Warren Buffett on Charlie Rose: Never Seen Anything Like This

Warren Buffett was on Charlie Rose last night. He repeated his "economic Pearl Harbor" refrain, said Berkshire's companies are starting to feel the pinch, and said he's never seen people this fearful in his adult lifetime.

We're watching the video now and will post some highlights below. Here's a link to the video.

HIGHLIGHTS

Made GE investment decision yesterday after getting call in the morning.
Using cash now because good time to do so: others fearful
In my adult lifetime I've never seen people this fearful economically.
8% of bank deposits have been moved in last few weeks...and people are not wrong to be worried.
Weakness being felt at auto retailers, furniture retailers. But will get worse.
Rescue plan: Not perfect, but I'd rather be mostly right than precisely wrong.
$40 billion of Treasuries sold last week at yield of 1/20th of %. That's money shoved under mattress time.
Major institutions all want to deleverage. What seemed so easy to borrow against a year ago now seems like rat poison. Only one who can lever up is US government.
Basically the right things have been done, but no one saw tsunami coming.
Response has been ad hoc, but better that than nothing. And three months ago, Treasury would never have been able to get the power to stop. Now people understand.
What is in trouble here is American economy, not Wall Street. I don't like what's going on, but Wall Street shareholders got creamed. Justice won't be perfect. Can second guess forever, but this is Pearl Harbor. Don't spend weeks and weeks deciding everything--spring into action.
Never seen anything like this in his life.
Depression is a possibility if this plan doesn't work. We've been in a recession by any definition. $20 trillion of houses, $20 trillion of stocks, both down dramatically. 95% of people worse off. That is bleeding into the real economy. That wave is just starting to hit. If every company keeps trying to deleverage...gets much worse. Unemployment will rise, but question is whether goes to 7% or 10-11%
I worry whether current Paulson plan enough. If you don't react to Pearl Harbor, every day goes by, gets worse.
Paulson best possible Treasury secretary. Right person. Sheila Bair, too (FDIC head). She's moved 8% of deposits in US in last 10 days. Great public servants. Right people to get job done. Need tools. Need money and flex.
NEED TO TIE TO MARKET PRICES. If they do this, they'll make money. I'd take 1% of that. Hedge funds are buying these assets for 15%-20% return. These assets will be worth more money over time. US government has very cheap borrowing costs.
Government will be investing, not spending. I'd love to do it, but just don't have $700 billion.
I don't think it would be crazy to have model on RFC (entity in Depression). Two things needed: 1) liquidity. 2) capital problem with some of the institutions. Feds did that in Depression. Problem today with RFC would be cumbersome process. Right now, commercial paper market drying up. RFC thing makes sense, but what is needed now is liquidity.
Any time I can help, give advice, happy to do that. That's why I'm here tonight.

Derivatives killed AIG. Very tempting. No capital requirements. I said they were financial weapons of mass destruction, and they have been.
Biggest single cause: tremendous residential real-estate bubble. Human behavior leads to bubbles. Everyone believed prices were going to go up forever. Behaved foolishly. We leveraged up: 20% fall in value of $20 trillion asset. That's $4 trillion. That's a big deal. And it continues.
The good thing: We have household formation in this country. Inventory too big, but we can work it off.
Should people have known better? People should always know better. They don't get smarter about fear/greed. Can't stand to see neighbor getting rich. Three "i's": Innovators, imitators, idiots. Same with silly Internet valuations...went up every day.
With housing, if you think prices go up every year, if don't buy this year, will have to buy it next year. Everyone who has done it has been proven right. And someone willing to lend you money for free? Found money...
It pays off for a while. You can use leverage. You can do lots of smart things, but if you do one wrong thing, wipes you out. Because anything multiplied by zero is zero. Cinderella: At midnights, everyone turns to pumpkin and mice. But no one wants to leave party, and no clocks on the wall saying "almost twelve."
Confidence: Treasuries 1/20th of a %. Not buying because attractive yield. People buying because confident will get money back. Confidence in markets is like oxygen: when have it don't even think about it. When gone, can't think about anything else.
If doesn't work, turn the spigot. You don't want to be too little too late.
If people think it's too little, it's too little.
The one thing you have to is buy assets at market [which the government is not planning to do]. You don't want to have artificial prices being paid.
This country will be living better 10 years from now, 20 years from now. We had Depression, wars, oil shock, etc. All these terrible things, but we had 7 for 1 improvement in standard of living. We have great system. American workers so productive.
Same things happening around the world. Europe banks doing same. Beware of geeks bearing formulas.
New Administration...
Recession is going to get worse. Things won't turn around in a couple of months. They will turn around. I don't know whether it's 6 months or 2 years. 6 months is best case. If we don't do things we should do, it will be 5 years.
We need to throw the resources at this. If we buy these assets intelligently. [a BIG IF]
I would hand a blank check to Hank Paulson... "Go invest it." I might ask him to put some money of his own up, too.
Trying to invest through 535 people is a tough job. Oversight good, but should be devoted almost entirely to question: Is this being done at market. Don't want government investing foolishly.
RFC: people knew what they were buying.
RTC is different...this was the stuff they inherited when thrifts went bankrupt. This is different. We're buying.
Markets aren't perfect. People go crazy. As long as have markets, will have excesses. Not going to change human animal, and human animal really doesn't get much smarter. People LOVE leverage when it's working.
Mark to market: I believe in it. In 1974-1975, we owned common stocks. We told shareholders what they were worth today. I thought "really worth much more." But not today. You get in a lot of trouble when you start putting fictitious numbers on value. You can explain you think will be worth a lot more, but once start putting phony figures into financial statements, you get in a lot of trouble. People want to make it worse.
I want to tell shareholders of Berkshire what it's all about. I explain in one case where I think figures calculated on our balance sheet is wrong. We do it way SEC wants and I explain. Shareholders can believe or not.
China, Asia holding American debt...we have been consuming about $2 billion a day of goods/services above what we're producing. We send them paper in exchange. They can do lots with that, including buy our companies. They are going to own something for that. Every day, they own $2 billion more of American assets. I think that's bad.
We've been good on exports. 12% of GDP. That was 5% many years ago. This is not the most pressing problem right now. We are trading away pieces of country, which isn't good. But we are growing.
Dollar? Inflation is a likely consequence. We are in effect making a choice between future inflation and getting off the floor. We are likely to have more inflation in future.
Obama talking about another stimulus program. Do we need? What we need now is liquidity. But if there is another stimulus, should go to lower and middle class. I've never had it so good. Rest of country should get this one. One-fifth of households earn 21,000 a year or less. Imagine living on that. Push out $1,000 a person to those folks, it will get spent. It should come from guys like me.
15% capital gains tax...and no payroll tax on that. I've never had it so good. I think it's terrible for people to say that income from investments should be taxed at lower rate than income from labor. You're going to get the money from someone. So who? Me and you? Or guy who drives taxi getting me here. Over the years, they've taken less and less from a guy like me. Everyone likes to talk about how top 1% pay huge percentage of taxes. $900 billion is payroll taxes--that comes out of people in my office. Payroll tax is one-third of receipts of fed govt. That doesn't come from me.
Inflation/interest rates: For time being, not an issue. Get patient up and walking first. What we're doing will have inflation issues.
Someone needs to explain all this, get the message out. Takes real leadership. Roosevelt didn't print money. He restored confidence. You needed to jumpstart economy. Did not change overnight. Put in FDIC, etc.
Roosevelt: Only thing we have to fear is fear itself: The country works very well. When I was watching house vote, I wasn't afraid, but we are going through a very tough period. I did not think I would see a time when AIG wouldn't be able to write checks. Why even talk about not saving? They were hoping private sector would save it. And private sector tried...but couldn't get handle on problem. Kept getting bigger and bigger.
An ounce of prevention worth a pound of cure. If we delayed it six months, we'd need a ton of cure. It would be crazy not to do this. It will NOT fix economy. Going to see crappy earnings, more unemployment, etc. But if we bottom out at 7% vs. 9% unemployment, that's 3 million people. Just think about that. You don't want to create that. You can't help some increase from this point. I don't want anyone to think that we can.
Once we rescucitate athlete, we can talk about regulation, etc. Can do later. We had good system. But then we went crazy on residential real estate.

Warren Buffett On Charlie Rose: Never Seen Anything Like This