2011 年 3 月 CNBC 访谈

March 2, 2011

Warren Buffett appeared live on CNBC’s Squawk Box this morning, March 2, 2011.

http://www.cnbc.com

BECKYWelcome back to SQUAWK BOX here on CNBC. We are in Omaha, Nebraska, this morning at the Durham Museum with Warren Buffett. We’re going to be answering some of your e-mail questions. And, Warren, just again for people who are coming in late, we’re in the Durham Museum in front of the Ernest Buffett Grocery Store. And this is pretty important to you.

BUFFETTYeah. That store was founded my-founded by my great-grandfather, Sidney…

BECKYMm-hmm.

BUFFETT…in 1869, which is when the transcontinental railroad was completed. That’s when the UP hooked up with the Central Pacific at Promontory Point, Utah. And my grandfather had two sons that worked with him, Ernest and Frank, and unfortunately they both fell in love with the same woman at the store. So she married my grandfather, and for about 20 or 30 years Frank didn’t speak to him and opened up another grocery store, but not that we carry grudges in the Buffett family. But Charlie Munger and I ended up working there.

BECKYYeah.

BUFFETTHe worked there in the late 1930s, I worked there around 1940, and we never knew each other. But we did have this experience of working for my grandfather, which, believe me was an experience. He believes in hard work.

BECKYYeah, you wrote about that in the annual letter, as well, and said that the thing that you learned coming out of that is the importance of liquidity and not getting overleveraged.

BUFFETTYeah. My grandfather left-gave $1,000 eventually, at 10 years after the marriage of each of his children and my aunt didn’t marry, but he gave her $1,000 as well and he sent them this letter and he said, Put this money away.’ He said, Don’t get tempted to invest it because some day you may need money and who knows what you’re can do with your investment then.’ So you’ll always want to have some cash. He gave me a $2 bill when I was a kid and he said carry this around and he said you’ll, you know, you’ll never be broke.

BECKYNow Berkshire has how much in cash?

BUFFETTWell, we probably have about-I think we had about 38 billion at the end of the year, so.

BECKYIt’s a lesson you took to heart.

BUFFETTYeah. He would be happy.

BECKYOK. Let’s get to some of the viewer e-mails and a significant number of those e-mails that came in had to do with Berkshire’s investments. You spent a lot of time talking about that in your annual letter. But one that came in from J.P. in Delaware says that “Given that Wells Fargo is your second-largest equity holding, how concerned are you with the resignation of the CFO and the manner in which the company disclosed this?”

BUFFETTYeah, I don’t think the manner in which they disclosed it was very good. The-but Howard Atkins was a terrific CEO or CFO.

BECKYCFO, yeah.

BUFFETTAnd you know, I didn’t know him personally, I never met him personally, but I-but I watched him on television, I saw what he wrote and everything. It has nothing to do with their financials.

BECKYMm-hmm.

BUFFETTI spent about four hours last Saturday reading the 10-K and I feel very good about the whole Wells operation. Obviously, there’s something there beyond what was in the news release and it’s a tough thing. If you’ve got something that neither side wants to talk about, they’re not going to talk about it. And I don’t-I don’t know the answer myself. I know it has nothing to do with financials, though, and…

BECKYThat was another viewer question that came in from Clif in Alabama.

BUFFETTYeah. Nothing.

BECKYThat-there was at least one analyst who wrote that this did have something to do with that.

BUFFETTYeah.

BECKYYou are 100 percent convinced it did not?

BUFFETTI’d bet a lot of money that he’s wrong.

BECKYOK. That’s one of many questions that have come in, but we also have questions that have come in about Moody’s. Achit in Arizona writes in, “In your FCIC interview, you spoke of the inherent advantages of a duopoly that Moody’s and S&P share. Why does Berkshire continue to reduce its interest in Moody’s? Is there too much headline risk” for you?

BUFFETTWell, I think that duopoly is in somewhat more danger than it was simply because people are mad at the ratings agencies and the ratings agencies totally missed what was going on in the mortgage market and that was a huge, huge miss. I don’t think they were, you know-I think they were just wrong, like a lot of people were wrong about in thinking that housing prices couldn’t go down a lot, but they were rating agencies and they’ve gotten a lot of criticism for it and their business model is sensational when it’s a duopoly. I mean, I have no bargaining power. I’m going to see Moody’s in the week or I think or something about our ratings.

BECKYMm-hmm.

BUFFETTAnd you know, I dress up and do everything I can to, you know, talk about my balance sheet. But they-they’re God in the ratings field and Standard & Poor’s, and I need their ratings. And if they tell me the bill is X, I pay that, and if they tell me the bill is X plus 10 percent, I pay that. You know, if Coca-Cola charges too much, you know, you may think about drinking Pepsi Cola, but in the rating agency business, you need those two. and if that-either people get so upset with them or whatever it may be, or Congress gets upset, that could disappear. It won’t disappear from natural reasons. I mean, it is a natural duopoly, just like-it’s a little different than Freddie and Fannie were, but they also had some specific advantage. Sometimes you find situations where you get a natural-well, you used to have that in the newspaper business. You had a natural monopoly in big cities. It wasn’t-it wasn’t illegal, it just worked out that way.

BECKYMm-hmm.

BUFFETTAnd that’s what happened in ratings agencies. But it’s not as bullet-proof as it was. Although, I will say that…

BECKYDoes that why you’ve been selling?

BUFFETTWell, we haven’t sold that aggressively.

BECKYMm-hmm.

BUFFETTI mean, if you look at it during the course of 2010, we sold a very small amount of the-it looked to me that that threat was receding to some degree. But it’s different than it was five years ago.

BECKYOK. Another question comes in from Christian in Germany who writes, “You’re invested in American Express, but you don’t like credit cards. How does this match?” And I’m guessing Christian is referring to what you were talking about in your grandfather’s letter.

BUFFETTYeah. No, I think-we offer credit cards at our furniture store, our jewelry store, I mean, the American public is going to use credit cards. I mean, if you say you’re not going to accept credit cards, you might as well say you’re not going to accept money if you’re a retailer. But I tell every student class I get, high school students, university students, you know, they’d be better off if they never used credit cards now.

BECKYMm-hmm.

BUFFETTNow if you use them and you pay at the end of the month so you don’t start revolving, that’s another question. But I can’t make money if I’m out borrowing, you know, at whatever the rate may be, 12 percent, 14 percent, 16 percent, when you know, Libor’s a quarter of a percent. I mean, the world isn’t that inefficient. So…

BECKYRight.

BUFFETT…I-if I’m going to go broke, if I borrow at credit card rates, you know, what kind of-they’re going to get in trouble. I get all kinds of letters from people who’ve gotten in trouble on credit cards. So I think it isn’t going to happen, but I think if credit cards didn’t exist, I think probably the economy would be better off.

BECKYWow. Does American Express know you feel that way?

BUFFETTIt isn’t going to happen. It isn’t going to happen. I mean, you know, people are going to do it. I mean, you know, and I understand why they do it. You know, it’s so nice to think that you know, I want this today and I’ll pay for it tomorrow.

BECKYMm-hmm.

BUFFETTBut it gets a lot of people in trouble and it’s expensive. And it isn’t because the credit card companies are getting rich, incidentally.

BECKYSure.

BUFFETTI mean, I went into the credit card business at GEICO, I thought I was this genius a couple of years ago and I was going to sell-have credit cards for GEICO customers because we have them at the furniture mart and other places and I lost about, I don’t know, $60 million later on. Our losses were quite significant. I mean, credit card companies run big credit losses, it’s an expensive sort of business. So it isn’t that they’re getting rich, necessarily, at 12 to 14 percent, but that doesn’t do their customer any good that’s paying that amount.

BECKYLet me ask you one more about American Express and then Joe has a question, too. But David from London writes in, that “as AMEX’s largest shareholder, are you concerned that Congress will reduce the credit interchanges fees as they have done for debit interchanges? Those account for the vast majority of AMEX’s revenue.”

BUFFETTYeah. Well, American Express has a very special card. I mean, it. The average American Express card holder, I think, I think they’re probably charging, I don’t know, 13, $14,000 a year. That’s four times of what-or five times, maybe, I don’t have the exact figures, what they’re charging at Visa. And the American Express card carries more cachet, by far, than a Visa and it has more utility in many different ways. American-I decided the American Express card was special, actually, back in the early 1960s. The first credit card was the Diners Club card.

BECKYMm-hmm.

BUFFETTAnd the Diners Club card kind of swept through. It was a-it was a hot stock and all of that.

BECKYMm-hmm.

BUFFETTAnd then American Express came in as a defensive measure, they thought it was going to knock out their traveler’s checks. And they priced their card higher than the Diners Club. Now imagine coming in against the leading guy and charging more. But they established their card as something special and it is something special. So it is-it is a-it is a superior card for somebody, particularly, that’s a big spender. My wife had one of those cards that was, you know, one of those black cards that cost a lot of money and everything. I still carry the green card.

BECKYOK, Joe:

JOEYeah, thanks. So Warren, so I’ve been sitting here thinking, I understand that chewing gum, people like to chew gum, I got that, and See’s and make-you know, See’s candy. I was thinking, you know, maybe a dental chain might be good, too. But what I’m getting at-where I’m going with this is I think about media and I think about the prospects for media and I don’t know whether people keep chewing gum. I don’t chew that much, but media is so pervasive and I just look at the outlook for media and I think about 1.2 billion people in China, but I don’t know how to play it right now and I don’t know whether you know how. I just see a huge opportunity.

BUFFETTI…

JOEI see a huge opportunity, but I don’t know what to do with it. And I’m wondering if you could help me.

BUFFETTPeople want to be entertained and they want to be informed. I mean, the demand for that is huge, is worldwide, it’s going to go on forever. So you know, newspapers satisfy that in a very important way, particularly on a local basis. And the nature of newspapers was that you didn’t want to subscribe to five of them, you subscribed to one and if there were two in town and one had 1,000 ads and one had 200 ads, you were going to buy the one with 1,000 ads because it told you were more jobs were available, more apartments were available, it gave you more sports news and whatever. So it lent itself to a single product. Now you have media where you go to the Internet and you can go-you can essentially hop from one source to another, you know, in a-in a fraction of a second. So it’s a different-it’s a whole different equation. It isn’t-the desire for entertainment and information, you know, is-will be around forever. It’s insatiable. How to get paid for it appropriately, you know, the world has changed and it’s changed dramatically, and I do not consider myself an expert in the least about where media is going to go in the next 10 or 20 years. I do not know where the money is going to be made. Somebody will make a lot of money, but I’m just not that good at picking the future on it. I understood the past on that. I understood the big network television station. I mean, back when there were three networks only in the ’60s, you could have run a test pattern, you know, on your television station and made a lot of money. It was-it was-it was a cinch. The orders came in over the transom. But all of a sudden they started putting more highways out there, more electronic highways and the fact that you had one of the three electronic highways diminished in importance enormously, so now you’ve got a network that is getting a 10 percent share, losing tons of money, and you’ll have a network with, you know, a 2 share, like ESPN, making a fortune because of the way the dynamics have worked out. I don’t have any great insights on that for the future. If I did, I’d-it’s just-I’m just not smart enough.

JOEI hear what you’re saying, it’s the same problem everyone has. I don’t even know, is it content? Is that king? Or is it delivery, like Apple? I mean, you look at, Apple might be the perfect company for when I-when I, you know, with all these mobile devices.

BUFFETTYeah.

JOEBut I don’t even know whether it’s content or the distribution that is-that win.

BUFFETTWell, if you’re the best heavyweight fighter in the world, which is the way I often think of you, Joe, actually, but if you’re the best heavyweight fighter in the world, if you’re the best singer in the world, you know, whatever it may be, you’ve got the ultimate asset. I mean, the delivery mechanism will pay you one way or another and you can command it from them. But obviously, I’m not-I’m not in a position to compete in that game. So the only way I can compete is in the delivery mechanisms and all that and I’m just not that smart. But the answer is I don’t have to be right about everything or even understand everything, I don’t have to know what cocoa beans are going to do or what cotton’s going to do, I just have to right on the decisions I make. So I stay with the simple things. Now a simple thing many years ago, back in 1965 I owned 5 percent of Disney and the whole Disney company was selling for $80 million, so at 4 million bucks bought 5 percent of the company. Well, Disney had a tremendous franchise and they could bring out “Snow White” every seven years or “Mary Poppins” or whatever it might be and wrote them down to zero, initially. Well, that was an easy decision. But I don’t see easy decisions like that now and if I don’t see an easy decision, I don’t play.

BECKYWarren, let me bring up a question from Pierce in Greenwich, Connecticut. He writes in about Apple, since you just mentioned it. “Do you feel the Steve Jobs saga has already taken its toll on Apple’s stock price or do you feel it has yet to make its mark?”

BUFFETTOh, I don’t-I don’t know that much about Apple. I mean, all I know is Apple is an absolutely phenomenal company. I mean, to think of where they were 10 or 15 years ago and where they are now.

BECKYMm-hmm.

BUFFETTAnd that’s been done by innovation. I mean, and I think Steve Jobs has had a whole lot to do with that. But…

BECKYI think that’s the big question is how important is Steve Jobs to that company?

BUFFETTWell, he’s enormously important to Apple. And you know, Walt Disney was important to Walt Disney, a company. I mean, there’s certain talents that are really rare and Steven Spielberg is important, you know, to his business. I mean, it-there-people who can read the needs of the American public before the American public even realizes that it has those needs, and then have the genius to create a product that satisfies those needs and gets there fast, and then is attractive, you know, in terms of all kinds of things, functionality that you can’t believe, they deserve to get very rich. I mean, they-he saw something that I didn’t see five years ago or 10 years ago.

BECKYMm-hmm.

CARLI think-it kind of sounds like you’re describing SQUAWK BOX.

JOEYeah, SQUAWK BOX. We’re fast, we’re entertaining, but then I also thought, I thought you were-when you were talking about me, I thought you were eventually going to end up with either a News Corp or a Comcast, you know, just to pull a name out of the-out of the thin air.

CARLWarren knows…

BUFFETTYeah.

CARLWarren knows something of Comcast.

JOEOr a-or a Disney or something. I mean, I don’t know, I’m just-one of those-the big companies, I think-I think it helps to have some size and some diversity with all your assets, but…

BUFFETTWell, but of course, the big companies, you know, if you go back 30 years ago, they started going for diversity with CBS. I mean, CBS ruled the-it was the Tiffany network and it even owned the New York Yankees at one point. So it’s very tough. General Motors ruled the world, you know, when I was a young investor. It-Sears ruled the world of merchandise. It’s not so easy to pick the winners. It looks easy in retrospect always.

JOEYeah.

BUFFETTYou know there will be winners. I mean, in media there will be huge winners. I mean, somebody that can figure out a way to attract millions of users, like just take a Facebook or something.

JOEMm-hmm.

BUFFETTImagine that, you know, being in the mind of a guy five years ago and now millions, hundreds of millions of people, you know, build their lives around it to some degree. That’s amazing. But I am not the guy that can do that, and I’m not the guy who can spot the guys who can do that. But fortunately, I don’t have to be.

BECKYOK, guys, we’re going to continue this conversation, but for now we’ll send it back to you, Joe and Carl, in the studio.

CARLI still like Warren calling Joe a prize fighter because I picture you at a-at a weigh-in in your underwear on the scale. JOE: Oh my God. I got some advice…

BUFFETTHe’s-he is…

JOEI don’t-you know what?

BUFFETTHe’s known as the Mike-he’s the Mike Tyson of cable.

CARLYeah. He’ll bite your ear off.

JOEBite your ear off. I might get one of those-one of those tat-do you think that would work, one of those tattoos on my…

CARLYeah, it would look good. That’s a good look for you.

JOEI don’t know.

CARLAnyway.

BECKYHey, guys, before you go, real quickly, let me point out one other thing. We didn’t get a chance to mention this earlier, but I know, Joe and Carl, you have both gone back and forth, boxers and briefs, boxers and briefs.

JOEYeah.

BECKYToday Warren wore in a special tie which shows some of his interests as well.

CARLReally?

BUFFETTYeah, this is a-I don’t know whether you can see this, this is a Fruit of the Loom tie, and I actually have this for airplanes and GEICO and a bunch of others. But I thought in honor of you, Joe, I would wear my underwear tie today. At Fruit of the Loom, you know, our motto is “we cover the asses of the masses,” and I thought of you when we-I put this tie on.

JOEThat is-you know what? We could not see it, but we just did. I really-I like that. But I-Carl’s got the right…

BUFFETTYou like that one? JOE: Carl, you don’t have to choose. You are a boxers combo brief guy, right?

CARLYes.

JOEAnd they make something…

CARLAnd you are a tighty whities guy because-you even have the underwear for the hands, remember? Jane Wells brought you…

JOEI have underwear-I have underwear…

CARL…hand underwear.

JOENo, I’m a…

BUFFETTI wish I hadn’t started this!

CARLI know.

JOEYeah, I know. I know. But you did.

CARLThanks for nothing.

BECKYYou brought it up.

JOEBut you did. And it doesn’t take much to get us to talk about this, Warren. Yeah, we’ll…

BUFFETTI can tell that.

JOEOh, yeah, OK, we’ve got… CARL: A lot more still to come from Omaha. We still got the ADP number coming, we’ll get that number and the reaction ahead of Friday’s jobs number. A lot more from the Oracle of Omaha as well when we come back.

*

BECKYAll right, welcome back, everybody. We are live in Omaha, Nebraska, at the Durham Museum. We’re speaking to the one and only Warren Buffett all morning long, and now it’s time to get back to some of your e-mails. You’ve been sending them in, and we do appreciate them. They’ve been thoughtful e-mails. Got a lot to get through. And, Warren, why don’t we jump right into this?

BUFFETTOK.

BECKYThere were a lot of questions that came in regarding Berkshire, people who still had questions after they read the letter. This came in from Steve in Dallas, Texas. He writes, “After a year of full ownership of BNSF,” the Burlington Northern, “is there anything you know now about the company that you didn’t know from reading the annual reports, 10-Ks and other public information? In other words, does full ownership confer additional information advantages that you did not have when you were a minority shareholder?”

BUFFETTWell, it would if I dug into it. And, you know, I will learn something occasionally about-I probably know a little bit more about the Rail Labor Act than I did earlier. You know, but nothing material. I mean, it-I’ve only been to the company once since we bought it, and I get-I look at a few more figures than I might otherwise. But I-but if I didn’t know enough before I wrote the check for 34 billion, I mean, you know, I was making a mistake. You know, I really have not-I’ve learned nothing of significance specific to the railroad. Now, I would say that over the last year my appreciation of the competitive position of the rail industry vis-a-vis trucking has improved somewhat. There’s-just the other day the truckers announced they’re going to have to spend-or they’re going to have to raise prices significantly this year. And so I think if anything, my appreciation for the competitive advantages of railroad both for the owner and for society have increased significantly.

BECKYOK. Let’s bring in a question from Richard in Tucson, Arizona, who says, “How do you evaluate the effectiveness of the $900 million spent on advertising last year at GEICO?”

BUFFETTThat’s a good question. Yeah, people have been asking that question ever since they started advertising. I think it was John Dorrance at Campbell’s Soup 75 years ago or so when it was a big advertiser, and they said, you know, Isn’t half your money wasted in-on advertising?’ He says, Yeah,’ he says, I just don’t know which half.’ Well, we can measure certain types of advertising. I mean, when we do direct mail advertising, you know, we get a response which gets measured. And we do cold phone numbers and that sort of thing. But now with three-quarters almost of our quotes coming from people who come to the Internet, you know, what drives them to geico.com, who knows? I mean, certainly our television advertising does it. All I know is it’s working. In February we had the greatest gain in policyholders of any month in our history. And it blows me away.

BECKYHm.

BUFFETTI mean, we had a gain of about 130,000 policyholders in one month. If you think of 130,000 households, that’s like a town of 300,000 just getting added in one month. And why they come, you know, what-that little gecko does wonders and, you know, we get in people’s minds that they’re going-they might save money by checking with us. And it’s a big, expensive item for most people, auto insurance, and if they can save a few hundred dollars, it’s meaningful. So-but exactly why we get more inquiries in February than we were getting last October, you know, I don’t know the answer. All I know is if I thought spending another billion dollars this year would work in an appreciable way, I would write a check so fast. I mean, I love advertising.

BECKYYou think the gecko works better than that catchy name, Government Employees Insurance Company?

BUFFETTIt-who knows what does it. It-one way or another-I mean, we were spending about 20 million a year when I took over in 1995, and now we’re spending 900 million. And all I know is every month I urge them to spend more. I mean, it-we want every American to at least give us a try. And what we have seen is that of the people that call us, you know, if they phone us, we’re going to get-over 40 percent of those people are going to become our customers. And when you get that kind of a response, you know, you better be out there talking to people.

BECKYOK, let’s bring in another question. Robert from Potomac, Maryland, writes in-and this is something that a lot of people are confused on, so hopefully you can clear this up. But, “Why did you allow, I assume, the new manager to liquidate many of Lou Simpson’s stocks? If they met your forever’ holding period criteria with Simpson, why sell? Simpson’s record is long-term proven. The new manager has no record long enough to show a similar competency or that his results are just luck. These stock sales are inconsistent with your forever holding period advice.” So maybe you could clarify what’s really happening there.

BUFFETTYeah. Well, we buy-when I say I, I buy stocks with the idea I’d be happy holding them forever. We don’t end up owning them forever, obviously, in many cases, because you find something else that’s more attractive and-or sometimes managements change and who knows what. But Lou Simpson was managing his own portfolio. He managed it for 21 years, did a sensational job. But when he said he was going to leave in June, he and I both decided he was going to liquidate his portfolio between then and the end of the year. In other words, I never inherit any investment decision from somebody else. If Charlie Munger made me a gift of 100 shares of some stock, I would sell it then-and then-I would then decide whether I wanted to buy it again myself. But I do not believe in default-type decisions on investments. So when Lou left, his portfolio left. When a new man comes in, his portfolio comes in.

BECKYAnd the two aren’t related.

BUFFETTThey’re not related at all. Lou had maybe 15 or so stocks, generally in the 3- to $400 million range, and he just sold them proportionally throughout the rest of the year. He wasn’t going to be managing them anymore, and I knew they were probably good companies, but I didn’t want to buy them myself. And there’s no reason, if I don’t want to buy them myself, I should tell the next manager at Berkshire-of GEICO to manage them. Todd is going to be responsible for his decisions, and-just as Lou was when he was there. And I want it to be Todd’s portfolio.

BECKYOK.

Carl, you have a question, too?

CARLI was just wondering, Warren, earlier you talked about searching-hunting for elephants or even any business, and occasionally some businesses do not want to sell to you for a variety of reasons. Does that ever take you by surprise? Do you ever say, Excuse me, I’m Warren Buffett. I’m kind of a big deal, and the opportunity to be owned by Berkshire doesn’t-is kind of a golden ring that may not come around too much’?

BUFFETTThat isn’t exactly the way I present it to people. No, it’s very-a really good business, like I say, if it’s owned privately, they shouldn’t sell. I mean, I-I’ve been called in by lots of families, and I-and they’re usually good businesses. And I-the first thing I tell them is that you should keep this business unless there’s some compelling reason other than the dollars you’ll get from it. Because you’ll get a lot of dollars from me, but those dollars are not going to buy a better business than the one you’ve got already. I mean, I-you know, that’s why I’m buying it. So I don’t think-the question usually-the question is now is finding big businesses. I mean, there aren’t that many big businesses in the world, and then I want big good businesses, and that narrows it down further. And then you have to have people who for some reason or another want to sell on the other side. And that happens from time to time in America.

I’ve-I had a fellow come to see me a few years ago, and he loves his business, it’s a wonderful business, and he said, Warren, I want to sell you this business.’ And he said, I want to sell you this business because I’m 61 years old and I’m in good health and I love running it, but I don’t know, you know, what would happen if something happened to me tonight.’ He said, I’ve seen’-he’d bought another business where the family had fallen apart when the-when the owner had died, and he said, I don’t want to leave my wife with that kind of a problem, and my children, and they wouldn’t know what to do with it. So as long as I get to keep running the business, I’ve got all the money in the world, and so I want to have the joy of running the business and I do not want to have the worry of what happens if I’m not around tomorrow.’ And he said, You’re the only guy that can solve that.’ So that’s the only way I win beauty contests is when I’m the only guy in them.

CARLAll right, we’re going to…

BECKYAll right, I think-go ahead.

CARLBeck, we’ll continue the conversation after we reset at the top of the hour. A lot more coming up with Warren Buffett and your e-mail questions, plus the countdown to jobs Friday is ongoing. It includes the ADP number in about 17 minutes’ time. We’ll get that number and the instant reaction when SQUAWK BOX comes right back.

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JOEHo, oh, hey, I thought we would be in…(unintelligible). Welcome back to SQUAWK BOX here on CNBC, first in business worldwide. I’m Joe Kernen. I’m with Carl Quintanilla at CNBC headquarters. And Becky, who looks really beautiful.

CARLRavishing.

JOEWhat’d you do, bring a-who’d you bring-who’s out there with you?

BECKYI have great people out there.

JOEAnd Warren looks-yeah-Warren looks good, too. That is Warren Buffett.

CARLRavishing.

JOEYeah, ravishing. A legendary investor, Warren Buffett, with his-he’s wearing an underwear tie. If you missed it, you should have been tuned in. He’s been answering-he’s been answering…

CARLI think the term was asses to the masses.

JOEYeah, asses to the masses. He said that, yeah.

CARLYes.

BECKYCover the asses of the masses.

CARLRight.

JOERight. All right, answering viewer e-mails for the past two hours. We have many more questions or e-mails to go. I’ve got more, Carl has more, Becky has more. Plenty to discuss with him over the next 60 minutes. First, though, Carl is going to bring us up to speed, as only he can do, on the morning’s top headlines. Carl:

CARLJoe, thanks.

JOEYou’re welcome.

*

CARLEquity futures meanwhile holding onto some moderate gains, although Europe continues to be in the red. And, Beck, the market also responding, reacting to some of the calls that Warren has made in our first couple of hours. Some of them, I think, relatively bold, right, looking for unemployment in the low sevens by Election Day and other things like that.

BECKYYeah, that’s right. You know, Carl, we’ve gotten through a lot of ground this morning. In case you missed some of the earlier points, why don’t we talk very quickly about the economy and unemployment. As Joe and Carl mentioned, we do have ADP report. That report coming up at 8:15. And, Warren, we watch the ADP every month because we figure it’ll give us some indication about what’s happening with the big jobs report on Friday. It hasn’t been great in tracking that lately, but do you watch the ADP?

BUFFETTWell, I don’t really. I watch our own businesses. And we’ve got so many of them, I get a lot of data coming in all the time, and, you know I don’t know how accurate those surveys are. I do know how many people we’ve got on the Union Pacific working every day, or how many people’s at Geico. And I was surprised incidentally last year that our employment only went up 1 percent, whereas our businesses really did a lot more volume overall. And I don’t think we’re going to be able to continue that. And there was-I think as our businesses increase this year our employment will go up much more in tandem with the rate of increase.

BECKYWhat businesses do you expect to see more hiring within the Berkshire family?

BUFFETTWell, I think most of-I think most of our businesses will hire more people. And I mean I think our railroad, you know, our railroad during January hired more people. But I know Geico will hire more people this year. But I think you’ll see it. At Marmon, for example, one of our main businesses there is leasing-building and leasing rail tank cars. Now, when you see those trains going down the tracks, you think those cars all belong to the railroads. They don’t. The tank cars all belong to shippers or to people like us who lease them to shippers. We are-and we make those cars down in Alexandria, Virginia. We are seeing more people interested in buying tank cars for various things, whether it’s-I mean, it could be for ethanol, it could be-could be for all kinds of things that get carried in tank cars. We’re seeing more interest in that in just the last month or two. We will add people at Alexandria, Virginia, to our tank car line. I don’t know whether it’ll be this month or three months from now or two months from now, but the orders are coming in. And you see that in one area after another in our businesses. So I think we will-I would be surprised if we don’t add more-quite a bit more than 3,000 people this year to our overall employment.

BECKYYou know, you talked in the annual letter about optimism for this country.

BUFFETTSure.

BECKYYou’ve talked about how the economy is improving and how the investing outlook, you’ve said, is getting back to a normal situation, that things look very good in terms of the dividends you expect to be getting paid back from a lot of your major investments. You also, though, wrote in the annual letter about GE and Goldman. Those are two companies that you made major investments in preferred shares, and you did mention that by the end of this year you expect both of those companies to call you on those.

BUFFETTYeah, I made a mistake on those. I should have-I should have snuck in one sentence that said, “You have to find me if you’re going to pay me off.” And then, you know, I would have gone in the witness protection program and Immelt and Blankfein would have had these people out looking for me. But they know where to find me, and as soon as Goldman can pay me off, which is determined by the Federal Reserve, my guess is that they will. GE, by contract, can’t pay me off till sometime in October and I think they will-they’ve said they will pay us off as quickly as possible. So that-you know, I-Goldman, I think, I mentioned we get $15 a second as a dividend. So tick, tick, tick, that’s 15 bucks every time. And I love to hear those ticks, but they don’t like to hear those ticks. And as soon as-when the Fed gives them the green light, I have a feeling that Lloyd will charter a NetJets plane and fly that check out to me.

BECKYOK. Joe, you have a question, too?

JOEYeah, I do. And a-I should say I probably have a follow-up, too, because I’m going to get to where I’m going, but it always takes a while. I know that. Warren, we think about jobs in the country and how to get jobs. And then we also think about how to run businesses. And that huge-or that jet acquisition you made from Bombardier, you could have bought Gulfstream. Do you-do you ever think about social responsibility in terms of where the jobs will be-will be generated? That could have gone to Gulfstream, but it didn’t, it went to Bombardier, right?

BUFFETTYeah, we think about what will be the best deal for our customers in terms of what they’re going to want in terms of a wide cabin, long-range plane. And in the end the customer drives every decision we make on something of that sort.

JOEThat’s a global-are you’re buying-is that plane you’re talking about?

BUFFETTIt’s a series of four planes over the next decade or so. Eventually they’ll bring in a 7,000 and an 8,000, so there’s-and incidentally Gulfstream will be bringing in new planes over the next decade, too. But we evaluated the options just as we did in the small cabin planes, tried to decide what, in terms of the demands of our owners, what they want in terms of range, in terms of cabin width, in terms of all kinds of things, cost, and made that decision, because in the end we can buy planes, but we also have to sell planes, and the customer’s going to make that decision.

JOEWe-I guess this indicates that both business travel, which I figure use the big cabin ones, and also-you bought-you bought in Marquis jet, right? That goes more to, what?

BUFFETTRight.

JOEPleasure? How’s that acquisition going, and are we seeing then, you’re saying, a bounce in both business travel and individuals?

BUFFETTYeah. And we bought Marquis late last year, and Kenny Dichter, who runs that operation, is doing a terrific job for us. Our sales of Marquis cards in the month since we bought it are appreciably ahead of the same months a year ago, and it made sense for us to buy Marquis and I’m glad we own it. We’re seeing-we’re seeing increases in both personal use and in business use. And sometimes it’s hard to tell. Sometimes in small businesses an owner will have $100 or something, and we don’t really know whether he’s using it for personal or business use.

But we have seen-we have not seen a surge in demand at all. We have seen our present customers using more hours per month by a considerable margin than they were two years ago. They’re usage right after Lehman fell off dramatically. They were still paying us the monthly management fee and all of it. They had the right to the same number of hours, but they weren’t using them. It was amazing to me, because you had these very wealthy people and they had homes and, you know, that they went to at Christmas or Thanksgiving. But maybe they started going to them by bus. But our usage really fell off there significantly in the six months following Lehman. It’s come back quite a ways. Our sales have picked up, but they’re not remotely like they were four or five years ago when everybody was feeling flush. JOE: Well, you’re making a huge bet on the future of this. And, you know, you-sometimes you lessen investments like Washington Post or something, that it looks like even though NetJets has never-has it been a big moneymaker for you? You’re going in, you know, full bore at this point.

BUFFETTYeah. Well, Net, since we bought it, we made a couple hundred million dollars last year and that brought it-brought us back to where for the full 11 years we more or less broke even.

JOERight.

BUFFETTSo it has not been a satisfactory investment financially. It’s been-it’s been a significant winner in the marketplace. We have five times the market share of our leading competitor. Nobody’s gained market share on us, nobody gets the customer satisfaction reports that we get. But we have not-we have not made money. We were spending more money than we were taking in, which catches up with you eventually. Under Dave Sokol, it’s now doing very well. But it is now-we have not gone back to a period like 2005 and ’06 and ’07 when the hedge fund operators and everybody were signing up hand over fist. We’re selling more than we were a year ago and are using more than a year ago, but it’s not dramatic.

JOEWell, it looks like you’re expecting it to be.

BECKYHey, Warren, real quickly.

JOEI’m sorry, Beck, but…

BUFFETTWell, I…

BECKYOh, that’s OK. Go ahead, Joe.

BUFFETTJoe, I just feel if we could get you in the fold that millions would follow you. I mean, you’re a trendsetter. So…

JOEI have asked you many times for one of the-I don’t know how we can swing it, Warren, but a SQUAWK jet has been on our list of things to have. You want one, too? A Liesman jet or a SQUAWK?

STEVE LIESMANSQUAWK…(unintelligible).

BUFFETTIf you’ll just-if you’ll just let me garnish your wages I could promise you you’ll be in the-you’ll be in the pilot’s seat.

JOEYou-can you garnish into the hereafter? Because that’s what it would take, I think.

CARLHow about we just put it on a credit card.

JOEYeah. Put it on a credit card, that’s right.

BECKYPut it on our AmEx.

BUFFETTMaybe you and Carl ought to go in together.

CARLHe did send us a brick, and we will never forget that.

BECKYWarren, let…

JOENo, you sent-you sent-you sent me a brick and put my name on it.

BUFFETTYeah, and I do not remember a thank you note, but maybe I…

BECKYWarren, I want to ask real quickly, we just put up the picture of Dave Sokol. He’s one of the managers who is repeatedly mentioned as a potential successor. You said in your annual letter that there’s a manager you talk to every single day. Is that Dave Sokol? Is that a Ajit?

BUFFETTIt’s Ajit. I try-I talk to Dave very frequently, but I talk to Ajit every day. We have a lot of fun talking every day. I forget what the deal was he was-we were talking about yesterday, but it was-it was some insurance over-as you know, they’ve had two earthquakes in New Zealand and then floods in Australia, so that part of the world has been hit very hard by catastrophe. So there’s a demand for more catastrophe insurance, for example, over there. And so Ajit and I just sit down and try and figure out what the chances are of another earthquake in New Zealand. And who better than us? BECKY: You also just saw-we saw some headlines crossing about how Berkshire’s going to be getting into the India insurance sector. That’s a new move. Is that what this is…

BUFFETTYeah, that just happened. And I think we just got approved within maybe the last 48 hours. And we are going to have an agency over there that will be selling-I think it’s going to be called Berkshire Direct.

BECKYMm-hmm.

BUFFETTAnd I’ll be over there in about three weeks, and I think by then we will be up and running. We just got the permit the other day, and so we’re hiring people for the phones and all of that. So that should be fun.

BECKYHm. All right, real quickly, just to bring this back to jobs because we do have ADP coming out in just a moment, there are a lot of economists who are not expecting any significant decline in the unemployment rate this year; some who aren’t even expecting any until the end of next year. What’s your own personal prediction?

BUFFETTI think we’ll create more jobs this year than we did last year. Now, the unemployment rate bounces around in kind of a funny way depending on who declares themselves in the-in the labor force. But I think we will have better luck creating jobs in 2011 than 2010. Just-I just see businesses improving. And I think-I think they were very reluctant to hired when they first-saw the first robin or two.

BECKYMm-hmm.

BUFFETTI mean, they-they’ve been through such a painful period…

BECKYMm-hmm.

BUFFETT…that they just, they were not going to bring a bunch of people back on until they really needed to bring them on.

BECKYMm-hmm.

BUFFETTBut they need to bring them on now.

BECKYOK. And, Carl, I think you have more on that right now.

CARLWe do. We’re going to get ADP, Beck, in about 40 seconds.

*

CARLLet’s send it back to Becky in Omaha. Beck:

BECKYHey, Carl, thank you. You know, Warren, we just heard the ADP numbers here, and obviously they were a little stronger than had been expected. Everybody’s playing this guessing game right now, though, trying to figure out where the economy stands. And that brings us back to a discussion we had earlier this morning, trying to figure out what the Fed does next with its monetary policy. You said if you were Ben Bernanke, you’d end QE2 right now based on how you think the economy’s doing.

BUFFETTI think the economy is coming back, and I think that we’ll never know. There’s probably three big variables in the economy’s development, and we like to think of monetary policy and fiscal policy because we all learn about them in school and all that. I think the most important factor by far is just this underlying regenerative capacity of capitalism. I mean, if you go back a century or so, nobody ever heard of monetary policy or fiscal policy. And we had recessions, and they cured themselves. And they cured themselves because millions of Americans were trying how to-figure out how to do things better the next day. I mean, capitalism works. And I think in this particular recession, I think it was enormously important what the Fed and the Treasury and government did immediately. They had to end the panic. But I think if you talk about what’s happened in the last year, I think that who knows the importance of the variables of fiscal and monetary policy. If you-if you ask me, they’re number two and three compared to this natural regenerative capacity. And I-we’ve had foot to the floor, as I’ve said, on monetary policy, we’ve had foot to the floor on fiscal policy. But I think what’s really getting job-the job done is the imagination, creativity, the energy of the American public in terms of keeping a system going that’s worked marvelously for several hundred years.

BECKYHey, Joe, you have a question, too?

JOEYeah, I got a specific one, shifting gears a little bit. Warren, you like-you love Wells Fargo. You talk about it a lot. You were in…

BUFFETTYep.

JOEBerkshire was in Bank of America, and it wasn’t a good experience, and you’re out now. I think you lost two-thirds or something. But, I mean, obviously the financial crisis hit. But that-that’s making some-you’re voting with your feet there, I think, what, on management, on the prospects for B of A? I mean, you like Well-you’re staying in another bank, why would you get out with a loss instead of the…

BUFFETTYeah.

JOEGo ahead.

BUFFETTI never-Joe, I never bought a share of Bank of America. That was one of the 15 or so positions of Lou Simpson. So he did not make a decision to sell Bank of America in the second half of last year.

JOEOK.

BUFFETTHe just-he was liquidating his entire portfolio. He sold a-he sold Nike. He hated to sell Nike. He loved Nike. But he was cleaning out his portfolio, and Todd’s bringing in a new one. But I…

JOEOK.

BUFFETTBank of America was never part of a portfolio I managed.

JOEOK. So when you see Berkshire liquidates its entire stake in Bank of America, you can’t say, oh my God, they don’t like the prospects-or Warren doesn’t like the prospects for Merrill Lynch…

BUFFETTNo.

JOE…or Moynihan…

BUFFETTNo.

JOE…or you can’t draw any conclusions from that.

BUFFETTNo.

JOEOK.

BUFFETTZero, zero. I never bought a share and I never sold a share personally.

JOEAll right. OK.

BECKYWarren, let’s go back just to Fed policy and some of the things that are happening. Joe mentioned earlier about the idea that the government, not just this government’s printing money.

BUFFETTAbsolutely.

BECKYIs it about to overtake us? You start to worry about inflation?

BUFFETTYeah. It-you know, in-I think, you know, we’ve got major problems. And we’re-and I said, we’re always going to have problems, so this does not mean I’m bearish on America or anything. But we have a situation in Congress where we have a 10 percent deficit in terms of GDP, and we may be drifting into even larger numbers. I mean, we’ve made promises that-for the future that are really kind of inconsistent with the revenue streams we’ll have. There are three ways of solving that: breaking the promises of modifying them, taxing a whole lot more, or inflating your way out of it. And inflation is the-is the ultimate tax. I mean, it taxes people who don’t know they’re being taxed. It taxes people who believed in paper money, who believed in their government. It’s a particularly-you know, I find it-it’s almost a-it’s not the way government should be behave, but they do behave that way. Ad it’s the easiest thing to do. I mean, we…

BECKYDo you think we’re intentionally doing that right now? Do you…

BUFFETTOh, I don’t think it’s so much intentional, but it’s the fact we don’t want to do the other things, and so it becomes the default option. And we are doing things-we are following policies that will lead to lots of inflation down the road unless changes are made. And once-inflation is the kind of thing, when it gets started, you don’t even-you don’t particularly notice it. It’s a little like a guy, you know, jumping off a 50-floor-out of a 50-story building. The first 45 stories, he really doesn’t notice a lot of change, you know, in his circumstances.

BECKYMm-hmm.

BUFFETTBut eventually you hit the ground. And there is no way you can run the kind of deficits we’re running and following other policies, and this is true around the world, without it being enormously inflationary. And no politician is going to come out and say we’re really going to solve this by making our money worth less. But-I mean, it’d be suicide to do it. But that is-that’s the practical effect of the policies that are being followed now. You know, they’re not written in stone, they can-they can be changed. But the easier course for governments to follow always is to inflate, and that’s why paper money-and I don’t disagree with your viewer that wrote in. I mean, paper money generally has a lousy future. BECKY: Mm-hmm.

BUFFETTAnd I, you know, a couple of years ago when people were running to cash, I said, you know, it’s the worst thing you can have. I mean, there-the one thing I can guarantee will not work well as an investment is cash.

BECKYIs cash a worse investment now than it was two years ago?

BUFFETTIt-it’s a-no, it’s a-it’s a little less worse because then the option was to buy so many other assets so cheap.

BECKYMm-hmm.

BUFFETTI mean, you wanted to use cash then. People said cash is king. The ability to use cash then was king, but having the actual cash was the dumbest thing you could do. And-but people run to cash and they run, you know-but paper money is not a good bet. And the more of it that you issue-I mean, there have to be consequences to issuing paper money. There are consequences to the-to the Fed buying lots and lots and lots of securities and giving credits to the banking system in return. If it was all that easy, you know, we’d be doing it all the time.

BECKYBut you sound a little different than you have on this point the last few times we’ve checked in with you. It sounds like this is a time, maybe an inflection point where you’re getting a little uncomfortable with this.

BUFFETTYeah, I wrote an op-ed piece in The New York Times and-over a year ago-and I said this is-this is OK now, but it’s-but it is morphine, and you’ve got to get off of it. And we haven’t shown much tendency to get off of it so far. I mean, this-you know, the Simpson-Bowles thing came in, and those are two terrific people, they worked hard at it. They got 11 out of 18 votes, you know, and nothing’s been heard since. And that’s wrong, in my opinion.

BECKYThat disappoint you?

BUFFETTYeah.

BECKYWhat would you like to see happen? Would you like to see the panel’s recommendations be adopted?

BUFFETTI would like to see something seriously adopted that leaves us in a situation down the road that is tenable in terms of having a money that will retain its value to a very high extent. The fact that inflation now is 1 or 2 percent, you know, doesn’t mean anything. I mean, that-you know, I-if you jump off the 50th floor, I mean, at the 45th floor, you know, you should not judge the success of your effort by where you are at that point.

BECKYBut addressing this growing problem, you don’t think is something that can wait till after the 2012 elections?

BUFFETTNo, well, then there’ll be a 2014 election. I mean, no, I think-I think if you’ve got a very important problem, whether it’s in business, whether it’s in your personal life, wherever it may be, you know, you address it promptly.

BECKYOK. Carl, you have a question, too?

CARLYeah. Warren, I mean, we’re into some important stuff here now, talking about Simpson-Bowles and what needs to be done. There’s also this report out of Goldman that suggests that the 61 billion that the Congress is considering in cuts for the fiscal year could take a couple percentage points off GDP in the-in the second and third quarter, perhaps as many as 700,000 jobs. Whether or not you agree with that, does the momentum that the economy have, is there enough cushion that we can sustain so-called austerity? And what do you make of the UK’s situation, where they implemented something tough, and right away their fourth quarter GDP went negative?

BUFFETTWell, a 10 percent deficit of GDP, changing that in a small way does not lead you to austerity, believe me.

CARLOK.

BUFFETTThat is a number we haven’t had since World War II. And, no, I’m very suspicious of all economic forecasts, including my own, incidentally. No, I think these people who toss out numbers and say this bill, you know, saved us three billion jobs, I think that is total-I just don’t think they know what they’re talking about. I don’t think I-I don’t think I know what I’m talking about either when I-it isn’t that I think I have a better number, but I can assure you that I’ve seen so much of that that I’m very skeptical. I think it-no, I think when you give somebody the stature of Alan Simpson and Erskine Bowles, and you put together a first-class committee and they work very, very, very hard to get a compromise that 11 of the 18 sign onto when they have vastly different political beliefs, I think you ought to take it pretty seriously. And the real question isn’t the 61 billion now or so, the real question is whether right now you’re willing to say, Here is what we’re going to do so that these promises’-where-you’ve really got to start modifying promises you’ve made for the future, or you’ve got to admit you’re going to inflate your way into solving those problems. But we really haven’t done that.

CARLSo you are not-you…

BECKYDoes that mean…

CARLI was going to-just a quick follow-up, Becky.

BECKYGo ahead, Carl.

CARLYou are-you’re not worried about spending cuts, shrinking government expenditures, taking a big bite out of GDP, that the more important-the more important motive is the long-term solution, right?

BUFFETTI think the difference between having 10 percent of GDP as your deficit and 9 percent is not going to be the difference in a recovery going on. But incidentally, I have some thoughts on taxes, too, I mean, in terms of the distribution of-there-if you look at the top level people in the country, people like me, I mean, we are paying our lowest tax rates in a long, long time, at-and, well, really forever. And so I think there actually could be something done on the revenue side, but it would be at the very top levels. I mean, I’m not talking 250,000, I’m talking people of incomes a lot larger than that. But I don’t know whether you can actually see this, it’s the one thing I brought along. But-well, I guess I brought two things along, since I pulled out the wrong one. Here’s a table, the IRS puts it out, and if you go back to 1992…

BECKYHere, I’ll take that.

BUFFETT: If you go back to 1992 at the bottom, you’ll find that the-of the 400 top income tax returns filed in the United States, I think the income was around 45 million per person, and now in the last year shown there it’s 340 million. Think of that, from 40 million to 340 million, while the average American worker was going no place.

BECKYI think it’s down here.

BUFFETTNow, if you go to the last page there…

BECKYThe last page?

BUFFETTYeah. You’ll see the tax rate of those same four-not-of the 400 each year, over on the right-hand side, it starts at around 26 or 28 percent and it works its way steadily down to 16 percent. So while these people were having their incomes on average go from 40 million a year to 340 million a year…

BECKY(Unintelligible)

BUFFETT…their tax rate was going down from 26 to 16. And believe me, that is not the experience of the average American. So there are things that can be done, and in my view should be done, and they will not slow down the American economy at all.

BECKYYou know what? Let me ask a question from the…

JOEYeah. Four-that won’t be enough-that won’t be enough money…

BECKYGo ahead, Joe.

JOE…right, Warren? And you said that. Because they-it’s got to-you got to go to the middle class or-if you’re going to do it on a-on the revenue side, on the-I mean, it would help a little, but you need to go down to maybe 250,000 or even below that to really make a dent if you don’t address the spending side, right?

BUFFETTWell, you can do tens and tens of billions on people with a million and up-and up of income, but you-but the bigger thing actually over time-but you have to say-you have to do it now. I mean, just saying, Well, we’re going to solve this in five years or 10 years,’ yeah…

JOEWe…

BUFFETTYou really have to do something about the promises you’ve made on spending because we’re-it isn’t-if it doesn’t happen in 2011, it isn’t going to happen in 2012 and it isn’t going to happen…

JOEI mean, it’s-yeah. It’s entitlements, Warren. And there’s a-there’s a piece today…

BUFFETTYeah, sure.

JOE…I think it was in Politico, people in this country…

BECKYYeah. In the Tarrance Group poll, right?

JOEYeah. People still think…

BECKYThe-yeah.

JOE…that you can cut waste and save, or they think you can cut defense, that we’re spending all the money on defense. And it…

BECKYHere’s the numbers on the…

JOEYeah. What is it, Beck?

BECKYThe numbers on that poll that Joe’s referencing is a majority of voters incorrectly believe the federal government spends more on defense and foreign aid than it does on Medicare and Social Security.

BUFFETTYeah.

BECKYSixty-three percent of people they polled thought that. Another 60 percent incorrectly believes problems with federal budgets can be fixed by just eliminating waste, fraud and abuse.

BUFFETTYeah.

BECKYAnd it’s not just casual beliefs on this. Forty percent of them strongly agree with these beliefs. Less than half of them, just 44 percent, believe that Medicare, Social Security are the major source of problems for the federal budget. Only 49 percent disagree. So what-how do politicians deal with poll numbers like that?

BUFFETTWell, they deal with it by ignoring-essentially ignoring the problem. I mean, it’s the same problem you had with state and municipalities on pensions. It was so easy-it was easy for General Motors back in the ’60s to promise pensions and health benefits that later, you know, brought the company to bankruptcy. It’s-it was easy for state and municipalities, you know, in-when they were negotiating contracts 20 or 30 years ago to put in cost of living adjustments and retirement after 20 years and back-end loading in terms of the last few years of employment. And all of those things and those promises come due so much later, long after the politicians left office, that it’s a tremendous problem. But the future does arrive. And when the future arrives and you’ve made a lot of promises, you’re either going to break the promises, you’re going to raise taxes dramatically, or you’re going to inflate. And basically, I think…

BECKYSo wait a second. Are you on the side of some of the Republican governors right now who are saying, We can’t afford to keep up with the promises we’ve made, we certainly can’t continue these promises down the road,’ and, in some cases, as in the case of Scott Walker, saying, We need to get rid of collective bargaining as a result’?

BUFFETTWell, I think-I don’t want to-I’m not going to say about the collective bargaining. I do think that many states and municipalities-including Omaha, we just have had this-have made promises on benefits that really can’t be fulfilled if you continue to keep making them. I think it’s-listen, I would identify with the municipal employee who said, Look, if you made the deal with me. I mean, you know, I came to work here because you said I was going to get this.’ So-but I-the one thing I think you do is you quit making new promises. I mean, you may-you may have-be able to fulfill the ones that you’ve got up to this point, but you say, Look it, this is going to bust us. And I’m going to make no more new promises.’ And, you know, that’s a tough thing for a politician to say.

JOEWarren…

BECKYWhat about asking…

JOEIf the public employees at the state and local levels are installing the people that give them the benefits through collective bargaining, maybe that’s something you need to change.

BUFFETTWell, I-yeah, but you could say every constituency sort of votes its own interests. I mean, you know, there-you’ve got people-you’ve got the rich capitalists who are trying to keep down the rate on capital gains, and…

JOEYeah, but those-but those-yeah, but those companies can go bankrupt. I mean, the private unions are negotiating with…

BUFFETTYeah.

JOEIf they get too much, they know that they won’t have a job anymore. The others are negotiating-or they’re aligned against the taxpayers. The states and the local municipalities can never go bankrupt. So they-you know, that’s why there’s no reason for them to mitigate their demands, right?

BUFFETTWell, people are going to make the best deal they can. I mean, when you-you know, when you come up to negotiate your next contract with CNBC, you’ll try and make the best deal you can. But you’ve got to have people on both sides-and hopefully you’ve got people on both sides that are mathematically intelligent. And, of course, the big problem, you know, with pensions, with postretirement medical care and all of that, is that the guy that makes the promise is not the guy that has to make the payment. Yeah.

JOEYou saw-Welch yesterday, Warren, brought-and it was in the Journal, too, brought up a speech given by Corzine-Governor Corzine in 2006 to the public unions that said, We are going to fight for a better set of benefits for you.’ He was the guy giving the benefits to the public-how do you negotiate with someone who’s giving a speech saying, We’re going to give you’-and he knows that that might help him get elected the next time, having the public unions on his side?

BUFFETTYeah. Well, I haven’t read that speech, but if it says what you said, it was a mistake. It was a big mistake. I-yeah, and not only that, but they use unrealistic assumptions even in determining how much they have to put in the pension funds to meet the obligations. I mean, the pension fund assumptions of most municipalities, in my-in my view are nuts, you know. And-but there’s no incentive to change them. I mean, it’s much easier to get a friendly actuary than it is to face, you know, an unhappy public.

BECKYWell, so who’s right? Because this has gotten to be such a huge debate, and you have two sides that are painting two very different pictures and using two very different sets of numbers to say how bad of a situation different municipalities, different states are in at this point. Who do we believe? Is there a set of numbers that tells the absolute truth?

BUFFETTWell, I-actually, I’ve seen some pretty good numbers on that. But the-I would say that when they have pension assumptions that assuming they’re going to earn 8 percent or something like that when bonds are yielding what they are now, you know, that’s crazy. And…

BECKYI told somebody that who deals with pension funds a couple of weeks ago, and they said, Well, you’re just wrong because if you look at where things could go over the next 10 years, you’re just wrong.’

BUFFETTYeah.

BECKYWhat’s a safe assumption for pension returns?

BUFFETTWell, I use-we’re required, with our utilities, to use certain pension assumptions I don’t want to use. But we’ve used about as low as-anyway, but I think this. I think that-well, I think it’s nonsense, for example, when a company has subsidiaries in Europe and then they have them here, and they have an assumption for their pension fund in Europe that says we’re going to earn 4 percent over there and we’re going to earn 8 percent in the United States. I would say let’s give the money to the United States. The pension fund accounting has been terrible over the years. And many managements, I don’t think, understand it very well themselves, and many, you know, in a sense prefer not to understand it. You know, they care about their own pension, too.

We could-we could use a real overhaul of pension assumptions in this country. There’s been some of that, but I’ve been writing about it for years. You know, it-nobody’s really got an incentive to do it, you know, that’s one of the problems. But…

BECKYMm-hmm. But it sounds like you do have some sympathies with some of the Republican governors who are trying to make slashes.

BUFFETTWell, I have sympathy for anybody that’s trying to deal financially today with a whole bunch of promises made by somebody years ago.

BECKYYeah.

BUFFETTBut I also have sympathy for the guys that said, Listen, I took the job because of those promises.’

BECKYSure. Right. And 40 years later, these are the promises that were made.

BUFFETTYeah.

BECKYWhat about the idea of asking state employees to play*(as spoken)*20, 30, 40 percent of their health care costs from here on out?

BUFFETTYeah. Well, some of them-actually, there’s more contributory payments into pension funds in the-in the public arena than in the private arena. If you look at the old…

BECKYI mean in health care, in health care situations.

BUFFETTYeah, well…

BECKYThere’s a lot-that’s where some of the sticking points are, too.

BUFFETT…that’s changing the promise. You know, and I-and it’s very tough. But I think we have done that in some of our private plants at Berkshire.

BECKYMm-hmm.

BUFFETTAnd I think that-but when you’re doing it, you’re breaking a promise. I mean, people worked for 30 years in an auto plant or something of the sort, and they said you’re going to have your health care taken care of when you’re-when you’re out of here. And then if you say you’re going to pay 30 percent of it, that’s-that is changing the game somewhat. I think absolutely they ought to change the game on-from this point forward, I mean, in terms of hires they’re making and, you know. And if somebody wants to leave the public sector because now they’re not going to get benefits from this point forward because they-fine, let them do it. But I-every year that ticks away on this stuff, you know, the obligation gets larger.

CARLAnd, Warren, just on that…

BECKYMm-hmm. Carl:

CARL…I wonder, I mean, the problems we’re talking about are so huge, so structural, right, so intractable, how do you reconcile them with the optimism in your letter, and the notion that America’s best days are ahead?

BUFFETTBecause…

CARLBecause a lot of the people who read the letter and are skeptical of markets, skeptical of government, say the points you’re making prove that we may not actually be able to win this time.

BUFFETTOh, we’ll win. We’ll win. I mean, bear in mind this: You can make promises about what will happen in 2020 to somebody, but you-we can’t eat the food that’s going to be produced in 2020, we can’t use the cars. As long as the economy grows, we will have a larger pie. The problem is we’ve promised so much of that pie away to different people. But as long as the pie grows, you know, overall the country will do well. We’ll have enormous tension between various classes of people. But if you go back to when I was born in 1930, just look at what you could’ve predicted. You could’ve predicted, you know, that stocks would go down-from the moment I was born, they’d go down another 75 percent. You could predict 25 percent unemployment. You could predict a surprise attack, you know, that looked like we were going to lose the war in 1941. All of these things happened. And what happened in 1941? You had an economy that’d been kind of moribund through the ’40s-or through the ’30s, and everybody went back to work and we were turning out battleships, we were turning out planes.

This country has enormous potential, and we will be turning out more goods and services per capita five or 10 years from now than we are now. The problem is whether we’ve overpromised those to too many parties. The pie will get bigger, and that is a huge advantage over time. And it just means that the members of the family fight over who gets how much of the pie, and maybe part of that pie has been overpromised to people. But the pie getting larger solves a lot of things; and it solved things from a couple hundred years in this country, and it’ll continue to do so.

BECKYWarren, we got lots and lots of questions that came in from Berkshire shareholders, from viewers. We also got one that came in from Mohamed El-Erian, who I know you’re friends with, too. He asks a broad question that talks about this high unemployment rate. Let’s call this up right now. It’s, “The persistence of high unemployment and, within that, large youth unemployment, is leading some to worry about skill atrophy, expertise mismatches and lower future productivity. So how valid are these concerns? And if they are valid, what should the government and companies do to try and counter this trend?”

BUFFETTYeah. Well, actually, productivity’s been terrific in the last few years.

BECKYMm-hmm.

BUFFETTI mean, that’s the reason that we are doing a lot more business than a year ago and we only have 1 percent more employees. We’re-productivity has improved very significantly. And, you know, that’s-that-if productivity hadn’t improved, though, we’d have-we’d have less unemployment right now.

BECKYMm-hmm.

BUFFETTBut productivity is great over time. It’s terrible for the guy that loses his job because somebody’s figured out a machine that does it better, given time, but we want gains in productivity. They give us more output. More output is what really solves problems over time. We want more output per capita. Then we’ll fight like hell about who gets it, you know. And the rich people say, Well, we don’t want you to take any of that away from us.’ And other people say, We’ve been promised it.’ And you’ll have all these fights about it. But having more output solves a lot of thing. A family that has greater and greater income may still have fights within the family about who gets to spend it, but it’s-those fights are a lot easier to solve than if the income is shrinking.

BECKYLet me ask you a question that was sent in by a viewer. This is-control room, I’m jumping out of order-number six from Mark in Illinois. And this was written tongue in cheek, but he says, “You and Bill Gates have recently been trying to get extremely rich individuals to give half their wealth to charity. I was wondering about all the concern over our nation’s serious debt issue. If the US citizens on the Forbes 400 list gave half their wealth to paying down the debt, how much of a dent would you put in it?”

BUFFETTWell, the Forbes 400 had, I think, about 1.3 trillion last year, so that’d be about 650 billion. So in terms of the-in terms of the net debt, it would knock off about 7 or 8 percent.

BECKYSo you are talking about a serious dent with that. And I guess the question he maybe is asking in a more roundabout way is, why not give that money to the government instead of private charities?

BUFFETTIt would-it would-it would take about-it would wipe out about six months of the deficit, and then we’d back-we’d be back where we started. I do think that that group should be paying much higher taxes than they are, you know, and I think they-there should be higher estate taxes, too. But I don’t think-I don’t think you should have a tax system based on free will contributions. I’m not sure that would be the most successful tax system ever devised.

BECKYOK. All right, well, we do have more to come. In fact, when we come back, we’ll have a final go-round with Warren Buffett, a rapid-fire session to get through some of your last questions, and ours as well. SQUAWK BOX will be right back.

*

BECKYWelcome back, everybody. It’s time for a final round with Warren Buffett, so let’s get right to some of the e-mails that you’ve been sending in. And, Warren, the questions that came in this year were extremely thoughtful. One that came in from Duane in Tribune, Kansas, writes in, “What do you think about the rapidly increasing prices paid for farmland across the country, and where do you see this trend going?” BUFFETT: Well, my son is the farmer, and I’m not the big expert on it. But obviously, commodity prices have gone up significantly. And if they…

BECKYMm-hmm.

BUFFETTIf that represents a permanent factor, I mean, if you’re really talking about $7 corn and $12 soybeans and so on, it makes the farmland worth more money. And of course, farmland does become more productive year after year. So, you know, a farm is a decent long-term investment. Generally they’ve sold on the fairly low yield basis, but good farmland is not a terrible investment.

BECKYYeah. You’ve seen prices crash, though, for some of these things very rapidly before.

BUFFETTI don’t know what will happen with commodities.

BECKYYeah.

BUFFETTBut what you’re seeing with commodities to some extent is the-is the converse to the-to paper money. I mean, it…

BECKYMm-hmm.

BUFFETTIf money becomes worth less and less, copper and cotton and soybeans are going to be worth more and more, measured by dollars.

BECKYMm-hmm. Let’s get to another question. Lindsay writes in from Cedar Rapids that, “Risk managers within many firms got it wrong, as evidenced by the financial failures and required government bailouts. Beyond the answer of maintaining a strong capital position like that of Berkshire Hathaway-obviously, not every company has the balance sheet of Berkshire-what’s the most important advice you can provide with regard to risk management so that companies don’t repeat the financial failures of the recent past?”

BUFFETTYeah, Well, financial companies always have-the CEO has to be the chief risk officer. And I think the boards of directors should have compensation policies that make sure that if the CEO fails in the risk job that that CEO goes away poor. I mean, I think that it’s been disgusting, frankly, with huge financial institutions having-needing government assistance, all the disruption that’s caused both in the institutions, the economy and everything else, and people walking away rich. So incentives matter enormously, and incentives have all been to the upside with managers. I mean, you have stock options, all of these things that if it works out they do great, and if it doesn’t work out they still are very rich and they leave and, you know, it’s goodbye, and then you need government money. So I think boards have been very derelict in the big financial institutions in the way they designed compensation packages. But they’ve been encouraged to do so by comp consultants and just by prevailing practice.

BECKYCan we count on anything the government may do or has tried to do to this point with stopping that, or is this just always going to be a ticking time bomb?

BUFFETTWell, the two big problems of the period were leverage and bad incentives.

BECKYMm-hmm.

BUFFETTThey’ve done some things about leverage, quite a bit. And the temptation is always just to leverage up more and more if you’ve got a financial institution. If you’re-if you’ve got a government guarantee behind you, in effect, which the FDIC has been, or with Freddie and Fannie, you can print money. And when people get the ability to print money, they enjoy it. And then when you get the incentives wrong so that if things work they get paid off incredibly, and if things work they still get paid off incredibly, it-you’re going to-you’re going to have people do crazy things. So you got to have the incentives right, and you’ve got to have some limits on leverage.

BECKYAll right, we’ve only got…

BUFFETTAnd we’ve made some progress on that.

BECKYWe have made some progress.

BUFFETTYeah.

BECKYWe’ve only got a few minutes left, but I’m hoping you can solve the problem with Fannie and Freddie and home mortgage issues while you’re here. You did write about that in the shareholders letter this year.

BUFFETTHm.

BECKYYou wrote about your experiences through Clayton, and why Clayton has not had the types of bad loans that we’ve seen so prevalently through other areas in home mortgage.

BUFFETTYeah. Yeah. Well, we lent to people who put up reasonable down payments, and we verified their income. And these were people living on the edge, in many cases. I mean, these were not people with great FICO scores, everything, but they were buying homes not to flip them, they were not refinancing to try and take the money out to-they were-they were-they were keeping their monthly payments in line. And we were keeping the mortgages. We kept 11 billion or so of mortgages, three-200,000 of them. So we cared whether the people were going to pay us in the future. If you have a government-guaranteed mortgage, you know, you don’t care whether the person’s any good or not. I mean, you know-well, you care whether the government’s good or not, but you don’t care. So when Freddie and Fannie guaranteed mortgages, the only person that could care was Freddie and Fannie. The people that bought them knew they were going to get paid because they knew, in effect, they were government guaranteed. Now, having government guarantees in there brings down the cost of financing to rock-bottom levels. I mean, it does reduce the cost of homeownership because you’ve got a government-guaranteed obligation.

I think going forth in the future, you may need some system where private guys-guys like me, guys like JPMorgan or whomever-have large mortgage guarantee operations backstopped by the federal government. So you get the benefit of the cost of that, but you have the discipline of the private market in terms of pricing these things and determining what you take and don’t take. And you get it away from congressional pressure.

BECKYSo that nothing like a Fannie or a Freddie exists?

BUFFETTYou-I don’t think you necessarily need Fannie or Freddie, but what you might-you might-let’s just say you had a company capitalized at $10 billion and we own it. We couldn’t take any money out of it for at least five years. And we guaranteed mortgages, and we took 80 percent of the guarantee, and the federal government took the 20 percent. But the government also said if for any reason this $10 billion company couldn’t pay, they would pay. Now, we would have an interest in getting decent loans, we’d have an interest in getting paid reasonably. The government guarantee would probably never be called on, it would keep the price low. So you get the discipline of the private market, and you wouldn’t have a whole bunch of lobbyists coming around to us and saying, We want you to give money to anybody that shows up and, you know, can show a faint pulse.’

BECKYDo you-do you think that that’s actually a likely scenario, though? Do you think that there’s the political will or desire to get the government entirely out of it?

BUFFETTWell, I think-I think there’s desire to get some answer to Freddie and Fannie. They all want to sweep it under the rug. It’s the only thing, incidentally, that’s cost the government a lot of money out of this whole panic.

BECKYRight.

BUFFETTThe banks have pretty well paid things back, the FDIC didn’t have to come up for any money, and the-even General Motors is doing reasonably well. So-AIG is going to get the money paid back. The big losers are Freddie and Fannie. And they were the ones run by government, and they were subject to government pressures. So I think that there’s a desire for a solution that keeps the cost down-which government guarantees, too-but also imposes market discipline.

JOEHey…

BECKYJoe:

JOEHey, Warren, is too big to fail-we keep hearing that it-that that wasn’t fixed, that obviously the banks have gotten even bigger, the big ones. If you get their-the leverage better in order and make them, you know, keep more capital, and if you get the compensation or the incentives in order, is it OK to-in a capitalist system, to have things that’re too big to fail, that would be bailed out? I-it seems like that’s still a problem and we still have it.

BUFFETTYeah, you don’t-but you don’t want to bail out the managements. I mean, you know, in the case of-you know, Fannie and Freddie stockholders lost all their money. You know, the-AIG and Citi, you know, they’re down-I don’t know whether they’re down 80 percent or what. The stockholders at WaMu lost all their money. The stockholders at Wachovia lost a very high percentage of their money.

JOEYeah.

BUFFETTSo they failed. Now, the-they didn’t fail in the sense that you had a liquidation sale.

JOERight.

BUFFETTAnd we tried that with Lehman and that didn’t work out too well. There will always be, in my view, places that’re too big to fail. But you could make it so that the incentives are that the people running them, if they…

JOERight.

BUFFETT…if the institution fails, they fail. That’s enormously important, in my view.

CARLWarren, I don’t know if you saw…

BECKYCarl:

CARLI don’t know if you saw the Oscars this past weekend, but the winner of Best Documentary was this film called “Inside Job,” which paints a very dark picture of the crisis. And in his acceptance speech, the producer said that the-three years after a crisis that he says was caused by a massive fraud, in his words, not a single executive has gone to jail, and he says that’s wrong. Is it?

BUFFETTWell, I would say that what’s really wrong is that the chief executives of most those companies walked away extraordinarily rich. Now, whether they should’ve gone to jail or not’s a-you know, that’s a question of statutes and whether you could prove it and so on. But I think the idea that they were allowed, by the terms of their contracts that they’d made and the boards of directors allowed to be put into place, that they could walk away with hundreds of millions of dollars while the country suffered the consequences of really some terrible actions. Like I said, I don’t know whether it should put them in jail, but it should-it should not put them in Cadillacs.

BECKYAnd, Warren, just wrapping things up again quickly, you are incredibly optimistic not only about America’s futures, but about the stock market’s future. Is that fair to say?

BUFFETTI think-I think-I would-certainly fair to say that I would-if you asked me for owning equities vs. fixed dollars, either long-term or short-term…

BECKYMm-hmm.

BUFFETT…governments or anything, I know-I don’t think there’s a chance that governments will outperform equities over any, say, 10 or 20 or 30-year period. So I…

BECKYEven with the big runs we’ve seen recent-oh, you’re looking over the longer term. Yeah.

BUFFETTYeah, over the longer-I have no idea what’ll happen in the next year.

BECKYOK.

BUFFETTBut the-but I think it would be very, very foolish to have your money in long-term fixed-dollar investments or short-term fixed-dollar investments when you could-if you had the ability to own equities and own them for a-and hold them for a considerable period of time. You shouldn’t own them with borrowed money.

BECKYOK. Well, Warren, again, we want to thank you very much for your time here today, for being so generous with your time and taking so many of our questions and so many of our viewer questions as well.

BUFFETTOK. I hope your viewers come out and look at the Durham Museum sometime, you know, enjoy it.

BECKYThat’s right. Again, we’re at the Durham Museum, for anybody who missed it. We’re standing in front of the Ernest Buffett grocery store. Ernest Buffett, of course, was Warren Buffett’s grandfather. And if you haven’t read it already, check out the annual letter that he wrote. It tells you a little bit about a lesson that his grandfather taught him. But again, Warren, thank you.

BUFFETTThank you.

BECKYAppreciate it. And, Carl, we’ll send it back over to you.

CARLOK. All right, thanks to Warren from both me and Joe.

JOEThank you, Warren. Yes.