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Financial Crisis Inquiry Commission


Staff Audiotape of Interview with Warren Buffett,
Berkshire Hathaway
May 26, 2010

Interviewer: as well since you are a significant Warren Buffett:


Thank you. Mr. Buffett we’re with the shareholder in Moody’s. And if you There is no staff. I make all the
staff of the Financial Crisis Inquiry don’t mind, let’s ask first about Moody’s investment decisions and I do all my
Commission. We were formed by specifically. own analysis. And basically it was an
Congress in 2009 to investigate the evaluation both of Dun and Bradstreet
causes of the financial crisis both Interviewer: and Moody’s but of the economics of
globally and domestically. And to do I understand sir, that in 1999 and in their business. And I never met with
a report, due at the end of this year, February of 2000 you invested in Dun anybody. Dun and Bradstreet had a
December 15, 2010 to the President and Bradstreet. very good business and Moody’s had
and to Congress which we also plan to an even better business. And basically
Warren Buffett:
release to the American public. We’re the single most important decision
That’s correct. I don’t have the dates,
tasked not only with investigating the in evaluating a business is pricing
but that sounds right.
causes of the financial crisis but looking power. You’ve got the power to raise
at specific issues that Congress has Interviewer: prices without losing business to a
enumerated in the Fraud Enforcement Yes sir. And am I correct, sir, in competitor, and you’ve got a very good
Recovery Act which formed the saying that you made no purchases business. And if you have to have a
Commission. The Commission is a bi- after Moody’s spun off from Dun and prayer session before raising the price
partisan Commission, six Democrats Bradstreet? by a tenth of a cent (laughs), then you
and four Republican Commissioners got a terrible business. And I’ve been
and we are with the staff of the Warren Buffett: in both and I know the difference.
Commission. We wanted to ask you a I believe that’s correct.
few questions today and get your views Interviewer:
and your insights so that we may better Interviewer: Now, you’ve described the importance
understand the causes of the financial What kind of due diligence did you and of quality management in your
crisis. In addition, we would like to your staff do when you first purchased investing decisions and I know
ask you a few questions about Moody’s Dun and Bradstreet in 1999 and then your mentor Benjamin Graham,
again in 2000? I happen to have read his book as

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FCIC Interview with Warren Buffett | 2

well, has described the importance of customer nevertheless. And what I Warren Buffett:
management. What attracted you to see as a customer is reflected in what’s If I thought they needed me I wouldn’t
the management of Moody’s when you happened in their financial record. have bought the stock. (laughs)
made your initial investments?
Interviewer: Interviewer:
Warren Buffett: And I’ve seen in many places where In 2006 Moody’s began to re-purchase
I knew nothing about the management you’ve been referred to as a passive its shares, buying back its shares that
of Moody’s. I’ve also said many times investor of Moody’s. Is that a fair were outstanding and they did so
in annual reports and elsewhere that characterization and what sort of from 2006 to 2008 according to our
one of the many, but with reputation interactions and communications records. Why didn’t you sell back your
of for brilliance in him gets hooked have you had with the Board and with shares to Moody’s at that time? I know
up with a business with a reputation management of Moody’s? subsequent in 2009 you’ve sold some
of bad economics, it’s the reputation shares but from ‘06 to ‘09 during the
of the business that remains intact. If Warren Buffett: buy-back did you consider selling your
you’ve got a good enough business, if At the very start there was a fellow shares back and if so, why didn’t you?
you have a monopoly newspaper, if named Cliff Alexander who was the
you have a network television station, Chairman of Dun and Bradstreet while Warren Buffett:
I’m talking in the past, you know, they were breaking it up. He met me, I Oh, I thought they had an extraordinary
your idiot nephew could run it. And met him in connection with something business and, you know, they still have
if you’ve got a really good business, it else years earlier. So we had a lunch an extraordinary business now subject
doesn’t make any difference. It makes at one time, but he wasn’t really an to a different threat which we’ll get into
some difference maybe in capital operating manager, he was there sort later, I’m sure. But I made a mistake
allocation or something of the sort, but to oversee the breakup of the situation. in that it got to very lofty heights and
the extraordinary business does not Since we really owned stock in both we didn’t sell. It wouldn’t have made
require good management. Dun and Bradstreet and Moody’s any difference whether we were selling
when they got split up, I’d never been to them or selling in the market. But
Warren Buffett: in Moody’s offices. I don’t think I’ve there are very few businesses that had
I’m not making any reference to ever initiated a call to them. I would the competitive position that Moody’s
Moody’s management, I didn’t know say that three or four times as part of a and Standard and Poor’s had, they
them, but it really, you know, if you general road show their CEO and the both had the same position essentially.
own the only newspaper in town up investor relations person would stop Very few businesses like that in the
till the last five years or so, you have by and they think they have to do that. world. It’s a natural duopoly to some
pricing power and you didn’t have to I have no interest in it basically and I extent, now that may get changed,
go to the office. never requested a meeting. It just, it but it has historically been a natural
was part of what they thought investor duopoly where anybody coming in and
Interviewer: relations were all about. And we don’t offering to cut their price in half had
And do you have any opinion, sir, of believe much in that. no chance of success. And there are
how well management of Moody’s has not many businesses where somebody
performed? Interviewer: could come in to cut the price in half.
What about any Board members? And if somebody doesn’t think about
Warren Buffett: Have you pressed for the election of shifting, but that’s the nature of the
It’s hard to evaluate when you have a any Board members to Moody’s Board? ratings business and it’s a naturally
business that has that much pricing
obtained one. I mean, it’s assisted by
power. I mean, they have done very Warren Buffett:
the fact that the two of them became
well in terms of huge returns on No, I have no interest in it.
the standard for regulators and all
tangible assets, almost infinite. And
Interviewer: of that. So it’s been assisted by the
they have, they have grown along
And, we’ve talked about just verbal governmental actions over time. But
with a business that generally capital
communications. Have you sent any it’s a natural duopoly.
markets became more active and all
that. So in the end--and they’ve raised letters or submitted any memos or
Interviewer:
prices--we’re a customer of Moody’s ideas for strategy decisions to Moody’s?
Now, Mr. Buffett, you’ve been reported
too so I see this from both sides and as saying that you don’t use ratings.
an unwilling customer, but we’re a Warren Buffett:
No, no.

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FCIC Interview with Warren Buffett | 3

Warren Buffett: determine proper capital or to prevent Interviewer:


That’s right. buccaneers of one sort from going out I do want to ask you some questions
and speculating in the case of banks about the formation of that bubble, if
Interviewer: with money that’s obtained through a I may ask a couple more on the rating
But the world does. government guarantee. So that is not agency side and then shift to that. And
an easy question. that is, do I take it, though, that you
Warren Buffett:
believe that at least the failure of the
That’s right. Interviewer: ratings contributed in some part to the
As I mentioned at the outset we’re financial crisis?
Warren Buffett: investigating the causes of the financial
But we pay for ratings which I don’t crisis and I would like to get your Warren Buffett:
like. (laughs) opinion as to whether credit ratings But I do think it was, I think every
Interviewer: and their apparent failure to predict aspect of society contributed to it
My question is one of more policy accurately credit quality of structured virtually. But they fell prey to the same
and philosophy and that is, would the finance products like residential delusion that existed throughout the
American economy be better off in mortgage backed securities and country eventually. And it meant that
the long run if credit ratings were not collateralized debt obligations. Did the models they had were no good.
so embedded in our regulations and that failure or apparent failure cause or They didn’t contemplate, but neither
if market participants relied less on contribute to the financial crisis? did the models in the minds of 300
credit ratings? million Americans contemplate what
Warren Buffett: was going to happen.
Warren Buffett: It didn’t cause it but there were a vast
Well, I think it might be better off if number of things that contributed to Interviewer:
everybody that invested significant it. The basic cause was, you know, And similarly, sir, the ratings agencies,
sums of money did their own analysis embedded in, partly in psychology, both Moody’s and S&P downgraded
but that is not the way the world works. partly in reality in a growing and finally securities en masse in July of 2007,
And regulators have a terrible problem pervasive belief that house prices July, roughly starting around July 10,
in setting capital requirements all of couldn’t go down. And everybody 2007. And then again in mid October
that sort of thing without some kind succumbed, virtually everybody of 2007. Many have pointed to these
of standards that they look to even if succumbed to that. But that’s, the only downgrades as contributing to the
those are far from perfect standards. way you get a bubble is when basically a crisis. Do you believe that these
I can’t really judge it perfectly from very high percentage of the population downgrades, the sudden downgrades
the regulators’ standpoint. From the buys into some originally sound contributed to uncertainty in the
investors’ standpoint, I think that premise--and it’s quite interesting market or the looming crisis?
investors should do their own analysis how that develops--originally sound
premise that becomes distorted as time Warren Buffett:
and we always do.
passes and people forget the original Well, I think that the realization by
Interviewer: sound premise and start focusing solely people that a bubble was starting to
Would you support the removal of on the price action. So the media, pop and, you know, everybody doesn’t
references to credit ratings from investors, mortgage bankers, the wake up a six a.m. on some morning
regulations? American public, me, you know, my and find it out. But Freddie Mac,
neighbor, rating agencies, Congress, Fannie Mae they all felt different in
Warren Buffett: you name it. People overwhelmingly the middle of 2007 than they did in
That’s a tough question. I mean, you came to believe that house prices could the middle of 2006 or 2005. So people
get into, you get into, you know, how not fall significantly. And since it was were watching a movie and they
you regulate insurance companies and the biggest asset class in the country thought the movie had a happy ending
banks. And we are very significantly and it was the easiest class to borrow and all of a sudden the events on the
in the insurance business and we are against it created, you know, probably screen started telling them something
told that we can only own triple B the biggest bubble in our history. It’ll different. And different people in the
and above and different--there are all be a bubble that will be remembered audience picked it up maybe different
kinds of different rules in different along with South Sea bubble and hours, different days, different weeks.
states and even different countries. [unintelligible] bubble. But at some point the bubble popped.
And those may serve as a crude tool to

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FCIC Interview with Warren Buffett | 4

Warren Buffett: Looking back, you know, a) we don’t premise than with a false premise. If
And for differently people it was, they short around here but, you know, if I’d you have some premise that the moon
were seeing it at slightly different seen what was coming, I might have is made of green cheese or something,
times. But you can say the media’s behaved differently (laughs) including you know, it’s ridiculous on its face.
caused it too, if they say the bubble’s selling Moody’s. Something’s wrong. If you come up with a premise that
popping, you know. The recognition common stocks have done better
of it by the rating agencies I would say, Interviewer: than bonds and I wrote about this in a
you know, may have pulled a whole And we’ve obviously had bubbles Fortune article in 2001. Because it was,
bunch of people that previously hadn’t in the past. As you pointed with the there was a famous little book in 2001
been paying much attention that it was internet bubble and others. But at by Edgar Lawrence Smith, in 1924,
happening. The report’s coming out least in recent times we’ve never had I think, by Edgar Lawrence Smith
of Freddie and Fannie may have told a financial crisis as severe as the one that made a study of common stocks
people what was happening country- we’re living through now. When did it vs. bonds. And it showed, he started
wide and I think that was the summer dawn on you that this bubble bursting out with the idea that bonds would
of 2007 certainly was telling people and this financial crisis was going to be over-perform during deflation and
that. So it was dawning on people in different than none others in recent common stocks would over-perform
a way sort of that what they believed time? during inflation. He went back and
wasn’t true. studied a whole bunch of periods and
Warren Buffett:
lo and behold, his original hypothesis
Interviewer: Well, unfortunately, it’s a gradual
was wrong. He found that common
Now, I read in one of your shareholder process and, you know, you get wise too
stocks always over-performed. And he
letters I thought you appropriately said, late. When it really became apparent
started to think about it and why was
“A pin lies in wait for every bubble.” that, you know, that this was something
that. Well it was because there was a
like we’d never seen was in September
retained earnings factor. They sold,
Warren Buffett: 2008 that’s when I said on CNBC, this
the dividend you got on stocks was the
And this was the biggest one. is an economic Pearl Harbor. Well,
same as the yield on bonds and on top
it was an economic Pearl Harbor
of that you had retained earnings. So
Interviewer: by definition I meant that I hadn’t
they over-performed. That became the
When did you realize that there was a seen it three months earlier because
underlying bulwark for the ‘29 bubble.
mortgage melt down coming and if so, I didn’t see a Pearl Harbor three
People thought stocks were starting
what steps did you take to prepare for months earlier. There were all kinds of
to be wonderful and they forgot the
it? And if not, why were you unable, as developments, but the degree to which
limitations of the original premise
one of the purportedly wisest investors it would stop the financial system, you
which was that if stocks were yielding
in the United States, why were you know. And then with the consequent
the same as bonds that they had this
unable to spot this massive bubble overflow into the economy, you know.
going for them.
growing? Until September 2008, I didn’t fully
realize. So after a while the original premise
Warren Buffett:
The answer is to the first part was which becomes sort of the impetus for
Interviewer:
not soon enough. (laughs) And it what later turns out to be a bubble is
What do you think it was, if you were to
was something we talked about at forgotten and the price action takes
point to one of the single driving causes
our annual meetings. And I think one over. Now we saw the same thing in
behind this bubble? What would you
point I referred to it as a bubblette, I housing. It’s a totally sound premise
say?
don’t remember what year that was. that houses will become, worth more
But, and I talked my home in Laguna Warren Buffett: over time because the dollar becomes
where the implicit value of the land There’s a really interesting aspect of worth less. It isn’t because, you know,
had gotten up to $30 million an acre or this which will take a minute or two construction costs go up. And it isn’t
something like that, on that order. But to explain, but my former boss Ben because houses are so wonderful it’s
the nature of bubbles is that, you know, Graham in an observation 50 or so because the dollar becomes worth
with the internet bubble I was aware years ago to me that really stuck in my less that a house that was bought 40
of it too, but I didn’t go and shorten mind and now I’ve seen elements of years ago is worth more today than it
stocks. I never shorted internet stocks it. He said you can get in a whole lot was then. And since 66% or 67% of
and I didn’t short housing stocks. more trouble in investing with a sound the people want to own their home
and because you can borrow money

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FCIC Interview with Warren Buffett | 5

on it and you’re dreaming of buying a created a bubble like we’ve never seen. one that this time was different that
home, if you really believe that houses I wish I’d figured that out in 2005. made, why it didn’t catch fire earlier, I
are going to go up in value you buy can’t give you the answer.
one as soon as you can. And that’s a Interviewer:
very sound premise. It’s related of This bubble, though, has been Interviewer:
course, though, to houses selling at described as different from prior You don’t make our job any easier.
something like replacement price housing bubbles. And certainly the (laughs)
and not [unintelligible] of stripping forces that you’ve described about
inflation. So the sound premise it’s prices and certainly the types of loans Warren Buffett:
a good idea to buy a house this year that you’ve described have been (laughs) No, well, no, listen, I don’t
because it will probably cost more next around for a while. What do you think, have a great answer, I’d probably
year and you’re going to want a home though, made this particular housing have written an essay or something
and the fact that you can finance it gets bubble different and what would you on it by this point. I mean, you know,
distorted over time if housing prices point to to the growth of this particular I think it’s going to defy an answer
are going up 10% a year and inflation housing bubble? Some have pointed to be perfectly honest. That doesn’t
is a couple of percent a year. Soon the to cheap money, in essence, some mean that your time is wasted or
price action, or at some point the price have pointed to lack of regulation in anything. Understanding, you know,
action takes over and you want to buy the origination business, some have the pathology of bubbles is not an
three houses and five houses and you pointed to the drive from Wall Street unimportant--we had one that was
want to buy with nothing down and for securitized mortgages and RMBS more severe, in fact there was an
you want to agree to payments that you and then as collateral for CEOs. article in the Omaha World Herald
can’t make and all of that sort of thing Others have pointed to government about three months ago that described
because it doesn’t make any difference, policy that created the housing bubble. how it was more severe, we had a
it’s going to be worth more next year. What do you think created and caused bubble in the Midwest in the early ‘80s
And the lender feels the same way. this housing bubble? in farmland that created much more
Doesn’t really make difference if it’s a financial dislocation, but it was limited
liar’s loan or you don’t have the income Warren Buffett: to the farm belt than this particular
or something because even if they have It’s a great question to which I don’t bubble has which has not hit as hard
to take it over, it’ll be worth more next have a great answer. Why did the, in terms of housing in the Midwest.
year. Once that gathers momentum I don’t know whether the tulip bulb So Nebraska was much harder hit
and it gets reinforced by price action bubble was in 1610 or 20 but tulips in the farmland bubble. And the
and the original premise is forgotten had been around before and they’d farmland bubble had the same logic to
which it was in 1929. The internet, always looked beautiful and people had it. Inflation was out of control, Volcker
it’s the same thing. The internet wanted them in their tables and all that. hadn’t really come in with his, with his
was going to change our lives, but it And for some reason it gets to a critical meat axe to the economy and people
didn’t mean that every company was mass, this critical point where price said, you know, you’re not making
worth $50 billion that could dream action alone starts dominating people’s more farmland, there are going to be
up a prospectus and the price action minds. And when your neighbor has more people eating, farmland gets
becomes so important to people that it made a lot of money by buying internet more productive by the years, we learn
takes over their minds. And because stocks, you know, and your wife says more about it, fertilizers and all that
housing was the largest single asset that you’re smarter than he is and he’s sort of thing. And cash is trash so you
around 22 trillion or something like on richer than you are, you know, so why should go to, and own something real
about, you know, a household wealth aren’t you doing it. When that gets to a which was a farm. And I bought a farm
of 50 or 60 trillion or something like point, when day trading gets going, all from the FDIC and well, no, it was the
that in the United States, such a huge of that sort of thing, very hard to point FDIC I think. They took over a bank
asset, so understandable to the public. to what does it. I mean, it, you know, 30 miles from here, I bought up a farm
They might not understand stocks or we’ve had hula hoops in this country, for $600 an acre that the bank had lent
the internet, you know, they might we’ve had pet rocks, I mean, you know, $2,000 an acre against. And the farm
not understand tulip bulbs, but they and this is the financial manifestation didn’t know what I’d paid for it or the
understood houses. And they wanted of, you know, a craze of sorts. And I, other guy had paid, or lent on it. And
to buy one anyway and the financing, it’s very hard to tell what got the--all that farm had a productive capacity of
and you could leverage up to the sky, it the, you can name a lot of factors that probably $60 an acre in terms of what
contribute to it but to say what is the corn soybeans were selling for. To lend

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FCIC Interview with Warren Buffett | 6

$2,000 against it when interest rates before in a case against Freddie Mac’s the financial world and the economy
were 10% was madness. And both the CEO where you had indicated that you was going to come out of this situation
banks in [unintelligible] and Nebraska became troubled when Freddie Mac that, of paralysis in September of 2008
went broke because they went insane. made an investment unrelated to its and I made the fundamental decision
They got through the ‘30s alright, but mission. And you were quoted in that that we had really the right people in
the psychology that farms could do article as saying that you didn’t think Bernanke and Paulson and in there
nothing but go up took over. And that that it made any sense at all and you with the President would back them
was a significant, but very miniature were concerned about what they might up. That we had a government that
version of what could happen with be doing that I didn’t know about. would take the action and only the
houses country-wide. What was that investment unrelated to government could. It would take the
its mission? action to get an economic machine that
Interviewer: had become stalled basically back into
Now earlier you referenced the GSEs Warren Buffett: action. And I didn’t know what they
and it’s been reported that in 2000 you As I remember it was Philip Morris would do, I didn’t know what Congress
sold nearly all of your Freddie Mac and bonds, I think, I could be wrong, it would go. It didn’t really make much
Fannie Mae shares. What persuaded might be R.J. Reynolds or something. difference. The important thing was
you in 2000 to think that those were no But they’d made a large investment in the American public would come to
longer good investments? that. Now they’re dealing essentially believe that our government would do
with government guaranteed credit. whatever it took. And I felt it would,
Warren Buffett: We knew that then, we’ve had it ratified it would have been suicide not to. But
Well, I didn’t know that they were not subsequently by what’s happened. So it hadn’t been done in the early ‘30s
going to be good investments. But I here was an institution that was trying and therefore those companies like
was concerned about the management to serve two masters, Wall Street and General Electric or Goldman Sachs
at both Freddie Mac and Fannie her investors, and Congress. And they were going to be fine over time. But
Mae although our holdings were were using this power to do something it was a bet, essentially, on the fact that
concentrated in Freddie Mac. They that was totally unrelated to the the government would not really shirk
were trying to and proclaiming that mission and then they gave me some its responsibility at a time like that
they could increase earnings per half-baked explanation about how to leverage up when the rest of the
share in some low double digit range it increased liquidity which was just world was trying to de-leverage and
or something of the sort. And any nonsense. And the truth was they were panicked.
time a large financial institution starts arbitraging the government’s credit.
promising regular earnings increases And for something the government Interviewer:
you’re going to have trouble. It isn’t really didn’t intend for them to do. Around that same time on October
given to man to be able to run a financial And, you know, there’s seldom just one 17, 2008 you wrote an op-ed piece
institution where different interest cockroach in the kitchen, you know. in the New York Times on why you
rates scenarios will prevail and all of You turn on the light and all those were buying American stocks. And did
that comes to produce smooth regular others all start scurrying around. And anyone from the federal government
earnings from a very large base to start I wasn’t, I couldn’t find the light switch or Federal Reserve ask you to write
with. So if people are thinking that but I’d seen one. that?
way they’re going to do things maybe
in accounting it’s turned out to be the Interviewer: Warren Buffett:
case in both Freddie and Fannie but Shifting to more recent times. You’ve No, no.
also in operations that I would regard made investments in Goldman
as unsound. I don’t know when it’ll Sachs in September of 2008 and in Interviewer:
happen, I don’t even know for sure if General Electric. What were your And similarly, I know you weren’t
it’ll happen. It will happen eventually considerations when you made those persuaded by anything the government
if they keep up that policy and so, we, investments and were you persuaded asked you to do but did anyone ask you
or I just decided to get out. by any government official to make to make any investments in financial
those investments? companies such as Goldman?
Interviewer:
The Washington Post reported Warren Buffett: Warren Buffett:
on October 31, 2007 that you had I wasn’t persuaded by, I was, in my own No. Well, Goldman asked me to and
provided some testimony the day mind, there was only one way the, both GE asked me to and a number of other

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FCIC Interview with Warren Buffett | 7

companies asked me to but nobody money. And the idea that they would insurance. And, you know, I don’t
from government. walk away and think, ah, I’ve been think the way--I don’t see a connection
saved by the federal government when between selling insurance and
Interviewer: I think just the companies I named thinking something can be systemically
No one from government? there’s a least a half a trillion dollars dangerous if again carried to extremes
of loss that the common shareholders in terms of the leverage produced and
Warren Buffett:
now--there’s another question with the scope of contracts entered in but
No.
managements which we might get into I don’t see anything improper about
Warren Buffett: later. But in terms of moral hazard I credit insurance.
I have, I have, actually, testified that in don’t even understand why people talk
about that in terms of equity holdings. Warren Buffett:
the connection with Lehman was trying
Banks are doing that for decades with
to raise some money in the spring of
Interviewer: letters of credit and that sort of thing.
2008 and Dick Fuld was calling me
Do you think we would have been
and he did get Hank Paulson to call but Interviewer:
better off though, if we had not the
Hank did not urge me to buy. He was And in terms of though your concern
infusion of government assistance?
responding to the entreaties of Fuld with derivatives, is it a question of the
that he make a call but I was not asked Warren Buffett: type of product or is it a question of
to buy anything. Wouldn’t have done I think it would be a disaster, you know. the use or both?
any good if they’d asked. (laughs) It would have. It would have been the
disaster of all time. Warren Buffett:
Interviewer: It’s a question of being, it’s the ability
Do you believe that your prominence Interviewer: to inject enormous amounts of
as an investor and your stock purchases I’d like for you to try to help me square leverage into a system where leverage
could alleviate the financial crisis, was something you’ve been quoted as is dangerous. And without people fully
that--? saying about credit default swaps and appreciating the amount of leverage
I’m sure my colleague Chris Seifer and as a handmaiden of leverage, a
Warren Buffett:
has been focusing in on these areas, risk of counterparties running up huge
That was not a motivation.
he’ll ask you additional questions. But amounts of receivables and payables.
Interviewer: you’ve been quoted as saying credit And one of the reasons stock markets
Was that a consideration? default swaps were financial weapons work well is that you’ve got a three day
of mass destruction. settlement period. But if you have a
Warren Buffett: one year settlement period--in fact,
No, no, not a bit. (laughs) My public Warren Buffett: I think over in Kuwait they did some
spirit has stopped short of $8 billion. Well, I, I, no, I said derivatives. years ago, and they had a total debacle-
-you would have far more problems.
Interviewer: Interviewer: Well, derivatives and bonds are very,
Would the American economy have Derivatives, excuse me. very long settlement period and things
been better off in the long run if there’d can happen between when you write a
Warren Buffett:
had been no exceptional government contract and if you have a settlement
Yeah, were financial--systemically
assistance to financial institutions? In period, there was one at Gen Re that
they represented potential financial
other words do you think that we’ve was 100 years, very hard to predict the
weapons of mass destruction. And I
increased the likelihood of moral behavior of somebody else 100 years
think, I don’t think there’s any question
hazard in the long run? from now. (laughs) And derivatives
about that.
present big problems. Now, if there’s
Warren Buffett: only a small amount in use it doesn’t
Interviewer:
I think the moral hazard thing is make that much difference to the
And in 2008 you began to invest in
misunderstood in a big way. There system. But if they become more
credit default swaps and I understand
is no moral hazard existing with and more pervasive, more and more
that--
shareholders of Citigroup with Freddie imaginative and less, and in effect
Mac, with Fannie Mae, with WaMu, Warren Buffett: very little attention being paid to them
with Wachovia, you just go up and down Yeah, we’ve sold insurance for a lot which is why I sounded a warning. I
the line. I mean, those people lost of years and sometimes that’s credit don’t think they’re evil per se, it’s just,
anywhere from 90% to 100% of their

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FCIC Interview with Warren Buffett | 8

they, I mean there’s nothing wrong with commented on what you view as buy a stock, I don’t care whether they
having a futures contract or something speculation in one of your letters. But close the stock market tomorrow for a
of the sort but they do let people we’ve had some internal conversations couple of years because I’m looking to
engage in massive mischief. And the within the Commission itself about the the business, Coca-Cola or whatever it
thing I found really extraordinary-- use of the term speculation whether it’s may be to produce returns for me in
and Tracy, you might give them that a-- the future from the business. Now if I
letter-- I mean I wrote this letter care whether the stock market is open
in 1982, about the date--the, here, Warren Buffett: tomorrow then I say to some extent
you’ve got a Commission that’s doing It’s an interesting--defining investment, I’m speculating because I’m thinking
what before I did, you know, many speculation and gambling is an about whether the price is going to up
years ago. And when we had those interesting question. tomorrow or not. I don’t know where
hearings after ‘29 we decided leverage the price is going to go. And then
was dangerous for people and it could Interviewer:
gambling I would define as engaging
cause systemic problems when used I’d be interested in, you know, what
in a transaction which doesn’t need to
in the stock market. And we had the you think speculation is as opposed
be part of the system. I mean, if I want
Federal Reserve power to determine to investing which you’ve written
to bet on a football game, you know,
margin requirements. We said that about and also what you think excess
the football game’s operation is not
was important and that if people got speculation or excess risk is in that
dependent on whether I bet or not.
over leveraged in the stocks they could context.
Now, if I want to bet on October wheat
cause a problem not only for themselves Warren Buffett: or something of the sort people have
but for others if it was done on a wide It’s a tricky definition, you know, it’s to raise wheat and when they plant it
scale. And then we came along in 1982 like pornography (laughs) the famous they don’t know what the price is going
and we in a sense opened up leverage quote and all that, but I look at it be later on. So you need activity on
to anybody in extreme measures and in terms of the intent of the person the other side of that and who may be
since that time, 28 years since then, engaging in the transaction. And an speculating on it but it is not an artificial
I and perhaps others, but I know I investment operation and that’s not the transaction that has no necessity for
pointed out at least 20 times the, really way Graham defines it in his book, but existing in an economic framework.
nonsense of saying somebody at the an investment operation in my view is And the gambling propensity with
Federal Reserves telling people they one where you look to the asset itself people is huge. I mean, you took a,
can only borrow 50% against stocks to determine your decision to lay out you know, some terrible sand out in
or whatever the margin requirements some money now to get some more the west about 100 years ago and you
have been at various times. And then money back later on. So you look to the created, you know, huge industry with
at the same time telling them that apartment house, you look to the stock, people flying thousands of miles to
you can go gamble, you know, in S&P you look to the farm in terms of what do things which are mathematically
futures or something, the 2% or 3% that will produce. And you don’t really unintelligent, you know. Now that
margin or whatever it might be and to care whether there’s a quote under it is, shows something in mankind that
this day, and I’ve talked to Congress all. You are basically committing some has a strong, strong behavioral, has
about it and to this day we sit there funds now to get more funds later on a strong behavioral aspect to it and
with a system where the Federal through the operation of the asset. think how much easier it is, you know,
Reserve is telling you how much you Speculation, I would define, as much to sit there in front of a computer
can borrow against stocks and we’ve more focused on the price action of and have the same amount of fun
got this parallel system where people the stock, particularly that you buy or without, you know, getting on a plane
can gamble anything they want the indexed future or something of the and going a 1,000 miles and having
virtually in terms of the most obvious sort. Because you are not really, you to make reservations and do all that
one being the S& P futures. And I’ve are counting on, for whatever factors, sort of thing. So with this propensity
seen no attempt by anybody to address could be quarterly earnings, could be to gamble encouraged incidentally by
that total contradiction. Might be a up or it’s going to split or whatever it the state with lotteries, you know, with
suggestion for your Commission. may be or increase the dividend, but terrible odds attached to them, people
you are not looking to the asset itself. don’t have to be trained to want to
Interviewer: gamble in this country but they, they
And I say the real test of how you,
On that vein we’ve been charged have this instinct, a great many people.
what you’re doing is whether you care
with talking about excess risk and They’re encouraged when they see
whether the markets are open. When I
excess speculation and I know you’ve some successes around, that’s why

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FCIC Interview with Warren Buffett | 9

the bells and whistles go off in the houses kept going up, you know, after Interviewer:
casino when somebody hits a jackpot, a while people quit listening and it (laughs) Do you think if Fannie had
you know. So, you know, you have all [unintelligible] because they’re nuts tighter standards and tighter controls
these things pushing to that including anyway, you know, anything that’s going that we could have averted a financial
governmental urging to buy lottery on so you, you have a fringe element crisis?
tickets and all that sort of thing. And to Cassandras too. Conceivably, you
now you’ve got a vehicle like, you know, know, if the President of the United Warren Buffett:
S&P futures or something where you States, you know, or the Chairman of Well, Freddie and Fannie were in a
can go in and out and where Congress the Fed or somebody made a strong position--whether they were practically
has granted particularly favorable tax statement, Greenspan made a strong in that position, whether Congress,
treatment to you if you win. I mean, statement I remember in 1996 you you know, would have tolerated them
you can be in for ten seconds and have know about irrational consumers, you coming out with really much stricter
60% long term gain which I regard as, know, that didn’t stop the stock market. standards, I don’t think it probably
you know, extraordinary. But it exists. When people think there’s easy could have happened. I’m not sure
money available they’re not inclined they wanted it to happen either. I
Warren Buffett: to change. Particularly if somebody mean, they were enjoying the party
That’s all I know about gambling, said a month or two ago watch out too. And they didn’t think the party
actually speculation (laughs) but I do for this easy money and then their was going to end like this. I mean,
know it when I see it. neighbors made some more money in it wasn’t like somebody was thinking
the ensuing month or two, it’s just, it’s this is going to end in a paralysis of the
Interviewer: American economy, you know. They
overwhelming. And we’ve seen it.
My last question before I turn things just, they started believing what other
over is, you’ve mentioned management Interviewer: people believed. It’s very tough to fight
and people have observed that there And the failures of regulators? Were that. We will have other bubbles in
has been failures of management at there any? the future, I mean, there’s no question
Wall Street banks. Similarly people about that. I don’t think the President
have described there to be failures of Warren Buffett: of the United States, you know, could
regulators during this crisis. Well, oh, I mean they are failures have stopped it by rhetoric. And I think
of everybody in one sense. But the if any President of the United States
Warren Buffett: biggest failure is that were unable to had said, you know, I’m campaigning
Failures of the media, failures of, you act contrary to the way humans act on a program of 30% down payments,
know, Congress failures, you know. in these situations. I mean, it would verified income and not more than
Commentators, you know. have, you can say regulators should 30, you know, they might not have
have been out there screaming about impeached him but they sure as hell
Interviewer:
the fact you people are doing foolish wouldn’t have re-elected him. (laughs)
How did management fail and what
things and sure, regulators could have
do you view as the essential failures in
stopped it. If a regulator said, or Interviewer:
management of the Wall Street firms
Congress could have stopped--Freddie Thanks. I’m going to primarily ask you
and similarly what would you view as
and Fannie, if Freddie and Fannie had about derivatives generally but I want
the failures of the regulators leading up
said, you know, we will only accept to ask you about a couple of things
to and during the crisis?
mortgages with 30% down payments, different first. In your most recent
Warren Buffett: verified income and the payments can’t shareholder letter you talked about
Well, they didn’t anticipate, you know, be more than 30% of your income, you how Berkshire Hathaway--
how extraordinary a bubble could be know, that would have stopped it. But
who, you know, who could do that. Interviewer:
created, you know. And very difficult
That Berkshire Hathaway would never
to fault them because so few people
Interviewer: become dependent on the kindness of
have a difficult time doing that when
Do you think if Fannie-- strangers.
a crowd is rushing in one direction
knowing the other direction is very Warren Buffett: Warren Buffett:
hard. And usually the people that In fact, if I think you recommend that Absolutely.
do that become discredited by the (laughs), of course for future mortgage
price action, you know. If you were actions you better get an unlisted Interviewer:
a Cassandra in 2005 or 2006 and phone number. And too big to fail was not a fallback

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FCIC Interview with Warren Buffett | 10

position and that the company would Interviewer: Warren Buffett:


always have sufficient cash apparently And I understand that is, I’m just Well, all of that is good. I mean, that’s
in the magnitude of $20 billion these asking if, your opinion, is the answer to better than what existed before. But I
days so that would not be a problem. the too big to fail problem make them think it has to be far more Draconian
Generally when you look at the issue of hold more cash? than that, to really change behavior big
too big to fail, is it just a liquidity issue? time. And the difference is between
Do you have enough cash? No one’s Warren Buffett: a guy making $100 million and $50
too big to fail because the issue will The answer, and it isn’t a perfect million, you know, that, I don’t think,
never come up? answer, you will always institutions too or clawing back $25 million of it, sure,
big to fail and sometimes they will fail you know, it registers but it doesn’t, I
Warren Buffett: in the next 100 years. But you will have don’t think it changes behavior that
You’ll have the institutions too big to fewer failures if the person on top and much compared to at least what I
fail. We still have them now, I mean, the Board of Directors who select that would have in mind.
we’ll have them after. Your Commission person and who set the terms of his or
reports, certainly I mean Freddie and her employment if they have a lot to Interviewer:
Fannie we’ve totally acknowledged we lose. And in this particular incident the Do you and the next I was going to ask
got--and incidentally are too big to fail. shareholders have got probably it’s well you, what are the more Draconian--
I’m not quarrelling with the policy on over half a trillion, maybe approaching
it and they aren’t too big to wipe out a trillion, they’ve suffered the losses, Warren Buffett:
the shareholders though, I mean. So society has suffered the losses from I think it’s enormously important when
it isn’t, you know, society has done the all the disruption in the second place. you get very big financial institutions
right thing with Freddie and Fannie Directors and CEOs, CEOs, you know and maybe in other cases too, well,
in my view. They’ve wiped out the they only have 80% of what they had we’re in a building run by the Keywood
shareholders, nobody’s got any illusion before, but they’re all wealthy beyond Company. It’s the most successful
that the government is protecting them the dream of most Americans. The construction company in the world
as an equity holder. They do have the Directors, you know, have collected and it has been for decades. Nobody’s
belief that they will be protected as their $200,000 or $300,000 a year and ever heard of it but it’s huge and it’s got
debt holders but we were sending that they’re protected by insurance. And a set of management principles and
message well before the bubble. I so the people that are in a position basically it started with Pete Keywood
mean, you know, Congress would say to make decisions day by day as to saying that arranging a compensation
technically we aren’t backing them and trading off the safety of the institution system so that the company got in
they’ve only got this two and quarter vs. the chance for improving quarterly trouble not only he went broke but all
million or whatever it was line of. But earnings or something of the sort, you the people that got him in trouble went
Freddie and Fannie paper was held need different incentives in my view. broke. And you, when you have the
all over the world and, you know, in And so far nothing’s been done on that. ability to do things with government
a world where the other guy’s got guaranteed money as the banks or
nuclear bombs (laughs) you’re sort of Interviewer: something, or Freddie and Fannie
implying to them that the government So let me ask you because another area whatever it may be, you need a person
was standing behind this. I don’t think we look at is a potential contributing at the top who has all of the downside
you would have wanted to default on cost of financial crisis are compensation that somebody has that loses their job,
Freddie and Fannie, so I think we’ve structures and incentive structures you know, working in an auto factory
done the right thing. But there will within firms. And you have seen a lot or something of the sort. And that
be institutions that are too big to fail of firms, you know, come out since the will change behavior. Now, you can
but they’re not too big to wipe out the crisis and say, oh well, now we’re doing argue it may make them too cautious,
shareholders--and I would argue that things differently. Now we pay more of I mean that, so you want some upside
they’re not too big to, I think there our executives in stock. Now the stock for them, too, I mean, you want them
should be different incentives with or cash bonuses are subject to claw to balance somehow their interest
institutions like that with the top, the back provisions and vesting periods or in a way that society might balance
top management. They’re not too big whatever. Do you have any thoughts its interest. And as part of that with
to send away to the CEO that caused on, you know, how you do make them the CEO I think you need important
the problem, away without a dime. have accountability for when things go but far less Draconian arrangements
wrong? in terms of Directors. Because they
can’t evaluate risk in a large institution

www.santangelsreview.com
FCIC Interview with Warren Buffett | 11

or have risk committees telling them has to say, well, we’ve got a .320 hitter suggests a compensation consultant.
what’s going on. But they can set the because they couldn’t be responsible But a compensation consultant
terms of employment for the CEO in for picking a guy that bats .250. So who is Draconian is not going to get
a way that will make him terribly risk you have this racheting effect which hired, generally around, or even too
conscious and if they don’t do that, if I’ve talked about a lot of times. And innovative on the downside, there’s
they haven’t done it effectively, I think the more information that’s published just--so it is, you know, it’s the agency
there should be significant downside about compensation in a way, the worse problem that the economist would call
to them. I’ve suggested to them that it’s gotten in terms of what people do. it. But it’s very, it’s very hard, over time-
maybe they give back five times the Because they look at the other guy and -and then you’ve got this comparison
highest compensation they received in he’s got personal use of the plane or factor which embodies all the other
the previous five years or something. It whatever it may be (laughs) and that things I just mentioned and then they
has to be meaningful but it can’t be so gets built into the next contract. So, get into the system and people say,
Draconian that you don’t get Directors. it’s changed over the years and the well, we didn’t hire a guy in the bottom
You’ll get CEOs, you don’t have to downside is not parallel, the upside in quartile to be our CEO so we’re not
worry about that, if you’ve got a lot of terms of innovation. going to compare to the bottom
upside for CEOs you can give them the quartile, we’re not getting compared
downside of, you know, sack cloth and Interviewer: to the next to bottom quartile. So it
ashes and you’ll still get CEOs that-- Well, let me ask you other than looking just ratchets up and we’ve seen it. And
at perhaps more Draconian measures I am the comp committee for 70-some
Interviewer: for money and compensation that is companies which Berkshire owns. It’s
The downside of course is just zero received, do you have any opinions not rocket science. And we pay a lot
because they file bankruptcy and that’s on just the amounts that are paid in of money to some of our CEOs but it’s
it. I had a question for you though whatever form in the first place. And all performance. When they make a
related to that, in the 50 years plus that for example, one of things we see, and lot of money it’s performance related.
you’ve been investing have you seen frankly I saw this before I came to the And we have different arrangements
changes in compensation approaches, FCIC is you always read in a proxy for different people. But we’ve never
policies, attitudes with respect to statement that all these companies go hired a compensation consultant,
senior management at these various-- out and hire somebody to do a survey ever. And we never will. I mean, if
and see, you know, to come up with I don’t know enough to figure out the
Warren Buffett: executive compensation and they’re compensation for these people, you
Well, it’s gradually, maybe not, yeah, looking at a bunch of companies that know, somebody else should be in
it’s changed over the years and you’ve pay their executives a lot of money. my job. And the test is how do they
seen it just in the relationship of top And they say, okay, you should get a perform and do they leave for other
management compensation to the whole lot of money too. places and, you know, we’ve got the
average employee. So it has gotten
record on that. The problem, you
considerably more generous-- if Warren Buffett:
know, I’m in a position of control, I
you want to use that term - from 50 Ratchet, ratchet, ratchet, that’s the
am the stockholder of these subsidiary
years ago. There used to be a few name of the comp board.
companies and when you get people
outstanding--Bethlehem Steel was
Interviewer: in between who are getting paid, you
famous for paying a lot of money and
I mean, is, do you have any opinions know, $200,000 to $300,000 a year
you go way, way back and all that, but in
on just the level of executive being on a Board which is important
general it wasn’t expected. And there’s
compensation? to some of them and where they’re
some ironic aspects to that because
hoping that they get put on some other
in a sense the SEC has required
Warren Buffett: Board so they’ve got another $200,000-
more exposure in pay packages and
Well, it’s perfectly understandable, I $300,000 a year, they are not exactly
everything like that so you’ve got this
mean, you’ve got a CEO that cares going to be doberman pinschers, you
envy factor, I mean, you know, the
enormously about his compensation. know, in policing things.
same thing that happens in baseball. I
mean, if you bat .320 you expect to get You’ve got a compensation committee
that meets, you know, for a few hours Interviewer:
more than .310 and nobody knows in In terms of, we’ve seen Bear fail,
business whether you’re batting .320 maybe every meeting. You’ve got a
human relations vice president who Lehman fail, Merrill essentially fail
or not so everybody says they’re a .320 and get acquired by BofA and Morgan
hitter. And the Board of Directors is working for the CEO that probably
Stanley and Goldman both received

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FCIC Interview with Warren Buffett | 12

government assistance and Goldman a contributing cause or part of the story to, I wouldn’t know how to get more
received the benefit of your investment of what happened on the street? specific than that.
too. All of those investment banking
franchises, I believe the compensation Warren Buffett: Interviewer:
structure was essentially minimum Comp, most of the comp, you’re Well, then, let me ask you this then. If
45% of net revenues was getting paid talking about individual trader or the CEOs and their spouse--unlucky
out in comp, some years even higher. something, you know, and they have, marriage there--you know, have to give
Any opinion on that structure? you know, they call it trader’s option. back everything--
That they’ve got the upside, they have
Warren Buffett: a good year and they have a bad year, Warren Buffett:
I can tell you it’s very hard to change. you know. They might not have a good You’d think the spouse would be
I was at Solomon (laughs) and it, the year again next year, they might go to a better police than the regulator
nature of Wall Street is that overall it a different firm but they really, their (laughs)
makes a lot of money relative to the interests are not totally aligned with
number of people involved, relative shareholders. And I would say this, I Interviewer:
to the IQ of the people involved and think most managements of Wall Street You know, that they need to give
relative to the energy expended. firms and I was around Solomon and I everything back or be shown the door,
They work hard, they’re bright, but know what happens at [unintelligible], if the company needs government
they aren’t, they don’t work that they’re trying, they want to align them, assistance, there are CEOs at some
much harder or that much brighter I mean, it isn’t, you know, it isn’t like firms that got government assistance
than somebody that, you know, is the top management is oblivious to this that are still there including for
building a dam someplace, you know, problem. But I can just tell you, being example Mr. Blankfein that I’ve at
or a whole lot of other jobs. But in a at Solomon personally, it’s just, it’s a least read you said, boy, if they’re going
market system it pays off very, very real problem because the fellow can go to replace Blankfein I’d like to replace
big, you know. And it, in effect, you next door or he can set up a hedge fund them with his brother.
know, boxing pays off very big now or whatever it may be. You don’t, you Warren Buffett:
compared to what it did when the only don’t have a good way of having some Yeah, I don’t think they needed
auditorium we had was 25,000 seats guy that produces x dollars of revenues assistance. The system needed
at Madison Square Garden and now to give him 10% of x because he’ll assistance then but if, when they had
you’ve cable television so you can put a figure out, he’ll find some other place that famous meeting at the treasury
couple of, you know, lightweights who that will give him 20% of x or whatever on Monday if they hadn’t called on
you’ll never of again, you know, on pay it may be. It is a tough managerial Goldman Sachs and they called on the
per view and they’ll get millions for it problem, but I think the best thing others, Goldman would have been fine.
now. Market systems produce strange again, if you’re worrying about the Bear The system needed to be supported,
results and Wall Street, in general, the Stearnses of the world or anything is just, you know, it wasn’t important the
capital markets are so big, there’s so to have an arrangement in place that precise action. It was that the world
much money, taking a small percentage if they ever have to go to the federal had to see that the federal government
results in a huge amount of money per government for help that the CEO and was going to do whatever it took. And
capita in terms of the people that work his spouse come away with nothing. nobody knew whatever it took meant.
in it. And they’re not inclined to give And I think that can be done. And I But they did need to see conviction,
it up. think if society is required to step in action and all of that. And Bernanke
and, you know, come up with all kinds and Paulson they could have called on
Interviewer: of things, disrupt, you know, the lives
When you see the general nine different other institutions, these
of millions of Americans in various were particularly good names to have
compensation structure in terms of ways, I think there ought to be a lot
percentage payout and the types of there, but had gone through the same
of downside. And I think that would mechanism and Goldman Sachs would
structures they have with ever different change behavior more than any, trying
levels of Draconian claw backs or have been fine, Wells Fargo would
to write some terribly complicated have been fine. They didn’t need
whatever and the risks that were taken thing, you know, that only 38% of us
that resulted in failures and bailouts, I the money, the system needed the
can (laughs). I just don’t know how reassurance that the government was
mean, do you see in the big, you know, to write rules otherwise. This would
the compensation picture in general as going to act.
get their attention and I wouldn’t try

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FCIC Interview with Warren Buffett | 13

Interviewer: or market participants that work with Interviewer:


It’s, we’ve been reported when you derivatives. And, of course, we’ve And just broadly, whether it’s interest
made the investment in Goldman read, you know, what you’ve written in rate, foreign exchange commodity
in September of ‘08 that you were, the shareholder letters, the weapons equities or credit derivatives, do
you know, somewhat betting on the of mass destruction, they can lead to you have a view on whether they
government taking some type of action. excess risk and leverage and there’s contributed or caused the financial
counterparty risk. At the same time crisis, what role they played whether
Warren Buffett: if they’re managed effectively they it was a cause, a contributing cause, a
Not in relation to Goldman though, but can be fine although I think in your propagating mechanism or anything?
in the, no, I was betting on the fact the shareholder letters you’re primarily
federal government would show the talking about credit derivatives there Warren Buffett:
will to the American people that they but I may be mistaken. Anything that increased leverage
would, in effect, do whatever it took to significantly tends to make, it can’t
re-start the engine. Warren Buffett: even create a crisis, but it would tend
Well, when we buy the Burlington to accentuate any crisis that occurs.
Interviewer: Northern, they’re hedging diesel fuel. So I think that if Lehman had been
So, I don’t know if you can answer this Now what I tell them is I wouldn’t do less leveraged there would have been
question because it’s somewhat of a it if I were them but it’s entirely up to less problems in the way of problems.
hypothetical but if you knew then that them. I mean, diesel fuel’s a big cost And part of that leverage arose from
the government was not going to put for them and they’ve got pass-through the use of derivatives. And part of the
any money into Goldman would you costs to some of the people that use dislocation that took place afterwards
have still made the investment? the railroad and they don’t have pass- arose from that. And there’s some
throughs so they’re exposed partly. interesting material if you look at, I
Warren Buffett: The only, I tell them if they really don’t don’t exactly what Lehman material I
Oh, yeah, it wouldn’t bother me want diesel fuel on the market we’ll was looking at, but they had a netting
whether I’m going to put it in Goldman just close up the railroad and then all arrangement with the Bank of America
but if I thought the government was trade diesel fuel all day, you know. And as I remember and, you know, the day
not going to reassure the American if they don’t know it, they’re going to before they went broke and these are
public through acts, speeches whatever be out the frictional costs over time. very, very, very rough figures from
it might be that they were going to do The reason many of them do it is that memory, but as I remember the
whatever it took to save the system, they want, the public companies, they day before they went broke Bank of
I would have, you know, got my want to smooth earnings. And I’m not America was in a minus position of $600
mattress out. But, Goldman did not saying there’s anything wrong with that million or something like that they had
need the money, the system needed but that is the motivation. They’re not deposited which I think J.P. Morgan
the reassurance. But Goldman would going to, they’re going to lose as much in relation to Lehman and I think that
have been, if they’d ever been called on the diesel fuel contracts over time the day they went broke it reversed
down there they would have been fine. as they make but they can protect to a billion and a half in the other
I wouldn’t have put the money in if themselves just like Coca-Cola does direction and those are big numbers.
I thought Goldman needed specific on foreign exchange and they make a And I think the numbers are, I think
government action. But I also would big thing of this. I wouldn’t do it, they I’m right on just order of magnitude.
not have put the money in if I thought do, but all kinds, most companies what So when things like that exist in
the government was going to stand by to do that. Anheuser-Busch was just the system, you know, that’s under
and watch things unfold. talking about it in Business Week a stress for other reasons, it becomes a
few weeks ago how they do it. It’s a magnifying factor. How big of one you
Interviewer:
common practice. It’s overdone in my don’t know. But Lehman would have
Okay. So now let’s actually turn to
view, but it is the response to the fact had less impact on the system if they
derivatives, I didn’t think we’d spend
that the market doesn’t like the fact that had not had the derivative book they
that much time--the statute amongst
diesel fuel could affect the earnings of had. Now they had plenty of bad real
other things tells us to look at the
Burlington or Union Pacific up and estate investments and a whole bunch
role of derivatives that it played in
down in some quarter when really over of other things as well.
the financial crisis and we have been
time they’re not going to make any,
talking to “many” experts in the field
you know, they’re not going to save any
that, whether they’re academicians
money by doing it in my view.

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FCIC Interview with Warren Buffett | 14

Interviewer: loaded a dice they’re doing for $5 a to devise any reporting system to me
And when you talk about the leverage throw but it makes a lot of difference that would enable me to get my mind
and the counterparty risk from when you get into big numbers. around what exposure that I had and
derivatives are you talking about it wouldn’t have worked. I mean, it
certain types or derivatives, you know, Interviewer: just, the only answer was to get out of
there’s the five categories we see. Do So let me ask you on the issue of it. Can you imagine 23,000 contracts
you have any opinion on--? transparency you wrote in your with 900 institutions all over the world
shareholder letter, not the recent one, with probably 200 of them names I
Warren Buffett: but the one from the year before that can’t pronounce. And all of these
Unfortunately, yeah, unfortunately it’s simply impossible for investors to contracts extending years into the
people were not really imaginative understand and analyze these. It was future, multiple variables, you know,
about derivatives. I mean it started impossible or at least very difficult and all of these, you can’t manage
out with the simple ones, you know, for auditors to audit them and for it. In my view, I wouldn’t be able to
interest rates, swaps and that sort of regulators to regulate them and manage something like that. And
thing, foreign currency. And then after spending time with financial if I read a 10K that’s 300 pages long
the profit got driven away from those. institutions 10K or whatever else you and it describes notional values of all
When I was at Solomon they talked reached for a bottle of aspirin which I this, not to impugn anybody because
about in the plain vanilla contracts can very much appreciate. probably one of the best managed
there wasn’t any money in it anymore really large institutions around, but if
because they were on the screens (laughter) I look at J.P. Morgan I see two trillion
and everybody knew--but what they in receivables, two trillion in payables,
call sometimes the toxic waste, there But, and you also wrote, you know, that
policymakers talk about transparency a trillion and seven netted off on each
was a lot of money in and, you know, side of the 300 billion remaining
the more complicated the derivative, as being a great cure-all for--
maybe 200 billion collateralized. But
well, you remember the situation with Warren Buffett: that’s all fine but I don’t know what
Proctor and Gamble thing from the It’s a great word (laughs). dis-continuities are going to do to
Banker’s Trust and American Greetings those numbers overnight if there’s a,
and all of that, if you read the nature of Warren Buffett: if there’s a major nuclear, chemical or
those contracts where they had these Nobody can be against transparency. biological terrorist action that really
exploding factors, you know, when you is disruptive to the whole financial
got beyond a certain point, the CFO Interviewer: system here, who the hell knows what
of a place like Proctor and Gamble But, you said, you know, look, I don’t happens to those numbers on both
or American Greetings was probably know of any reporting system, you sides or thousands of counterparties
not understanding those things very know, that can fix this. So, I mean, around. So I don’t think it’s -- I think
well. And there’s just more money in obviously, you know, we’re not just it’s virtually unmanageable.
contracts that people don’t understand. looking at causes of the financial crisis
And so they get this proliferation but this whole lack of transparency Warren Buffett:
of these things and who knows particularly in the area of derivatives as Certainly it is, would be for me.
what’s in the mind of the end user you know from taking aspirin for your
of the things that, you know, they’re headaches after looking at 10Ks, is a Interviewer:
protecting themselves against the sort problem. So I’m just wondering what, And let me ask, well, Goldman’s the
of Jefferson County in Alabama and you know, your opinions are and how K, I looked at recently and there I see
all kinds of things. So, you know, it’s, do we address that problem? over a million contracts.
it’s an instrument that’s prone to lots
Warren Buffett: Warren Buffett:
of mischief because long settlement
I think it’s a terribly difficult problem, Over a million contracts
periods, complicated formulas for
sometimes deriving the variables that well, it was so difficult a problem
I didn’t think I could solve it. We Interviewer:
are entering into the eventual payout, They don’t disclose notional values in
it’s got a lot of possibilities for mischief. bought Gen Re which had 23,000
derivative contracts. I could have the K, at least not that I found yet, but,
And a lot’s been caused. And mischief you know, they do disclose when you
doesn’t make much difference if it’s, hired 15 of the smartest people that,
you know, math majors, PhDs and I take out the netting, it’s about one and
you know, one guy, you know, rolling a half trillion dollars both assets and
dice against another and one guy’s could have given them carte blanche

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FCIC Interview with Warren Buffett | 15

liabilities go to BIS and get information could come in with spreadsheets and on, during the height of the crisis on
from Goldman, it’s not in their 10K, it’s explain it all and I always thought that just a relatively small piece of it. If
like 45 trillion when you add up all the was total nonsense. we would accept, if we would change
numbers. from non-collateralized contract to
Interviewer: a collateralized contract, my Wall
Warren Buffett: There’s at least been some recent Street, big Wall Street firm and we
Its bigger at J.P. Morgan. (laughs) reports in the press that you’ve been just say if that’s forced upon us to do
lobbying against the retroactive, that we want $150 million or whatever
Interviewer: adjustment of the retroactive effect or the appropriate number is. We sold a
And I don’t see anything in the Ks and at least some provisions in legislation house in effect that was unfurnished
there is a question coming, I promise, that would require collateral to be-- and if we sold it furnished we would
(laughs) on who the counterparties are.
have gotten more money and if the
So, I mean, does, would that help in Warren Buffett:
government says now later on, two
transparency, some more disclosure on Yeah, we’re not against collateral being
years after we made the deal, you’ve
who the counterparties are? required at all as far as--we do say if
got to give the furniture too we want
you’re changing contracts retroactively
Warren Buffett: to get paid. And I think that would
that if a change in any part of the contract
You can’t design the system, I don’t probably stand up in court incidentally,
is made that the party benefiting from
believe, I mean, I couldn’t design the I mean, if it wasn’t even addressed in
that change should pay the appropriate
system and I’ve got a smart partner, the bill. But we’ll see what happens
amount to the party that’s suffering
Charlie Munger and we, the two of us on--
from it. Now when we put on our
couldn’t design a system or come close contracts because we didn’t want to get Interviewer:
to designing a system that would have ourselves in a position where we were a Sure. Other things we’ve heard from
told us what we were doing. So we problem to the country, we negotiated other folks that I’ll ask your opinion
got out. And we do know what we’re for non-collateral type contracts. Now on, a lot of people seem to think a lot of
doing with the 250 contracts we’ve got. the price of collateralized contracts over the counter derivatives are really
And frankly I think we do a better job we would have received considerably pretty standardized contracts that
of disclosure of our derivatives position more in the way of premiums if we had should be triggered on an exchange.
than any company in the United States, agreed to collateral. Right now we’re Any opinions on that?
you know. We just tell people what looking at one contract where we can
we’ve done but, that’s easy to do with get paid $11 million if we agree to Warren Buffett:
250 contracts or thereabouts and they put up collateral and we can get paid Well, I think it’s very hard to do. I
only fall into a couple of categories. $7.5 million if we don’t agree to put mean, you’ve got right now certain
But I want to know, I want to know up collateral. Every other term of the foreign exchange contracts that are
every contract and I can do that with contract is the same. So all we say is if traded on exchanges. The volume is
the way we’ve done it. But I can’t do these things are changed retroactively, practically nothing. Because there,
it with 23,000 that a bunch of traders we want to be paid for the difference in let’s just take a Swiss Franc contract.
are putting on. I’m putting these on value between a collateralized contract There’s a September contract and
myself and I really only about two or and a non-collateralized contract. a December contract and a March
three decisions that go through my And otherwise, incidentally it isn’t contract. But if we want to hedge
mind in doing that. But to have a just us, Coca-Cola, Anheuser-Busch, some instrument we’ve got and
group of traders putting on thousands you name it, will have to send money we’ve done this with a few contracts,
of them and counting on the behavior to Wall Street as part of the deal that we want to hedge some contract
of party A over here to be the offset to will be changed from before. And that comes due December 16th, we
what might happen with party C and there’s nothing wrong with that, if it’s probably want to have a contract, a
I’m in between, I just, I don’t know a matter of public policy that they want forward contract expires December
how to do that. And I don’t think really all contracts collateralized including 16th. And so whereas it’s easy to have
anybody knows how to do that. And I changing them retroactively. There and I don’t know whether July corn or
probably shouldn’t talk about names on may be a constitutional problem, October corn of whatever it may be
this but I’ve had discussions with very I’m not sure about that. But if the there’s not a big delivery, there’s not a
important people about this in the past difference was paid for the difference big tailoring of the specific industry’s
before the crisis hit and those people between a value of the collateralized requirements. You can get away with
were confident that risk committees contract we were over $150 million four different expiration dates or S&P

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FCIC Interview with Warren Buffett | 16

you can get away with four expiration you don’t need it and if you’re dumb a lot of those will be a lot of personal
dates or something but if you’ve got you shouldn’t be using it. So I’m not ownership anyway. But FDIC is not
a power contract or something of the a big fan of leverage. But leverage the federal government. I mean, that
sort, to deliver electricity on July 15th and incentives are in my view things is banks paying for banks errors but
and you worry about what you might that, try to focus on. And recognizing when society, the U.S. government
have to buy in the merchant market to that there’s a lot of limitations on what starts paying for specific errors that-
do it you’re probably going to need one you can do. But if, I mean, we’ve -I think there ought to be a lot of
that contracted July 15th. And I don’t always felt that way with banks. The downside.
know how you standardize, I mean, it’s bank has the right to use government
very easy to have standardized October guaranteed money in effect. You’ve got Interviewer:
copper and oil, I mean, you know, you to have some limitations on leverage Can I follow up on that. You mentioned
got oil contracts extending out for so then they come up with SIVs and small banks and community banks.
many years or natural gas, but they are derivatives and all kinds of ways to We’ve read stories and certainly
just periodic settlement dates. And increase leverage without breaking the heard reports about community banks
I think that gets, that gets very tough rules. And then, it’s a tough question investing in CDOs investing in--
with a great many derivative contracts. but I would be fairly tough about
But I don’t, I’m no expert on how all how I would go at that. And I don’t Warren Buffett:
this works, I mean, there may be ways like to keep going back to it but I, it They bought a lot of Freddie and
of solving that in terms of exchanges. doesn’t seem to be anything talked Fannie preferreds, a lot of money lost
about much, but the CEO is the guy in that.
Interviewer: making the decisions, I’m making the
Let me ask you about regulation. Interviewer:
decisions at Berkshire. When I make Correct, correct. But with respect
One of the things that we know from the decisions at Berkshire, I’m thinking
doing some research is that, of course, to CDOs and many of them bought
about the fact that a) I’ve got 99% of what were rated as triple A tranches
back in the beginning of the decade my net worth in it and it’s all going to
or the beginning of 2000 was the of CDOs. Over 90% of the ratings on
charities so I mean, if I cause this place CDOs have been downgraded to near
Commodities Futures Modernization to go broke, there’s a lot of downside
Act, that had terms in it that said you or around junk status. How much,
to me. And there’s a lot of downside to putting aside legal responsibility
can’t regulate credit derivatives. So the Keywood Company if they do silly
they went unregulated. Any opinions because credit rating agencies have
things in their construction business. asserted they have a First Amendment
on regulation of credit derivatives or And I think that downside has an effect
derivatives in general? right, how much though responsibility
on people. in the moral sense or otherwise
Warren Buffett: Interviewer: do credit rating agencies have for
I think it’s very tough to do and I will Well, do you think that, I mean, the decisions by the investment
tell you that whenever I hear the you keep coming back to the CEO community to rely on their ratings,
terms modernization or innovation in and accountability for perhaps that triple A meant triple A. How
financial markets, I reach for my wallet unreasonable risks they are taking. Is much responsibility do you think the
(laughs). It’s, usually what they mean that an area that you think regulation credit rating agencies have for these
is revenue producing and I think it’s should address? decisions that the community banks
very tough. I mean that’s what I got made and subsequently made to their
into in my letter of 1982, I mean, you Warren Buffett: demise?
are opening Pandora’s box when you Yeah, I think, but, you know, I’ve never
give people the right to either invest, written a Bill in my life so I don’t know Warren Buffett:
speculate or gamble on very long term how you do that. But I do think that What do you think if you’re a banker?
contracts, you know, with minimal if I were in charge I would have some, Your job is to assess the credit of
margin requirements and all. I mean, yeah, I would, wouldn’t have to be whatever you’re committing to. And
it can pose dangers to the system but it very complicated. I mean, we’re not the interesting thing about those CDOs
gets down to leverage overall. I mean, talking about some small community and a lot of them consisted of hybrid
if you don’t have leverage, you don’t bank or anything. We’re talking about bank securities. I mean, so they were
get into trouble. That’s the only way institutions that require government actually benefiting and there were a
a smart person can go broke (laughs). intervention. The FDIC will take care lot of hybrid bank securities put in the
And I’ve always said if you’re smart of the small banks and all that. I mean, CDOs and they were benefiting from

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FCIC Interview with Warren Buffett | 17

raising money from that forum. And that message across. And you’d think said well, that’s $50 a piece or
that turned out to be a way poorer asset bankers however would have learned something. I mean, you get craziness
than they thought. They created the by the time they get to run a bank. that goes on there. Leverage was not
liability to some degree as they grew. as much a factor in the internet bubble
But I would get back to the fact that if Interviewer: but I think in this particular bubble
you run a bank, you know, I think your Okay. Let’s move away from derivatives because leverage is part of, so much a
job is to assess the credit of when you now and talk about, I mean, we talked part of real estate that once you loosen
lay out money whether you’re buying about several areas already today about up on that, you provide fuel because
U.S. treasuries, whether you’re bonds your views on causes or contributing that bubble will get even bigger and
of Greece, whether you’re buying or causes to the financial crisis. Of course you made the pop even bigger when it
lending money to, for construction we have a statute with a gazillion things finally did pop.
and, I think I would not want to cop out in there telling us to investigate and I
really, I was relying on a rating agency. know time’s probably starting to run Interviewer:
And the rating agencies they have short so I’d like to first just ask you, Any views on the role of fraud, whether
models and we all have models in our you know, what haven’t you told us in mortgage fraud or other types of fraud
mind, you know, when we’re investing terms of do you think were, you know, in the crisis?
but they’ve got them all worked out, important contributing causes of the
you know, with a lot of checklists and crisis. And then I’m going to try to Warren Buffett:
all of that sort of thing. I don’t believe quickly go down the list in our statute No, I mean, it was obviously a lot of
in those myself, only to say I’ve got and get your ideas on this. fraud. There was fraud on the parts of
a model in my mind, everybody has the borrowers and there were frauds
a model in their mind when they’re Warren Buffett: on part of the intermediaries in some
making investments. But reliance on Well, I think the primary cause was cases. And, but, you better not have
models, you know, work 98% of the a almost universal belief among a system that is dependent on the
time but it’s, they never work 100% everybody, and I don’t ascribe absence of fraud. (laughs) It will be
of the time. And everybody ought to particular blame to any part of it, but with us.
realize that that’s using them. it’s Congress, media, regulators, home
owners, mortgage bankers, Wall Street, Interviewer:
Interviewer: everybody that house prices would go What about, you know, another thing
You mentioned transparency earlier as up. And you apply that to a 22 trillion that we, I think we’ve seen in the last
well. These CDO instruments were dollar asset class that’s leveraged up ten years was different was a lot of
largely opaque in terms of compositions in many cases and when that goes financial institutions before used to
and the like to the investors who wrong you’re going to have all kinds of originate loans and, you know, how
were investing in them. They were consequences and it’s going to hit not novel, carry them on their books. But
structured and created though around only the people that did the unsound now we see, you know, the proliferation
the ratings and in connection with the things but to some extent the people of mortgage brokers, originate to
ratings and the rating agencies. Do that did the semi-sound and then distribute models, the street packages
you think, though, that because of finally the sound things even if it is and securitizes, sends it off to someone
the opaqueness of these instruments allowed to gather enough momentum else who maybe either keeps it or
ratings became in the minds of of its own on the downside, the same throws it into CDO and so on and
investors more important than perhaps kind of momentum it had on the so on. Any opinions on that relative
maybe they should have been? upside. I think contributing to that, change in the way that mortgage assets
causing the bubble to pop even louder are originated?
Warren Buffett: was and maybe even to blow it up
Well, I would say that, you know, some was improper incentive systems Warren Buffett:
anybody that’s investing in something and leverage. I mean, those--but they No, people will be more careful
they consider opaque should just walk will contribute to almost any bubble with their own money than with
away. I mean, whether it’s a common that you have whether it’s the internet other people’s money. And you can
stock or, you know, new invention or or anything else. Incentive systems argue that Freddie and Fannie were
whatever it may be. You know, that’s during the internet were terrible. I the ones, you know, they started
why Graham wrote books is to try and mean, you just, you formed a company securitizing in effect and in a huge way
get people to, you know, invest, to take and you said I’m going to somehow people got used to buying mortgage
that investment, it’s very tough to get deliver a billion eyeballs and somebody instruments where they were very

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FCIC Interview with Warren Buffett | 18

divorced from the origination of it. So Interviewer: Interviewer:


there’s no question that if there’d been We, I mean, from people we’ve talked Both through statements, through
a law against laying off mortgages to to and articles we’ve read, I mean, plans and policies. How much of
somebody else that you wouldn’t have we’ve heard people talk about or read that do you think contributed to the
the same situation. You might not that, you know, there was a lot of bubble?
have as much, a lot of good things did money coming into the U.S. chasing
happen in the country too, there was a-- yield. There was the Street wanting Warren Buffett:
balancing the two, I’m not sure I could it because of the change from buy It all contributes, but the truth is
do but I can tell that more mischief will and hold to the securitization model. I’ve told people, home is a good
occur if somebody in Norway is buying Were Fannie and Freddie, you know, investment, you know. Particularly if,
a mortgage in Omaha than if some guy changing their purchasing patterns and it’s got values beyond what it will do
here is lending his own money. (laughs) increasing demand for non-traditional in terms of possible appreciation over
mortgage product for whatever time. It really is a way to go short on
Interviewer: reasons. Any comments on any of the dollar. I mean, if you borrow a
There certainly appeared to be a those possibilities? fair amount of money it gets and most
loosening of underwriting standards people don’t have a good way of being
and certainly an increase in what we’ve Warren Buffett: short on the dollar and it’s a pretty
termed non-traditional mortgage The market system creates incentives sound policy to be short dollars as long
product whether it’s lower down to do more business. (laughs) That is as you’re carrying costs aren’t too high.
payments, whether it’s the liar loans, the nature of it. And, but I, you know, And when interest rates get low the
stated income loans, whether it’s option and people talk about excess funds carrying costs are not high. So it is not
arms, whether it’s 228s, 327s, etc., etc. around the world and all that. I tend to an unintelligent thing to do. It’s only,
Any views on whether that had any? discount that sort of thing. But I don’t it’s only when it gets into this bubble
discount the incentives that everybody aspect that it becomes unintelligent.
Warren Buffett: in the American public from wanting But I would recommend today, you
Oh, it had had plenty to do, I mean, to do a piece of business if they can know, if a couple can afford it and
it fuelled, it fuelled extreme leverage do it tomorrow. Doesn’t mean that you’re not paying silly prices in terms
and it fuelled leverage that could only they’re terrible people or anything of replacement value or things like that
be paid out of the re-sale of the asset but what, you know, if I’m a realtor and you want to buy a home in Omaha,
rather than the income of the borrower and I’ve seen a house go from $250 to I would say, you know, have you found
and once you start lending money big $500,000 do I say to the person, now, the neighborhood you wanted and
time to people where your hope of this buying the house at $500,000 is you’re going to, your family’s going
getting your money back is that the kind of dumb because--it just doesn’t to live there and right now I think
asset goes up rather than the asset happen. They say, you know, you mortgage rates are very attractive, I
produces enough to service the loan, better do it today because it’s going to would say buy it. But I wouldn’t say
I mean, that very nature whether it’s be more tomorrow. And so everybody buy three more on speculation and I
farmland, whether it’s oil in Texas, you gets into the act, doesn’t mean they’re wouldn’t say buy it if it’s going to take
know, it creates a lot of problems. evil people. There are some crooks in 50% of your income to service the
the process, but overall what happened mortgage. It’s a sound idea that went
Interviewer:
was not caused by the crooks. It may crazy.
Any views on why we saw the growth in
have caused the crooks to get rich
that kind of non-traditional mortgage Interviewer:
(laughs), a lot of it but it in my view was
product? Should it be a government policy to
caused by a mass delusion.
encourage home ownership?
Warren Buffett:
Interviewer:
We believed that, you know, houses Warren Buffett:
Throughout the ‘90s and the 2000s
were going to go up. Once you think Well, I don’t think, I would say it should
members of Congress, members of the
the asset will go up you don’t look be a government policy and we’ve got
administration were all encouraging
to anything to anything else. And it it through and Fannie and Freddie,
home ownership.
became, because it had been going up, we say we’re in the mortgage business
an awful lot of people believed it had to Warren Buffett: as a country. To help people who are
keep going up. I mean, it gets back to Sure. following sound practice in the one way,
the nature of bubbles. I do not see anything wrong with having

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FCIC Interview with Warren Buffett | 19

a government guarantee program that looking at of course is the role of statements affirmed where they have
kicks in when people really have a 20% accounting and specifically mark-to- both sides of a derivative transaction
down payment, really only putting only market rules on accounting. I know and there is a different value being
30% or so of their income into it. Still you wrote in your shareholder letter put on them by the two parties. And
people are going to lose their homes or letters that, you know, the mark-to- they’re signing them, I mean, we’re
for unemployment reasons and death market accounting rules result in wild talking big numbers sometimes, too.
and divorce and disability. I mean, the swings in your derivative accounting It’d be interesting to take the million
three Ds. But that’s not going to cause but that you and Mr. Munger and what contracts or whatever they, a couple
a systemic problem. And more people it is-- of million J.P. Morgan, and find two
are going to benefit from that program firms that have the same auditor and
by far than anybody’s going to be hurt Warren Buffett: compare the valuations. (laughs)
by it. So I think that the government We explain it, it is our job to explain it.
has a place in that and around the Interviewer:
world has a place in it. But I don’t Interviewer: It might have been a good survey for
think that if you’re going to get 20% Right, but do, and other people we’ve us. You know, I mean, an area we
down payments that you should then talked to and articles we’ve read have somewhat touched on that’s really,
take deals on the 3% down payments talked about, you know, the mark-to- leverage and liquidity are just capital
and then lay off that on some mortgage market accounting rules if nothing else requirements for financial institutions.
insurer or something like that. You perhaps fueling the downward spiral, Were they too low, are they too low?
don’t want to encourage people to do you know, in the ‘07 and ‘08 timeframe
things that are going to cause them when folks got into liquidity crunches Warren Buffett:
pain later on. And you’re going to have and had to sell assets, etc. Any views It’s very tough, it’s very tough because
occasional pain for unemployment but, on the role of accounting and mark-to- there’s such a difference in how when
you know what, you don’t want system- market accounting? institutions can be doing, you know, I
wide pain because you’ve encouraged mean, just take the derivatives book,
Warren Buffett: I mean. How do you measure that
them to do things that are stupid. I’m less religious about it than I used to compared to straight loans? I mean,
be (laughs). I, because, well, you know, are you going to only take the netted
Interviewer:
after ‘29 in the insurance business they off, non-collateralized balance finally,
One of the areas in our statute is the
put in so-called, I forget, they had a I mean, the residual and say that’s the
role of monetary policy and of course
term for it but I think it was called, only exposure you have or are you going
a lot of folks have commented on the
basically it commissioned evaluations to weight some for netting, you know,
low level of interest rates throughout
of some sort. And they did not make but only compounds it at 10%. It is very
the 2000s. Any view on that as a
insurance companies write their stuff tough and, we’re going to have higher
contributing cause?
down because they said, you know, capital standards in all likelihood but
Warren Buffett: you’re basically putting them all out knowing what to measure against
Well, it makes it obvious, it makes it of business and these are temporary and all that, it’s just a very difficult
easier but no, I don’t think that was things. And the truth was it probably problem. And, of course, partly that
what caused this. You couldn’t have benefited the country that they didn’t was solved by people using ratings.
had it if you’d had 15% rates obviously. liquidate all the insurance companies And, you know, and the extraordinary
But it all, you know, it all worked in the early ‘30s based on what would thing, if you look at the AIG and my
together, you know. And finally the have, in effect, been mark-to-market memory is and again, I’m doing all this
fact that houses kept going up a accounting. I still, there’s so much from memory, my memory is that they
lot. It just, you know, put a model in mischief when you get away from mark- got up to like a number of 300 billion
people’s minds. You have 300 million to-market that I, that I’m still a believer of what they call regulatory arbitrage
Americans have got a economic model in it but I can see where, I can see certain where it enabled largely German banks
in their mind and you say, Moody’s is situations where it might have sort of or certainly European banks to carry
dumb for having it and S&P is dumb anti-social effects as well. Getting back less capital against their loans since
for having it but it was pervasive. to derivatives, I mean, what has always AIG was guaranteeing those loans
struck me as extraordinary is that you against loss and AIG had a triple A
Interviewer: basically have four big auditing firms rating therefore that carried over into
Another area in the statute that we’re in the country. And I would guarantee lower capital requirements abroad.
directed to look at and we have been you that they are attesting to the And they were getting paid practically

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FCIC Interview with Warren Buffett | 20

nothing for them and they thought they 40, 50 years ago, is that something of capital and I had one with 5% of
were running no risk at all. But it was a that you think should be a function of capital and I hired 50 people to go over
ratings arbitrage, basically, it was, they government through regulation or is and start standing right in front of your
called it regulatory arbitrage. But it that if Greenspan two years ago, is that bank, you’re the guy that’s going to
was based on what ratings required in something that the market could police fail first. Then when get through with
the way of capital requirements. But, itself in some way? you they’re going to come over to my
you know, the regulators got a terrible bank too, that’s why we don’t do that
job too, I mean, how do you deal Warren Buffett: sort of thing because you can’t contain
with all these people doing different I don’t believe the market polices the fire over on the other guy’s bank.
things and come up with some kind of itself, I mean, Greenspan is a friend But you can’t, you can’t stand a run.
standard that says what they have to of mine but he’s read more of Ayn So you need the Federal Reserve and
maintain in the way of capital. I don’t Rand than I have, I mean, I’ll put it the FDIC. And even with Northern
envy them the job. that way. (laughs) So I do not believe Rock, the UK government and came
the markets police themselves in and said we guarantee everything they
Interviewer: matters of leverage and other matters. still had lines. I mean, when people
You, an argument you often hear on the I do, that’s why I get back to the are scared they’re scared. And there is
other side from institutions that don’t incentives of the person. I mean, that no reason to leave, I mean, if you see
want higher capital requirements is it’s makes a difference. It doesn’t solve if it’s uninsured and you see a line at
going to impact us competitively across everything, I mean, you can still get a bank where you’ve got your money,
the globe. Any views on that response? terribly optimistic managements that get in line. (laughs). You know, buy a
will do very stupid things and all that. place from the guy that’s first in line
Warren Buffett: But if I had a choice between setting if necessary, you know. And even if
It would, it would. I mean, just take it the capital standards and setting the you’re at another bank, get in line there
to the extreme. If you said that every management incentives and that were and take your mad money and put it
in the bank in the United States had my only choice with banks, I would under a mattress. You can always put
to have 30% capital and every bank rather set the management incentives. it back a week later as long as there no
in Europe has 3% capital, you know.
penalties, why in the world, you know.
To earn the same returns on capital Interviewer:
That’s why we got a Fed and an FDIC
(laughs), they can work on much One of the things we’ve seen and that
and I think it’s one of the, you know,
narrower margins than the American I’ve seen from my previous life as a bank
I think the FDIC and Social Security
bank. That doesn’t mean you don’t do examiner, we particularly saw with the
were the two most important things
it but leverage is a competitive tool in broker dealers was the liquidity issue
that came out of the ‘30s. I mean, the
terms of achieving returns on equity. of their asset liability mismatch. And
system needed an FDIC.
That’s why it has to be guarded against. particularly, you know, that they were,
had a lot of short term money. Interviewer:
Interviewer:
What did you do, you know, this is,
Any views on what the right capital Warren Buffett:
you’re raising the issue really of the
levels are for financial institutions? It’s the nature of the national institutions
shadow banking system, the parallels
both life insurance companies and
Warren Buffett: unregulated without FDIC insurance
banks. The, no capital requirements
It’s more complicated than that. or any other form of insurance
protect you against a real run. I mean,
other than until they stepped in and
if your liabilities all are payable virtually
Interviewer: guaranteed money market funds as
that day or I should say virtually all
Believe me, I know. the short term stability and confidence
your liabilities are payable that day,
raiser. What did Berkshire Hathaway
Warren Buffett: you can’t run a financial institution and
do with all of its cash, I mean, you
Okay. (laughter) be prepared for that. And that’s why
don’t have --.
we’ve got the Fed and the FDIC. I
Interviewer: mean, you can’t stand, if you’re a life Warren Buffett:
Is imposing some kind of leverage company or a bank, you can’t stand That’s a very good question because
restriction and [unintelligible] the around, you can be the most soundly we were, for example, in September in
risk something that, looking back capitalized firm in town but if I hire, if 2008 we faced, I think it was October
before banks were able to get into there were no FDIC and the Fed and 6th or something like that we had to
more exotic businesses, you know, 30, you had a bank capitalized with 10% come up with six and a half billion for

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FCIC Interview with Warren Buffett | 21

our Wrigley deal. I was only going after 9/11 but who knows what happens mistake on Lehman they corrected
to have that in treasury bills even if I tomorrow. it. And they did everything they could
had got a minus yield because I had to correct it very quickly and if they
to come up with it. And I didn’t know Interviewer: hadn’t have done that and if Ken Lewis
for sure, whether on October 6th, you Speaking of that uncertainty, do the B of A, we would have, the system
know, what the situation would be you think in the financial crisis the would have stopped. It stopped a little
with any bank. Now I thought it was government created some uncertainty bit for a short period anyway. But
99.99% that it’d be fine, but I didn’t by for instance stepping in and what we saw fall off into the economy
think it was 100%. And I may bring orchestrating the deal between J.P. subsequently was nothing compared
along to the hearing, I sold a treasury Morgan and Bear whereas not stepping to I think what would have happened
bill in December 2008 for $5,000,090 in or at least not stepping in sufficiently otherwise.
and it was a $5,000,000 treasury bill to orchestrate a deal for Lehman. Do
due in April-something where the guy you think that created uncertainty in Interviewer:
was going to get $5 million. So he was the market for market participants? And following up on that the
saying that the treasury bill was $90 commercial paper market. You’ve
better than his mattress. I mean, he Warren Buffett: alluded to what happened in the
could have put the $5 million under Yeah, there’s no question that you commercial paper market there.
his mattress and then 90 bucks better would have expected, having seen Any thoughts in terms of additional
off in April than he was by buying them step in at Bear you would safeguards or anything that could
the treasury bill. Well, that’s the way have expected to see them step in at remedy what had happened in--
I felt too. I don’t, I still feel that way Lehman. So when they didn’t step in
incidentally. I mean, we don’t have at Lehman, the world panicked. Now Warren Buffett:
a whole list of approved short term it had all these repercussions too in that Pretty tough. We don’t buy commercial
investments around here. We have got Lehman commercial paper was held paper. But I do believe if you ran into a
treasury bills basically and treasury has by money market funds and 30 million similar situation today the government
the right, and is going to print money Americans held money market funds would guarantee commercial paper,
if necessary and that is triple A, I’m and if you get 30 million Americans they’d have to. And that’s the
willing to go on the record on that. worried about whether their money important part. You have to believe
(laughs). market funds are going to be worth 100 the federal government will act and
cents on the dollar, they’re not going they will act promptly, decisively and
Interviewer: to buy anything, I mean. So they, you all that sort of thing. That became, I
That’ll give you a rating yourself. know, you create a tsunami, but, and guess, a little bit of a, more than a little
(laughter) most interestingly, of course, is if Ken bit of a question, significant question
Lewis hadn’t have bought Merrill on after Lehman. The treasury and the
Warren Buffett: Sunday, I think the system would have Fed remedied that very quickly by
But nobody else is triple A in my mind, stopped, you know. He is (laughs) the taking, in my view, by taking action.
you know. And if we’re really going to guy that turned out to have saved the I said it was economic Pearl Harbor,
protect ourselves if we’re not going to, system. He paid a crazy price in my but we sent out, you know, we sent
we need to have real money. And now, view, well he could have bought it the out the fleet the next day, but we had
I let the smaller operations just for next day for nothing because Merrill the ships in the harbor unfortunately
matters of convenience do other things. was going to go when Lehman went. when the day Lehman failed. (laughs)
But in terms of the vast chunk of what So the government was going to have But you saw one of the first TARP type
we have around here it’s treasury and to step in some place and you can arrangement got defeated in Congress
it will stay that way. Because I don’t argue that they probably should have what happened in the market. I mean,
know what can happen tomorrow. I stepped at Lehman but I would say Congress was the big fear with, I think,
don’t know if there’s a, you know, pick this, I consider overall the behavior of was the biggest fear with the American
any kind of a hugely disruptive--that’s Paulson and Bernanke and Sheila Bair public at that time.
what you have to worry about are and even though I’m not a Republican,
the discontinuities and there will be even the President, I consider them Interviewer:
one someday. They closed the stock to have done a terrific job during How do you draw the line for
exchange in 1914, you know, for many that period. I mean, you don’t call determining where the government
months. They closed it for a few days everything right and if they made a should intervene for specific
institutions and not.

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FCIC Interview with Warren Buffett | 22

Warren Buffett: part of convincing the world that the a lot of burdens perhaps incur inflation
Well, I think they did it right in Bear, I system wasn’t going to totally collapse to help another group who they don’t
mean they wiped out the stockholders that they were part of the movie that think have been behaving the way that
pretty much, I mean, you lost 180 down took place. they would have behaved. And they
to 10 as it turned out. But if Paulson don’t really have the, you know, ethnic
had his way it would have been $2 or Interviewer: social connection, I think it’s really
less. You wiped out the shareholders. We’re very close to being done because problematic what happens.
Now again, you know, the management, we started a little bit early so I thank
Jimmy Cayne lost a lot of money, but you. A couple of questions. Do you Interviewer:
he’s a rich man. And so that did not set have any sense as to what the difference But do you think there are any parallels
a good lesson for the rest of the world between what’s going on in Europe in how their problem developed or is it
in my idea but you send a big lesson is and what went on in Europe is and really a European problem as opposed
in terms of the shareholders. And I what happened here because clearly to a housing bubble?
think if the government has to decide, Europe didn’t have the same kind of
crisis happening. Warren Buffett:
if troubles are brewing the government
Probably [unintelligible] because in
should err on the side of overkill.
Warren Buffett: the end, for a long time everybody
Interviewer: It’s true. It’s very different, it’s an even thought they were all equal and if you
How would you decide though more interesting movie (laughs) and got a Euro denominated bond it didn’t
between stepping in on Bear and not since this is on tape somebody will find make difference or a deposit from any
stepping in on ACME or another how it all plays out. I don’t know how one of 16 countries it was the same
financial institution. How do you draw it’ll play out. It’s a different situation then and all of sudden the market
the line in your mind? in that in the United States we were perceiving that it wasn’t the case. And
saving ourselves. And we wanted to be once people started thinking about it,
Warren Buffett: saved and we wanted Washington, we they realized it really wasn’t the case.
Well, with banks it’s easy because the knew only the government could save And this thing’s only been around
FDIC can handle everything except us basically at the time from a colossal for, you know, less than 15 years or
Citigroup and BofA, I mean. They collapse. And even with that a year and whatever it is. And they start thinking
handled Wachovia in their own way, a half later a lot of people are mad at maybe I better line up at that bank.
they handled WaMu. I mean, we had the people who participated in doing it And they don’t have to do it physically
8% or 9% of the deposits of the United when all we were doing was trying to they start pushing little buttons and the
States change hands without the save ourselves we weren’t trying to save money starts moving around and all of
federal government getting involved Mexico. It wasn’t like we had a North a sudden 16 countries have a problem
even. But the FDIC could not have, American union where we all were where they think, most of them think
they participated in the situation tied to the same currency and Mexico’s they weren’t part of it. And that is,
with Citi, but Citi would have been problems were--can you imagine what could be enormously contagious. No
probably too much. Wachovia was the reaction if we’d, if we’d been saving one has to buy a Greek bond, nobody
the third largest in the country and Mexico instead of the United States has to buy a Spanish bond. Now usually
they got it done. So, stepping in, you to the legislature or the regulators when, in America, the central bank has
don’t need to worry about stepping who were involved. So Europe, to buy, it’d be a roundabout process
in on institutions around here, but they have to act big but they have a, but (laughs) we know somebody will
the chance to step in on Freddie and they have a system where a group of buy U.S. bonds tomorrow because
Fannie there wasn’t any question about people are going to have to be helping we’ve got a central bank that’s totally in
that. And then you get--they really another group. Now we all think sync with the interests of the country.
didn’t need to step in, if they did with we’re Americans so when America is And we’ll print money if necessary.
Morgan Stanley or Goldman Sachs or saving America we, that can be pretty And nobody, Greece doesn’t have the
Wells Fargo. But they did need to get cohesive. But although like I say, it’s power to print, you know, they’d be
the system, they needed to give the still recriminations, all kinds of things fine if their obligation [unintelligible]
American public the confidence that have come out of it. Now you picture It’s a very, very interesting problem
they would do whatever it took. Now Europe where you’ve got a group of and I won’t predict how it will come
those firms didn’t need it as long as the people that are being asked perhaps to out because you’ve got a tape (laughs)
system didn’t totally collapse. But as put up a lot of money and perhaps bear and I’d look very dumb later on.

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FCIC Interview with Warren Buffett | 23

Interviewer: Warren Buffett:


So you have any books that you’d like I don’t expect, if you decide to write
that have been written on the crisis? I that book, I don’t expect any royalties.
know that Sorkin has worked with-- (laughs)

Warren Buffett: Interviewer:


Sorkin has written a very good book. At the rate we’re going it’ll take a long
I mean, there have been a number of time. Well, thank you.
good books. The book I would write if
I was in the writing business, I would
write a fictional book and my book
would probably be titled something
like, If Ken Lewis Hadn’t Answered
the Phone, and then I would go from
there forward with Merrill falling on
Monday and describing what the world
would have looked like. It’d be a hell
of a book. (laughs) I’m not sure what
the ending would be but, you know,
he got that call on Saturday, he gets a
fairness opinion in 24 hours from two
guys who are getting $10 million each.
Is the fairness buy Merrill Lynch at $29
a share which, I mean--

Interviewer:
Chris Flowers.

Warren Buffett:
Chris Flowers and another firm that is
affiliated with Chris Flowers. And do
you think Chris Flowers would have
paid $29 or $2.90 for Merrill Lynch
on Sunday? (laughs) You know, it’s
an interesting world, but it may have
saved the system some terrible acts.
May have actually saved the system.

Interviewer:
Okay. Well.

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