: Yeah.

JOE: We appreciate it, and Becky will, too.


BECKY: Yeah, Warren, we want to thank you for joining us here at Borsheim's in Omaha again and appreciate everything and we'll talk to you again soon.

BUFFETT: Thanks, Becky.

BECKY: OK. Joe, that does it for us from here and I'll see you back there on Wednesday.

JOE: All right. Thanks, Beck. We will see you and make sure everyone else joins us tomorrow.

Current Berkshire stock prices:

Class B:

Class A:

For more Buffett Watch updates follow alexcrippen on Twitter.

Email comments to