Jan 20, 2010
One-On-One with Warren Buffett (CNBC)
Quick Notes:
-Wells Fargo has done exactly what they said they could do. Their $40B of pre-provision earnings could handle large losses of $20B.
-The government did the right thing in acting fast in the financial system
Q: Why the share split?
A: We wanted to give a cash and stock option for the shareholders of Burlington Northern. It was an easy decision.
Q: Berkshire Hathaway a member of the S&P 500?
A: Never talked to S&P about it. It would be a plus for shareholders.
-Wells runs a terrific bank. A very customer oriented bank. Their revenues will come through. When the stress test was done, the people evaluating them were way off on the revenues. Wells felt that people did not understand their revenue ability. Wells will never disappoint on revenue.
Q: The Bank tax?
A: I don’t understand that. Some banks like Wells were forced to take it. The government made a lot of money off of banks with TARP, where they will lose money is with the automakers.
Q: What about the AIG bailout?
A: The banks got paid but so did millions of other contract holders.
Q: Should the banks be backstopping commercial and investment banks?
A: I don’t think the government should be backstopping Morgan Stanley or Goldman Sachs.
Q: How do you get around the idea where the commercial bank is with the investment bank? This notion of too big to fail.
A: The banks that were too big to fail had management problems at the top. The board of directors should have something where if the bank has to go to the federal government to be saved, the CEO and CEO before of two years should sign something where they get wiped out. The CEO should say: If this place goes down, I’m busted.
Q: You are saying guys like Chuck Prince?
A: Yeah.
Q: Should there be a split forced by Congress? Or the director plan like you said?
A: I would like what I just suggested. I think banks should be reigned in on leverage and activities they can’t engage in.
-Buffett trusts the Fed. to do more financial regulation on banks.
-Congressional elections are a reflection of voters, they don’t feel good about the health bill and the economy. Those feelings converged with feelings on the candidates.
-American people’s expectations were probably too high on the economy. To President Obama’s credit, he tried to dampen their feelings too. When it grinds along, they unreasonably expected better things by this point and that wasn’t in the cards.
-The stimulus bill could have been used in a way that has a faster more immediate impact.
-Some of the benefits of the stimulus bill were wasted because they were Washington as usual.
Q: Does legislative uncertainty affect corporate hiring?
A: At Berkshire, we are down 25,000 in employment off of base in the last year–year and a half. Our carpet business is down to 6,500 people. That is concentrated to a small area in Georgia. We will hire people when the orders come in. We have 1,000 people down from the peak in our Acme Brick business. We hire based on what is happening in our order book. We aren’t getting orders yet so we aren’t hiring. Unemployment will be a tough figure.
-Until things improve for the economy, the American people will remain unhappy. The Christmas tree approach to legislation where you add on earmarks is not encouraging to the American people.
Q: What do you think about the Kraft deal?
A: I feel poor. They sold a fine pizza business – Kraft sold it for what they said was $3.7B for it but because it had practically no tax basis they really got $2.5B when Nestle is willing to pay $3.7B. That business earned $280M pretax last year, they sold it 9X pretax but then paid 13X EBITDA for Cadbury. They are paying more than that, EBITDA is not earnings, depreciation is a very real expense. Then on top of that they are spending $1.3B on rearrangements at Cadbury, $390M of deal expenses, they are using 260M of stock that their own directors are saying is significantly undervalued, when they calculate the 13 they are using market price not what they think it is worth. So, the actual multiple is 16 or 17 and they are selling earnings at 9X.
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