2009 年股东大会 · 下午场

Quarterly earnings release schedule

WARREN BUFFETTOK, let's get back to work. I should mention one thing, because it's appeared in the press recently — a bit. We will — our goal is to issue every quarterly report on the last Friday — after the close — prior to the expiration of the 40-day period after the end of a quarter that we have for reporting to the SEC. The SEC says 40 business days — or 40 calendar days — unless it ends on a weekend. Forty calendar days after the end of the quarter — that you have to file." If it comes on a weekend, then it's the Monday following that. That usually means — because we hold the meeting, usually, on the first Saturday in May — it usually means that the last Friday possible will be the day before the annual meeting. This year, because the meeting is early on a calendar basis, because of Saturday falling on May 2nd, the last Friday will fall on May 8th. And that — our policy — We like to get it out on a Friday afternoon, if possible, because we want people to have the whole weekend to read it before the market opens. It takes time to — I think it takes time, anyway — to digest the report. And we'd like — we don't want some headline to determine market prices. We want, as much as possible, a thorough reading of the report. So we will always, unless something comes up, makes it unfeasible, we will issue our quarterly reports on the last Friday before the expiration of the 40-day period. And that's what we'll do this quarter. And so we have not changed anything.

Preliminary Q1 earnings

WARREN BUFFETTI can tell you some preliminary figures, which then we have to file an 8-K on, because then the information I give you has to be in the public domain before the market opens. But our — what I call our operating earnings, which would be the earnings before any gains or losses from securities or derivatives or any other transactions of that sort, the operating earnings will be about, after-tax, about 1.7 billion against 1.9 billion last year. And — as I told you, we're lucky to be — in this particular period — we're lucky to be in the insurance and utility business. They're relatively unaffected by the recession. Whereas most of our other businesses are anywhere from significantly to drastically affected by the recession. We had an underwriting profit, in our insurance business. It was a little larger than last year. Our float increased a couple of billion. That was primarily due to a transaction that was announced with Swiss Re, which occurred in March, in which they bought what's known as an "adverse loss development cover" — and gave us 2 billion Swiss francs for that. Now, that's very, very long float. And the probability is that we will not pay out on that, probably, for at least 15 years and maybe quite a bit longer. So that's long-duration float. And that's what accounts for the 2 billion— roughly — $2 billion gain in float. The utility business — earnings are reported down somewhat. But there were two items that account for that. One is that, on our Constellation Energy deal, which blew up last year, and we reported a significant gain on it, we got a bunch of Constellation stock. And that is a mark-to-market and goes through our income account, every day, in theory, but certainly every quarter. And Constellation was down somewhat during the quarter. So that got charged against the utility earnings. And then a larger item was a payment, and the final payment, in terms of options that were issued 10 years ago, which had the effect of increasing Berkshire's interest in MidAmerican, which we like. But we wrote a check, a significant check, with MidAmerican to buy out the option. So — and that got recorded as an expense in the first quarter. But the utility earnings are more than satisfactory with those two items in it. Then when you get into all of our other businesses, with just a couple of exceptions — those businesses are basically down. I mean, they're all getting hit to varying degrees by the recession. So — that's basically the operating earnings story. Our book value per share went down about 6 percent in the first quarter, which is a combination of security markets, and the fact that the credit default swaps, which — I'm the one responsible for writing them — that experience has turned worse, even since I wrote the annual report, in terms of bankruptcy. So that loss — or potential loss — we're actually still funds ahead by a substantial margin — but that potential loss — and, I would say, expectable loss — is reflected in the first quarter figures. And of course, there's been some bounce-back since March 31st. But that's pretty much the story of the first quarter. We ended the quarter with cash equivalence of about 22.7 billion, excluding any cash at the utility or at the finance company operation. But we spent 3 billion of that the next day on a Dow Chemical preferred. So we actually ended, effectively, one day later, the quarter with a little less than 20 billion in cash. We always keep a significant amount of cash at the parent company, not at the regulated subsidiaries, so that — whatever comes along, we're prepared for. And that's pretty much the story of the first quarter. And I wouldn't be surprised — I mean, I guess I would almost be surprised if the opposite happened, if the world changed much — over the remainder of the year. I think that we will continue, barring some huge natural catastrophe, we will do quite well on insurance. And we will do in the utility operation. And we won't do well in most of the other operations. But we will have significant operating earnings, which I mentioned is about a billion-seven the first quarter. If you look at our operating earnings, a billion, or a little more, that comes from MidAmerican — from our energy business, basically — we're going to leave in that business. I mean, there's all kinds of opportunities to do things even within our present subsidiaries. There's lots of projects that promise decent returns. So you should not think of that billion or so as being available to us at the parent. It would be, if we wanted it to be. But as a practical matter, we're going to leave it all in. The rest of the earnings are available to us in cash, plus or minus any change in the float, to do anything interesting that comes along. So that's an abbreviated summation of the first quarter. We will put out the 10-Q next Friday after the close. And we'll continue to follow that policy.

"Value" investments? What other kind are there?

WARREN BUFFETTWith that, we'll go to Andrew.

ANDREW ROSS SORKINExcellent. This question actually just came across the BlackBerry before lunch from what I think is an audience member. Josh Wolfe (PH) of New York writes the following: "BYD appears to be more like a venture capital speculative investment than a value investment. Would you both explain that investment, your logic behind it, and your expectations for it?"

WARREN BUFFETTYeah. I'm going to turn that over to Charlie in just one second. But Charlie and I think there is no other kind of investment than a value investment. In other words, we don't know how anybody would invest in a non-value investment. So we've always been puzzled by the term, "value," and saying that contrasts with growth or anything. Value relates to getting a lot for the expectable flow of cash in the future, in terms of what you're laying out today. So we — we've always — every time somebody characterizes us as value investors, we always ask them, what other kind can there be?

Munger: Electric car maker BYD is a "damn miracle"

WARREN BUFFETTBut Charlie is our team leader here on BYD. And he gets very excited. So I may have to control him. But go to it, Charlie. (Laughter)

CHARLIE MUNGERYes, well, of course, BYD, although its founder is only 43 years old, is not some early-stage venture capital company. BYD is one of the main manufacturers to the world of the rechargeable lithium battery. And it achieved that position from a standing start at zero under the leadership of the founder, Wang Chuanfu. And — they went on into cell phone components and developed a huge position. And then, finally, not satisfied with having worked a couple of miracles, Wang Chuanfu decided he would go into the automobile business. As nearly as I can tell, it was zero experience in automobiles. And from a standing start at zero and with very little capital, he rapidly was able to create the best-selling single model in China. And that's against competition that was Chinese joint ventures with all the major auto companies of the world, technological marvels with way more capital and so on. This is not some unproven, highly speculative activity. What it is, is a damn miracle. And — (Laughter)

WARREN BUFFETTI warned you. (Laughter)

CHARLIE MUNGERAnd of course, Wang Chuanfu has hired 17,000 engineering graduates. And those engineering graduates are selected from a billion, 300 million people in China. And he's hiring at the top of the classes. And — so you get a remarkable aggregation of human talent. And then you've got the basic quality of the Chinese people. Which, when unfettered from the wrong kind of government — for instance, the wrong kind of emperor — the Chinese people succeed mightily. When they came to this country as "coolies" — slaves — they would leave and soon be the most important people in the town. So this is a very talented group of people. And, in a sense, this particular period may be Chinese — the Chinese day. And of course, these batteries, these lithium batteries, are totally needed in the future of the world. We need them in every utility company in America. We need them in every utility company in the world. And we have to use the direct power of the sun. And we can't do that without marvelous batteries. And he’s in the — BYD is in the sweet spot on that stuff. And I know it looks like a miracle. And it looks like Warren and I have gone crazy. But I don't think we have.

WARREN BUFFETTWell, one of us, at most. (Laughter)

CHARLIE MUNGERAnd that car you're going to see in the annex — I think they make everything in that car except the glass and the rubber. There may be a couple of small exceptions. That's unheard of. Whoever went into the automobile business and made every part, and made the automobile a best-settle — best-selling — thing? This is not normal. I mean, this is very unusual. And I regard it as a privilege to have Berkshire associated with a company that is trying to do so much that's so important for humanity, when you get right down to it. Because it may be a small company, but its ambitions are large. And I don't want to bet against 17,000 Chinese engineers led by Wang Chuanfu, plus 100,000 more talented Chinese in a brand-new area — constructed the way they want it. I will be amazed, if great things don't happen here. I don't think, given the size, it can be all that important to Berkshire, financially. But I have never, in my life, been more — felt more privileged to be associated with something than I feel about BYD.

WARREN BUFFETTBYD was Charlie's last year. The Irish banks were mine. So he's — (laughter) — the winner. BYD, incidentally, does $4 billion a year of business. I mean, so it is not a small business. And it will probably get a lot larger.

U.S. dollar will buy less in the future

WARREN BUFFETTLet's go to the — area 2.

AUDIENCE MEMBERHello, Mr. Buffett and Mr. Munger. My name's Dan Lewis (PH). I'm from Chicago. My question has to do with the U.S. dollar versus other major currencies. You spoke a little bit already about the — government policy and its effect on inflation in the future. And just by itself, you’d think inflation would hurt the dollar. But obviously, there's a lot of other factors at play. So I'm kind of interested in knowing your latest outlook on the dollar. I know you've been bearish. But given everything that's been thrown up in the air in the last six months, how you think these various things will come together, trade deficit, budget deficits, and how it will affect the dollar?

WARREN BUFFETTYeah. It's pretty unpredictable. But the — I will guarantee you that the dollar will buy less, you know, five, 10, 20 years from now. And it may be — it may buy very, very substantially less. But I don't know that, obviously. But we are doing things that will hurt the purchasing power of the dollar. On the other hand, the same thing is happening in countries around the world. So it's very difficult to say whether the dollar versus the pound or the dollar versus the euro, et cetera — how that will behave. Because, you know, the British will run a deficit this year of 12 and a fraction percent of GDP. And even the Germans, with their, you know, long-time fear of inflation, will probably run a deficit of 6 and a fraction percent of GDP. So you've got governments around the world all electing to run — and I think properly so — electing to run very material deficits, in some cases, you know, close to unprecedented except in wartime — electing to do that in order to offset this contraction of demand by their citizenry. And how that plays out in relative exchange rates, I can't tell you. How it will play out in terms of the value of their currencies' purchasing power in the future versus now, I think, is fairly easy to say, and that's that it's going to cause units of currency to buy a lot less over time. That isn't going to happen in the next year or two. But that doesn't mean that markets won't start anticipating it at some point. And it's going to be a very, very interesting future. I mean, we are doing things that we haven't seen in the past. And policymakers do not know the outcome of that. I don't know the outcome of it. You do know it will have consequences. And — you can bet on inflation. Charlie?

CHARLIE MUNGERWell — I was raised here in Omaha. And I well remember the two-cent first class stamp and the five-cent hamburger. And so, in my life, there's been a lot of inflation. And in my life, I think I've had the most privileged era of all history in which to live. So a little inflation is not going to ruin the lives of any of us. The trick is to avoid the runaway inflation. That is a problem Warren and I are going to quitclaim to the younger people. (Laughter)

WARREN BUFFETTHere is a product, though. Six and a half ounces of this product, 100 years ago, cost a nickel plus a two-cent deposit. And it's hardly gone up in price at all. It's very interesting. And wheat hasn't gone up that much or oats or things of that sort. And on the other hand, a newspaper that cost a penny 100 years ago costs a dollar now and they lose money turning it out. So it gets very uneven, in terms of its impact.

Buffett "irritated" by the loss of triple-A rating

WARREN BUFFETTCarol?

CAROL LOOMISWarren, Charlie — this question, I got a good many of these. This one comes from — who does it come from? Well, it comes from Mr. Kempton (PH) — Kempton Lam or Lam Kempton (PH) — one of the two — from Calgary, Canada. And the question is, "How would you quantify the financial impact and damage of Berkshire losing its triple-A credit rating — which increased the cost of capital of Berkshire, which was surely a competitive advantage for the company? “And Warren, what are you doing actively to try to restore Berkshire's triple-A rating? Do you think that Berkshire will be able to regain it?"

WARREN BUFFETTWell, it won't regain it soon, because I don't think rating agencies will turn around like that, even if they should. We have a triple-A from Standard & Poor's, but it's provisional. And they're going to look at it in about — I think they said about 12 months. Moody's affirmed the rating early in January. Then we issued a bond at one point, where it was — well, that was right after the rating changed. And actually, in terms of our credit default swaps, which is a metric you can use for credit acceptance — although, I'll tell you, in a second, an interesting aspect of that — that spread came down, actually. It makes very, very little difference in our borrowing costs. I mean, very little. And it never has, incidentally. I mean, double-As versus triple-As, the spread has always been very small. And people would argue, in finance classes and all that, it wasn't worth paying the price to have a triple-A because you didn't save that much on debt. And it costs you, in terms of return on equity. I never subscribed to that. And I very much liked having a triple-A from both Moody's and Standard & Poor's. I was disappointed when Moody's downgraded us. We didn't really think that was going to happen, but it did. And — it doesn't have any material effect on borrowing costs. It does cause us to lose some bragging rights around the world in terms of our insurance promise, although nobody ranks ahead of us, that's for sure. But, it will not change back in a hurry. I mean, people don't make decisions in committees that they reverse very quickly. It's just not human nature. We're still a triple-A in my mind. And actually, we're a triple-A in Standard & Poor's' mind, till we hear something differently. We certainly think, and we run it in a way, that there can be no stronger credit than Berkshire. It's difficult for a rating agency, if they have a checkbox system of ratios and such, to measure something like the attitude of management toward creditors. But I will assure you that Berkshire has a management that regards meeting its obligations as sacred and a lot more important than increasing earnings per share or anything of the sort. I mean, we have obligations to people in something like workers' compensation that go 50 years out in the future. I mean, this is somebody that's been injured severely and they get a check every month from Berkshire. And you know, that's a lot more important than whether we earn X, or X plus a tenth, or a couple of tenths, percent on equity. And we conduct ourselves, or we try to — certainly try to conduct ourselves — so that not only will people get those checks, but they'll never have to even worry about getting those checks. And that's very difficult for a rating agency to quantify that attitude on the part of the management of Berkshire. But believe me, it exists. And — I would say that the triple-A change at Moody's is not going to be material in the future of Berkshire. But it still irritates me. Charlie? (Laughs)

CHARLIE MUNGERWell, at least they showed a considerable independence. (Laughter)

WARREN BUFFETTWho knows? That may have entered into it, too.

CHARLIE MUNGERYeah. My attitude is quite philosophical. I think the next change at Moody's will be in the opposite direction. And I think that will happen because we deserve a higher rating and they're smart. (Laughter)

WARREN BUFFETTWhen Charlie and I disagree, and we do disagree a lot. We never argue, but we disagree. And Charlie, when he gets to the point where he really wants me to do something, like buy the BYD interest or something, he always says to me, "Well," he says, "in the end, you'll see it my way. Because you're smart, and I'm right." (Laughter)

"Crazy" prices for Berkshire credit default swaps

WARREN BUFFETTI will — I can't resist pointing out one item that is, maybe, a little technical to most of you. But there are some people here who will find it quite interesting. And it actually even enters into credit ratings to a great extent, the credit default swaps enter into it. When we write a, let's take an equity put option, and we get paid for writing a billion dollar put, somebody pays us $150 million, we get the $150 million of cash that day. And we set up a liability for 150 million the first day, for the value or the — that we — our appraisal of what it's going to cost us to meet that obligation. I mean, that's the market price for it. The other guy takes 150 million out of his cash and sets up a $150 million receivable that day. Now, these receivables and payables change over time. But the first day, no profit, no loss, just cash changing hands. One guy sets up an asset, the other guy — we set up a liability. Now, as the world has developed in the last couple of years, the value of that asset to the other fellow has increased in a mark-to-market basis. And he reports that through earnings. So his asset goes up. Our liability goes up. And we report that through earnings as a loss. But we've got the cash and he's got an asset from us that comes due in 15 years or something like that. And in the last couple of years, the — his auditors — his credit department — has said, "Gee, you've got a receivable from Berkshire that comes due in 15 years. And, they don't have to post collateral. So you have to go out and buy a credit default swap to protect yourself against that receivable going bad." Now, that has two effects. A, he's laying out money every year to buy something that doesn't cost us anything but costs him real money. So the — and the more he shows us a profit, the more of the credit insurance he has to buy, so the more money it costs him every year. And that has driven up the demand for credit default swaps at Berkshire, which made for some crazy prices. So at one point, our credit default swaps were costing that guy five percent a year. So if he was showing, say, a $200 million asset, he was laying out $10 a year, and he was going to have to lay it out for 15 years, just because of these — this credit department's requirements. And it made it very unpleasant for the people on the other side of our transactions, even though they keep writing up the profits. It doesn't cost us anything. But it does result in kind of a crazy market in the credit default swaps. I realize that that has not been a burning issue with many of you. But it is an unusual — it's something I didn't anticipate. And it explains why, to some extent, people may want to modify their contracts with us. And if they — with us — and if they want to modify them enough, we'll answer the phone. But in the meantime, we're sitting with the money. (Laughter)

MidAmerican working with Iowa on wind farms

WARREN BUFFETTLet's go to area 3.

AUDIENCE MEMBERJim Hadden (PH), a Cornhusker in Davenport, Iowa. On our drive over from Davenport, we noticed two rather large wind farms by MidAmerica Energy. And my question is, when will be the return on investment of these wind farms? And are Berkshire Hathaway looking at any other alternative energies?

WARREN BUFFETTYeah, we're the largest, in terms of owned capacity in wind, in the country, I believe, of any utility. And Iowa has the greatest percentage of its electricity generated by wind. But of course, the wind only blows about 35 percent of the time in Iowa, something like that. And we've got people here who can be more accurate than that. But — so you can't count on it for your base load or anything of the sort. But Iowa has been very, very receptive and, I would argue, progressive, in encouraging us — and we've encouraged them, in return — to bring in a lot of wind capacity. We are a net exporter of electricity in Iowa. Iowa's far more than self-sufficient in our service area in terms of electric generation. And I think that works to the benefit of the people of Iowa. And we have an arrangement with Iowa. We — as you may know, we have not increased our rates at all — what — for more than a decade now. And that's been achieved by efficiencies. It's been achieved with wind generation. We have a return that's built in on that that's fair to us, fair to the people of Iowa. And part of that return comes in the form of a tax credit — I think it's 1.8 cents per kilowatt hour — that is given to anybody in the United States that develops wind power generation. We love the idea of putting in more wind. And we're doing it. We're doing it out at PacifiCorp. And I think we'll continue to be a leader in it. One advantage we have over, perhaps, some people is that we are a big taxpayer, so that we don't have to worry about whether the tax credits are useful. I guess the tax credit could be sold, also. But we don't need to do that in our particular situation. So you'll see more and more wind generation by the MidAmerican companies. When we went into PacifiCorp out on the West Coast, to six states out there, they had virtually nothing — maybe nothing at all — in wind generation. And we've developed a lot. And we've got more coming on. Charlie?

CHARLIE MUNGEROh, I think in practically anything that makes sense in utilities, the Berkshire subsidiaries will be leaders. I think we can all be very proud of MidAmerican and its two leaders.

Constellation and Dynergy deals

WARREN BUFFETTYeah, we're enormously proud of MidAmerican. And we will do a lot more in utilities over time. Constellation didn't work out. I wish it had. But we were back there — Constellation, we learned of their troubles on a Tuesday at noon. I mean, we saw it in the stock price and so on. Dave Sokol and Greg Abel were in Baltimore that evening with a firm, all-cash bid to solve Constellation's problems. And Constellation was likely to get downgraded within 48 hours, maybe 24 hours. And they would've had posting requirements in connection with various derivative transactions that they probably would not have met. I mean, they were facing bankruptcy. And we literally went from a phone call that Dave made to me at noon or 1 o'clock to handing them a firm bid that evening in Baltimore. And that's one of the advantages of Berkshire. That is — I think that's a durable competitive advantage. I think there are very few organizations that will act in that manner and that — where you have the talent there that you feel is — as a CEO — you can back them up with that kind of money without worrying about it. So it's — that is a plus — for Berkshire, even though it didn't work out in that case. We will do more in the utility business.

CHARLIE MUNGERWell, you bought a pipeline, didn't you, in about two hours?

WARREN BUFFETTYeah, we did buy a pipeline, and it's turned out very well. And, in that particular case, the company, Dynegy, that — this was back in 2002 or so — the company needed the money enormously. They had gotten the pipeline from Enron. It was a very complicated transaction. But they needed the money. And we needed the Federal Trade Commission approval, the FTC approval, on the deal, as would anybody that was buying it. And we literally wrote a letter. I wrote a letter to the commission. And I said, you know, "These guys need the money. They need it before the 30-day period is up. And let us go through with this early. And we'll do any damn thing you tell us, subsequently." And Berkshire can make that kind of a transaction. We don't ask the lawyers before we do it or anything. We just do it. And that is an advantage. And it was an advantage to Dynegy. It got them through a period that they would've — I'm not sure they would've gotten through otherwise. So, we can move fast when the time comes. But the — one of the reasons we — there's a couple of reasons we move fast. A, we've always got the money. You know, but — and we've got a mental attitude toward that. But we also know we've got the managers that can deliver on the properties, once we own them. And that's a huge, huge advantage. Back — (BREAK IN RECORDING)

Foreign ownership rules limit China opportunities

SPEAKERWARREN BUFFETT (IN PROGRESS): — China. We would be restricted by that ownership limitation. But it's very hard to imagine that we won't find more things to do in China over time. I mean, it's a huge market. We do a lot of things. And some of those are exportable. And there will also, perhaps, be opportunities to buy more businesses there. We would've bought more than 10 percent of BYD, if we could've. But, that's all that they wished to sell us. So we hope that comes about.

U.S. trade deficit is actually China's problem

WARREN BUFFETTIn terms of the Chinese dollar holdings, you know, in a way, they can't get rid of owning more dollar assets. I mean, the nature of it is, if we're going to run a, as we did a few years ago, or a year or two ago — If we're going to run a $250 billion trade deficit with China, I mean, if they're going to send us goods — and we want those goods — to the tune of $250 billion more than we sell to them, they end up with $250 billion of little pieces of paper. And they can convert those pieces of paper, called U.S. dollars, they can convert them into — U.S. real estate, into U.S. stocks, U.S. government bonds. They can do all kinds of things. They can even trade them to the French, you know, and get euros or something in exchange. But then the French have the problem. So the — Chinese dollar assets are going to build as long as there's a significant trade surplus with China. And then they have the choice of what to put those dollars into. And they have elected, so far, to put a significant amount — into U.S. government bonds. And — I think — a major official, about a month ago or so in China, said he wasn't too happy about the prospect of what's going to happen in terms of the purchasing power of that money that's been put in U.S. government bonds. And I would say he's right. I mean, he — it — he — anybody that owns dollar obligations outside of this country is, if they hold them a long time, is going to get less back in the way of purchasing power than existed at the time that they took on those dollar obligations. And it's a major problem, not the world's worst problem, but it's a major problem for a finance minister or a government in China to decide what to do with this buildup that comes about, because they are running a trade surplus. And — they've set up the Chinese Investment Corp, which has a couple hundred billion dollars in it — in terms of deciding to make investments around the world, but —

Munger: China's economic policies are "exactly right"

WARREN BUFFETTIt's an interesting question, if you made me the finance minister of China, what I would do with the trade surplus, the funds that came in because of the trade surplus. And I think it'll take it over to Charlie and ask him what he would do, if he were the finance minister of China.

CHARLIE MUNGERWell, I (Inaudible) that is a very easy question. I would do exactly what they're doing. I think China has one of the most successful economic policies in the world. And China has advanced more rapidly than the rest of the world. And, I would say their policies are exactly right. And their rate of advance is so great and so meaningful that if they lost a little bit of purchasing power on their dollar holdings, it's a trifle in the big scheme of things from the viewpoint of China. So I've got nothing but admiration for the way the Chinese have been running their own affairs. And they're going to be very hard to compete with all over the world. And that is exactly the correct policy for China. That's the way you get ahead fast is to be very hard to compete with all over the world. So I think they're doing it exactly right. And I think that the United States and China should be very friendly nations. Because we're joined at the hip.

WARREN BUFFETTSo you'd suggest they keep buying U.S. Treasurys at —

CHARLIE MUNGERYou bet.

WARREN BUFFETT— practically no yield?

CHARLIE MUNGERWhatever the yield. They're not no-yield. Because they can buy longer.

WARREN BUFFETTOK, we've got some advice for the Chinese government. (Laughter)

Deal post-mortems shouldn't be public

WARREN BUFFETTCarol?

CAROL LOOMIS"In the past, you have stated that management should —" This question comes from Ingrid Hendershot. "In the past, you have stated that management should be required, after several years, to do a post-mortem on acquisitions it makes. Would you each provide us with your post-mortem on Berkshire's largest acquisition, General Re?"

WARREN BUFFETTYeah, I don't think — I'll comment on General Re, but I don't think we generally should make our post-mortems public. I don't think — I think that, if we acquired — We do believe in post-mortems. We strongly believe in them. We think they're conducted at far too few companies. It's easy to propose a deal and it's much harder to account for it later on. And — Charlie is a big fan of rubbing anybody's nose in their own problems. And it absolutely should be done. I don't think it necessarily should be made public. I don't think that you attract businesses by — and managers — by pointing out — even though you are the one that made the mistake, as the acquirer, in your projections — pointing out the shortfalls that may have occurred with the managers that are maybe doing a very good job to try and overcome the fact that you made a mistake in buying it in the first place. So I don't want to — I wouldn't want to get into that.

Buffett: I was "dead wrong" on Gen Re's reputation

WARREN BUFFETTGen Re has worked out well after a terrible, terrible start. And I was dead wrong, in 1998, when I bought it, in thinking that it was the Gen Re of 15 years earlier, which had absolutely the premier reputation in the insurance world. And some practices, in terms of reserving and underwriting, had changed somewhat. But I'm happy to say that, thanks to the combined work of Tad Montross, who is with us here today, and Joe, that the —

CHARLIE MUNGERThat's Joe Brandon.

WARREN BUFFETTYeah, Joe Brandon, of course. But Joe and Tad, when they took over in, what, September of 2001, actually — right about the time of the World Trade Center problem — they took after all of the problems. They went right after them, reserving, underwriting, whatever it might be. And Gen Re is the company now that I thought it was when I purchased it in 1998. So we're proud of them. It was a very tough job. It wasn't one that was going to get done by itself. And that, to some extent, when you tighten up on an organization that has fallen into some lax ways, it can — you know, that is not an easy job. Both of them, or each of them, they could've left for some other place and made just as much money, maybe more money, not had to face the problems that they faced at Gen Re. But they hung in there. And now we have an organization that we feel terrific about and has a great future. Charlie?

CHARLIE MUNGERWell, I think that's right. And — but it's very important that you have an ability to turn your lemons into lemonade. And we were very, very lucky to have Joe and Tad to help us in the process. It wasn't pleasant. And it wasn't pretty. And it was very successful. And it wasn't something that ordinary managers would've been at all likely to do. You had to be very tough minded to fix General Re. And they really did fix it.

WARREN BUFFETTWhen we do the post-mortems, we, in a sense, are looking at our own handiwork. I mean, we make the decisions. You know, it's not some strategy department someplace, or vice president in charge of acquisitions, or some management consultant that comes in and tells us we ought to buy this or that. We're looking at our decisions. And that's very important. And we talk about that. And we've made some dumb decisions. And most of them have been mine. Because I'm the guy that's sitting in Omaha, making most of the decisions. But it would really be a mistake to discuss, in public, my dumb decisions, which might reflect, you know, on some of the managers in some of the arenas. So we will not disclose those. But we will tell you that there are dumb decisions made around Berkshire.

CHARLIE MUNGERThe really brilliant decision in the General Re transaction was made by Joe Brandon. He was the one who decided that Berkshire should buy General Re. And he caused the transaction. And it wouldn't have happened, I think, if he hadn't been there. Would you agree with that?

WARREN BUFFETTYeah, that's true.

CHARLIE MUNGERAnd Joe was the steward for the General Re shareholders. We got a decent result, and they got a fabulous result. So if capitalism has any heroes in that transaction, why, Joe's the hero.

"We are not big believers in contracts"

WARREN BUFFETTOK, let's go to number 6.

AUDIENCE MEMBERYes, sir. Mr. Buffett, Mr. Munger, I'm Chuck Hosmer (PH) from California. And you mentioned earlier the union cooperation at the Buffalo newspapers. Without the introduction of unions, how do you view contracts for other employees of BRK subsidiaries?

WARREN BUFFETTI'm just trying to think whether we have any real contracts.

CHARLIE MUNGERI hope not.

WARREN BUFFETTYeah, we are not big believers in contracts. We hand people hundreds of millions or billions of dollars, in some cases, to sell us their business. And the decision we have to make is, are they going to have the same passion for the business after they hand us the stock certificate and we hand them the money? Are they going to have the same passion that they had beforehand? And if we're wrong on that, no contract is going to save us. We don't want relationships that are based on contracts. So — I can't — you know, I'm — I can't really think of a formal contract that we have. We have understandings about bonus arrangements and that sort of thing — and that's not that complicated — with various managers. I mean, we have — the comp of the top person at each company is basically my responsibility. And we have all kinds of different arrangements, because we have all kinds of different businesses. Some of our businesses, capital's an important factor. So you have to put that in the comp arrangement. Some of it, capital doesn't mean a thing. Some of our businesses are very easy and very profitable. Some of them are very tough. And it takes a genius to, you know, to get a so-so result. So we have a whole bunch of different arrangements on that. But we don't try to hold people by contracts. And it wouldn't work. And we basically don't like engaging in them. So you're looking at a company that — can you think of any contracts we have, Charlie?

CHARLIE MUNGERNo. Our model is a seamless web of trust that's deserved on both sides. That's what we're aiming for. The Hollywood model, where everyone has a contract, and no trust is deserved on either side, is not what we want at all.

WARREN BUFFETTYeah, we don't — we do not want to negotiate the size of the executive bathroom. I mean, that is not our game.

How to get yourself thrown out of Buffett's office

WARREN BUFFETTBecky?

BECKY QUICKThis is a question from Edward Donahue (PH) from Belmont, Massachusetts. "In the spirit of raising partnership value in these times, has Warren given any thought to spinning off as separate companies? “My thinking is that some of these companies would sell at higher multiples to book value that Berkshire currently does. Further, where appropriate, consolidate companies with similar industries with the wish to save on management costs, administration, and even potential selling costs."

WARREN BUFFETTYeah, we will not be spinning off any companies. We had to — we were a bank holding company, believe it or not, at one time. We became one in 1969. Then we were given 10 years to dispose of our bank, which was in Rockford, Illinois, and we did have a, in effect, a spinoff of that. But, we — if somebody comes around us and says, "Gee, you can — you've got a multiple of X, and you can have a multiple of 1 1/2 times X for this subsidiary, if you spin it off," you know, we can't wait to throw them out of the office. I mean, it just doesn't interest us. We are not looking for something that gives a, you know, a one-month jump or something like that in market value. If we've got a wonderful business, we want to continue it within Berkshire. We've got this ability within Berkshire, which is a real asset, in terms of moving money around into various opportunities without tax consequences. I mean, they're part of a consolidated return. So if a See's Candy is a wonderful business, which it is, but it generates a lot of capital that can't be used effectively in that business, we can move it to some other business or buy other businesses with it. And we have a real advantage in allocation of capital that a shareholder, basically, can't do as tax efficiently as we can do it within the company. Plus, when we buy businesses from people, we make them a promise. You know, they can read our economic principles in the back of the annual report. And they know that we're buying for keeps. You know, it is a marriage that's going to last. And we're not going to, because we can get a higher multiple or something for a temporary period of time, spin something off. On top of it, that — there would be those other costs. But that’s not the determining factor. It's the basic principle at Berkshire that we buy to keep. And people can trust us to keep our word on that. Charlie?

CHARLIE MUNGERYeah, the — so many of those spinoffs, because your market cap will be a little higher, Wall Street sells that stuff, so they can get fees. It isn't really doing that much for anybody, in the ordinary case. I suppose the one exception that could happen, if the regulation was crazy enough, you know, you can imagine something that might cause Berkshire to go to two parts. But short of something like that, you're looking at what you're going to get.

WARREN BUFFETTYeah, if it was actually hurting some operation that — because regulation was focused in that, and that tied the hands of other companies in the Berkshire group, you know, we'd have to look at that. But, as Charlie said, we have listened to presentation after presentation, over a lot of years, about — by investment bankers, you know, basically saying, you know, "If you just do this wonderful thing,” you know, all these — that the market will love you. And — it — how much is conscious, and how much is subconscious, we'll never know. But the one thing we do know is there's always a fee that accompanies it.

Don't know much about student loan business

WARREN BUFFETTArea 7.

AUDIENCE MEMBERGood afternoon. Mike Nolan from Montclair, New Jersey. Until recently, the student loan business in the United States has been a very attractive and successful one. However, proposed changes coming out of Washington have thrown the industry into disarray. Could you comment on the industry, which is highly reliant on both faith, trust, as well as financing, and talk a little bit about the companies in this business?

WARREN BUFFETTYeah, I don't know that much about it. Maybe Charlie does.

CHARLIE MUNGERNo, I don't know this much about it, either. There's been a fair amount of scandal, in terms of the sales methods. Some of the companies in the field got awfully cozy with some of the university administrators and so on.

WARREN BUFFETTIt's been a long time since Charlie and I thought about getting a student loan. So we — (laughter) — haven't checked the regulations too carefully on that one.

CHARLIE MUNGERBut, you know, we don't know a lot about it.

WARREN BUFFETTYeah. (Laughter) I actually got approached, I guess it was about a year ago or a year and a half ago, on the deal that fell through, on Sallie Mae. And I said, at the time, to the fellow that called me, I didn't understand it that well. And it turned out to be a good thing I didn't.

Earnings "management" at Goldman Sachs and General Electric

WARREN BUFFETTAndrew?

ANDREW ROSS SORKINOK, this question comes from John McDonald (PH). And he asks, "Warren, in your General Electric and Goldman Sachs investments, do you think you've picked attractive businesses or simply attractive securities? “Ben Graham's 'Security Analysis' suggests that the most frightening things an executive management can do is manage earnings, which it could be argued both of these firms do. What is your reaction to that?"

WARREN BUFFETTWell, I can say that I could argue that a very substantial percentage of American industry over the last 15 years, at one time or another, has managed earnings. And I've witnessed it and argued against it and gotten no place. So, I don't regard that as a malady that's limited in its experience. I don't know anything. I would not get into the specifics of those companies. I felt good about those companies, in terms of the quality of the businesses they had and the quality of the management. But it was the terms, primarily, that caused us to make those deals. I mean, those were made in a period when markets were in chaos and you should've gotten very good terms for committing money then. Very people were either willing, or in some — many — most — cases, able to commit major sums on short notice. And it took good terms in order for us to do it. It — And like I say, I'm not sure there was any second possibility in those cases. It was a really extraordinary period. We were happy to do it. I feel good about the deals, obviously, because we got a very good coupon. But considering the circumstances under which the deals were made, I don't think there was an alternative. So if they wanted 5 billion and 3 billion, respectively, on those deals, I think we were the low bid, in effect. But I also think we made very decent deals. And you know, could we have done something better with the money at that time? I don't — as I measured at that time, I could not find anything that I liked better. It was the terms of the deals overwhelmingly, although we obviously liked the businesses. I know the managers, the CEOs, of both companies very well. And I think they are terrific people. I think they're smart people. And I think they're very — they've been very straight with us, straight with us long before we made a deal with them. So we're very happy with those deals. Charlie?

"Very happy relationship" with Goldman Sachs

CHARLIE MUNGERYeah, you know, there's been a lot of criticism of investment banking in this arena, starting with that movie. But Berkshire itself has had marvelous services from all of its investment bankers, which is interesting.

WARREN BUFFETTThink of what we'd be saying, if we'd been mistreated. (Laughs) We've done a lot of business with Goldman Sachs over the years. And my experience goes back to when I was 10 years old and met Sidney Weinberg, who was running the firm and was a legendary Wall Street — well, he was "Mr. Wall Street" for a long, long time. And I was a friend of Gus Levy's. And Gus Levy also did some really nice things for us, including when we had a little nothing company, called Diversified Retailing, which Charlie and I and Sandy Gottesman jointly formed. Gus came in on an underwriting of a $6 million issue brought by New York Securities, which he wouldn't have dreamt of coming in, you know, for — in that kind of a deal, under most circumstances. And he had Goldman Sachs join in at that time. So there have been a lot of things that have made for a very happy relationship with Goldman Sachs. I feel good about them. And of course, we do lots of business with General Electric. We've bought I don't know how many of those wind turbines from them. But GE — you know, is a very, very important American institution. We'll do — we'll sell them a lot of things. We'll buy a lot of things from them. And we'll make money on our investment. So that keeps me happy.

Buffett optimistic on America's standard of living

WARREN BUFFETTArea 8.

AUDIENCE MEMBERHello. Mark Hoffman (PH) from San Diego, California. Just want to thank you for all your wisdom and advice over the years. Also like to thank the boys at — the Blumkins — the Furniture Mart. They gave us a great tour the other day. I'm from an organization called Eel (PH). And they really showed us the culture at Berkshire and what you guys do. My question is, looking at the overall world economy, the Berkshire businesses are great. But my question is, is there underlying issues you see in the world economy, like going off the gold standard 40 years ago and fiat currency in countries making money like crazy? If the Berkshire businesses are great, but the underlying economy is a problem, where do we go from there? What are the questions you're asking yourself about the world economy? Thanks.

WARREN BUFFETTYeah, there's always a lot of things wrong with the world. Unfortunately, it's the only world we've got. I mean, so we live with it, and we deal with it. But the beauty of it is this system works very well. I don't have the faintest idea what's going to happen in business or markets in the next year or two years. But the one thing I know is that, over time, people will live better and better in this country. We have a system that works. It unleashes human potential. I was just thinking, we have, today, about 35,000 people here. That was almost 1 percent of the population of the United States in the first census in 1790. Just 100 groups like this, and you were talking the whole country. If you look at the — if we had had this room filled, back in 1790, with 35,000 citizens of the United States then, they would've been just as smart as we were, natively, their intelligence. They would've lived in a country with resources that, obviously, same fertile soil, the same temperature, the same minerals, all of that. So they were just as able as we are. But they weren't turning out anything like we turn out today. I mean, just look at how we live compared to those people several hundred years ago. So we have had a system that works. It unleashes human potential. And China went, for a long time, without a system that unleashed potential. Now they've got a system that's unleashing human potential. We haven't reached the end of that road, by a long shot. I mean, we're just starting, basically. We will have bad years in capitalism. I mean, it overshoots in markets. It gets overcome by fear and greed and all of that sort of thing. But if you look at the 19th century, you know, we had a civil war. And we had 15 years or so of bad economic times spread out through that century. We had six panics, as they called them in those days. And the 20th century had a couple of great wars. And we had plenty of recessions. And we had the Great Depression. So we have these interruptions in the progress of our society. But overall, we move ahead. And we not only move ahead, we move ahead at a pretty damn rapid rate, when you think about it. I mean, when, in the 20th century, we had a 7-for-1 improvement in living. And we did that. You know, we had slavery for a long time. We had blacks counted as three-fifths of a person. We didn't let women vote for 130 years or thereabouts. I mean, we have — we were wasting human potential. And we still are. But we were doing it more so for centuries. But we do keep moving forward in kind of fits and starts. And right now, we're sputtering somewhat, in terms of the economy. But there is no question, in my mind, that there is enormous human potential and that every period, every year we will meet, you can name a bunch of problems. I mean, it will happen. But the opportunities will win in the end. And you know, your kids will live better than you live. And your grandchildren will live better. And we will find more and more ways to find easier and better ways to do things that we haven't even dreamt of yet. Charlie?

Munger optimistic about solar energy

CHARLIE MUNGERWell, now that I'm so close to the age of death, I find myself getting more cheerful about the economic future — (laughter) — which I'm not going to be here to enjoy. And what I find really cheerful is that we are plainly going to harness the direct energy of the sun. And we're going to have electrical power all over the world. And that's going to enable overpopulated countries to turn seawater into fresh. And it's going to eliminate a lot of the environmental problems and preserve more of the hydrocarbon resources for future needs in — as chemical feedstocks. What I see is a final breakthrough that solves the main technical problem of man. And you can see it coming right over the horizon. And of course, MidAmerican and BYD will be participating in it. So, I think it's hugely a mistake to think only about your probable misfortunes. You should also think about what's good about your situation. And what's good about our situation now is the main technical problem of mankind is about to be fixed. It's the — if you have enough energy, you can solve a lot of your other problems.

WARREN BUFFETTHe is getting more optimistic as he gets older. (Laughter)

Not concerned about Swiss Re reinsurance deal

WARREN BUFFETTCarol?

CAROL LOOMISThis is a question about Berkshire's investment in Swiss Re. "Given that you have no control over Swiss Re's underwriting, how can you be comfortable with 2.6 billion invested in a relatively junior security in addition to the relatively sizeable common stock position you already have? "Did the Gen Re acquisition's problems over the first several years you owned it not make you wary of the potential landmines in reinsurance? “And isn't Swiss Re even more likely to continue to make mistakes, given that you have no management control? "Or has your insight into its underwriting culture, since you entered into the quota share agreement, increased your comfort level with the risks it is taking? “You have said, in the past, that Berkshire's float is worth as much or more than equity. Would you say the same about Swiss Re's float?"

WARREN BUFFETTAbout Swiss Re's what, now?

CAROL LOOMISSwiss Re's float.

WARREN BUFFETTOh. The — we have several arrangements with Swiss Re. One was engaged in a little over a year ago, where we take 20 percent of their property-casualty business, which is reinsurance business, primarily, over a five-year period. Then we made a — and that started about a year ago. And then, a month or two ago — and at that time, we bought about 3 percent of Swiss Re's common. Then, about a month ago, we invested 3 million — 3 billion — Swiss francs in a security which pays us 12 percent a year and which they can call, after two years, at 120 percent of its principal amount. And then if they haven't called it by the third year, it becomes convertible to 25 Swiss francs a share. The odds are probably pretty good that it will get called. And if it gets called, we'll be unhappy, because they only reason they'll call is if it's advantageous for them to call it and disadvantageous to us. But if it does get called, we will get 120 percent of par plus 12 percent a year for it. We are senior, actually, to the Swiss re-equity of roughly 20 billion Swiss francs. So I would not regard it as a junior security. Swiss Re's problems of the last year or so have not come about, in any way, through their insurance underwriting. Their insurance underwriting has been fine over the years. And we feel fine about having a 20 percent quota share in that. And we feel fine about our investment. So, I would regard — They develop a large amount — as many reinsurance companies do — they develop a large amount of float per dollar of premium volume. So we would expect that this 20 percent quota share that we've had for a year will develop a very significant amount of float relative to the 3 billion or so of premiums that it represents. And I think it will turn out to be attractive float. It will be attractive for us. And it'll even be a little more attractive for Swiss Re. Because in effect, they get — the commission we pay them gives them a little overwrite on that. I think, like I say, that the most likely thing is that our $3 billion position gets called. We also have that $2 billion or 2 billion Swiss franc. If I've said, "dollar," I meant Swiss franc. $2 billion — 2 billion Swiss franc — adverse loss cover. And what that says, essentially, is that, if their reserves — we'll say, in the property-casualty business, at the end of 2008 — were roughly 60 billion francs — that once they've paid out — these are not precise figures — but once they've paid out 58 billion, 2 billion less than their carried reserves, that we pay the next 5 billion. And like I say, it's very unlikely we would be paying out money before 15 years on that. And if their reserves are accurate, we will pay out only the 2 billion. So that was a transaction, again, that was made at a time when Swiss Re was under considerable pressure. They were under threat of downgrade, in terms of ratings. And, I met with the CEO — the then-CEO — of Swiss Re on a Sunday in Washington, D.C., along with his investment adviser. And we arranged a transaction, which their shareholders and their directors later approved. And I think we met their needs. And I think we've got an attractive transaction. There's nothing wrong — you know, we may prefer Gen Re — but there's nothing wrong with Swiss Re's underwriting. It did not cause any of the problems that they have now. That arose from something akin to the problems of AIG, although not remotely on the scale of AIG, but both in somewhat in financial products and somewhat on the asset side. It did not arise from underwriting. Charlie?

CHARLIE MUNGERYes, and that's a terrible problem. We wish we had more of it. (Laughter)

Irrational CEO compensation and incentive systems

WARREN BUFFTTArea 9, please.

AUDIENCE MEMBERI'm Vishali (PH) from the Philippines. My question is about compensation in a capital-intensive subsidiary. Now, I am going to take the liberty to assume that the large number of bank failures were caused, in large part, by incentive bias. If a board of directors makes a mistake with compensation, then the board introduces incentive bias towards earnings manipulation. So bearing in mind rule number one, which is, “don't lose money,” and bearing in mind that it's OK to have losses in the short term if the moat is widened, then how do you develop a fair and intelligent compensation package for a manager of a subsidiary that requires a lot of capital?

WARREN BUFFETTWell, you obviously — it's a very, very good question. It's one that Charlie and I have both thought about. And we've been around so many crazy compensation systems that we've spent a lot of time thinking about it and talking about it. In a capital-intensive business, you have to have something that — you have to have a factor in the compensation arrangement that includes a capital cost element. We have dozens and dozens of subsidiaries. And we have different arrangements for different businesses. Because — as you point out —an arrangement for a business that needs no capital, like a See's Candy or a Business Wire or something of that sort, has to be materially different than something that requires a lot of capital. We think we've got rational compensation systems. We agree with you that incentives are very important. I would say that I think your question implied, a little bit, that the board sets these things. The truth of the matter is, at least over 40 years of experience and 19 boards that I've been on and observing behavior a lot of other places — basically, the board has had relatively little effect on it. The CEO has managed, in most cases — in a great many cases — to be an important determinant of his own — or her own, usually his — own compensation arrangement. They, you know, they — the human relations — first of all, they pick the comp committee, you know. So I have been on one comp committee out of 19 boards. I mean, people are not looking for Dobermans. They're looking for Cocker Spaniels. And then — (Laughter) and they're looking for Cocker Spaniels that are waving — wagging their table — tails, very friendly. You know, you — CEOs spend a lot of time thinking about who's on their comp committee. The audit committee is less important. But the comp committee, they think about plenty. And the comp committee meets every few months. And a human relations vice president comes in, who is responsible, directly, to the CEO and probably recommends a compensation consultant. And believe me, they don't go around looking for the ones that are going to upset the apple cart. So it's been a system that the CEO has dominated. And in my experience, boards have done very little in the way of really thinking through, as an owner or as owners' representatives, what the hell is the proper way to pay these people and how to incent them, not only to do the right thing, but also to incentivize them not to do the wrong thing. Charlie and I are fairly familiar with a company here in town, the Peter Kiewit Organization. And Pete Kiewit, I don't know, 50 years ago or more, you know, figured out a very, very logical way to pay people in this business. And it wasn't rocket science. And I'll guarantee he didn't consult with any compensation consultant on the subject. He just figured it out. And you would be able to figure out one. I can figure out one. But you have to understand that not every CEO wants a rational compensation system, you know? Who wants rationality, when irrationality pays off more? So it's a real problem getting people at the board level — I think the — I don't think there should be a comp committee. I think the board as a whole actually should thrash this sort of thing out. So that you don't get some report from the comp committee, and that's treated as holy writ, because they've debated for a couple of hours the day before, supposedly, and then come in and give some recommendation, everybody rubber stamps it. I think it ought to be a subject of general discussion. I think it's very important how you compensate the CEO. I've said, in our annual reports, choosing the right CEO, making sure they don't overreach, and exercising independent judgement on major acquisitions or divestitures, if the board does that right, you can forget about all this other check the list — checklist stuff. And if they don't get that right, the other doesn't make much difference. So I would say that it can be done. It's very difficult to have a system where somebody — where the board, thinking as owners or representing owners, care as much about it as the guy on the other side who's getting compensated. I do think it's gotten better in recent years. But it started from a very low base. Charlie?

CHARLIE MUNGERYeah, there are some counterintuitive conclusions in the field that are quite interesting. I would argue that a liberally paid board of directors in a big American public corporation is — the liberal pay is counterproductive to good management of the company. There's a sort of a reciprocation. You know, "You keep raising me, and I keep raising you." And it gets very club-like. And I think, by and large, the corporations of America would be managed better if the directors weren't paid at all.

WARREN BUFFETTWe're working toward that. (Applause) Well, it is interesting. Because the SEC would define independent directors, you know, as — they would question, you know, my independence, if we would own billions and billions of dollars' worth of some security, but we would sell them some ice cream at Dairy Queen or something of the sort. And the — to get real owners' representatives is very — and knowledgeable, because they've got to know business. They have to really have some business savvy. And the truth is, if you get somebody that's getting $200,000 a year, $250,000 a year, for being director of a company, and they don't have that much income outside or net worth, and they would just love to get one more directorship for another $200,000, they are very unlikely to sit there and argue with the CEO and say that the system is rigged in favor of incentive compensation or something of the sort. There is more baloney in the compensation arrangements — And now, you have these 100-page proxy statements. If you take 100 pages to explain how you're paying the people of the place, something is wrong. I mean, you don't need 100 — we don't have 100-page, you know, understandings or anything of the sort. But it's gotten to be more and more of a game as it's gone along. And I would say that, as Charlie — that when compensation is a very important part of a director's wellbeing, you do not have an independent director. And the funny thing is, the way it's — the system has been arranged, those are the very people that tend to be regarded as the independent directors, in most cases.

CHARLIE MUNGERIt's way worse than practically anybody recognizes. Elihu Root, who was the ultimate good Cabinet officer in the United States, used to have a saying that no man was fit to hold public office who wasn't perfectly willing to leave it at any time. And of course, the minute he left public office, he went right back to being the leading lawyer of the world. So he didn't have much to lose by — But the man who has a lot to lose from his office is going to be very loath to be an independent director. So the way we do it, at Berkshire Hathaway, is one-tenth of 1 percent of America. And the way everybody else does it is silly. (Laughter)

WARREN BUFFETT(Laughs) I love being up here with him.

Worst-case scenario for insurance operation

WARREN BUFFETTBecky.

BECKY QUICKThis is a question from Paula Sauer (PH). And, since Charlie seems to be getting more optimistic, maybe we should ask him this question first. And then Warren, you can try and top it. But Paula writes in, "What's the worst-case scenario you could imagine with respect to the insurance business?"

CHARLIE MUNGERYou mean ours or generally?

BECKY QUICKI believe she means yours in particular.

CHARLIE MUNGERYeah. Well, the very worst case is some catastrophe where we lose quite a few billions of dollars pretax. Even that, I don't think, significantly impairs the basic business in place. So I think we have a marvelous insurance business. I don't want to trade it for any other that I know. How about you, Warren?

WARREN BUFFETTYeah, no, it is a fabulous business. The worst — I used to say we would probably play 4 percent to 5 percent of the industry loss — from any mega-catastrophe. I'm not sure where Katrina finally came in. I don't know whether it was 60 billion or something in that area. And we probably did pay close to — we were in that 4 percent to 5 percent range. We're lower than that, probably, right now, not necessarily way lower. But if we had $100 billion catastrophe, you know, we would probably pay 3 to 4 percent of that, currently, so that you'd be talking 3 to 4 billion. You know, the worst — I think the worst situation that could occur is if we ran into so much inflation that people got very, very unhappy with anything that they had to buy in their daily life. This applies in the utility business, too, but certainly like auto insurance, and in effect, that they express their outrage at inflationary increases and said, "Let's nationalize the whole thing." I mean, that would not — that would be a huge asset that would disappear, if that occurred. I don't think that's a high probability. But if you're asking me to look at worst cases, that's probably the one I would come up with. I —

CHARLIE MUNGERWell, that happened. Auto insurance was nationalized somewhere, New Zealand or somewhere.

WARREN BUFFETTOh sure.

CHARLIE MUNGERBut it's not — if you want the absolute worst cases, you found it.

WARREN BUFFETTYeah, we nationalized, to some extent, the annuity business, you know, when we went into Social Security. I think it was a good thing. But when people get outraged enough about something, you've heard talk about the banks. I mean, when the public gets outraged, the politicians will respond. And inflation would be — wild inflation — would be the most likely cause, it seems to me, if something like that — I don't think that's probable — but something like that happening in auto insurance. It's a bill that most people pay, you know, every six months, or even more frequently than that. And if they see that bill going up and they don't want to get rid of their car, they're going to get mad. And utility companies are going to get — utility customers — are going to get very mad during inflation. Because they need to turn on the lights. And they hate to see, you know, those monthly bills going up. It's the — it’s something they can't give up. And it's very visible. And the reaction will be to go to their public representatives and say, "Do something about this." And one of the things they can do about it is take it over. So very low probability of that, but it's not nonexistent.

No preset goal for international investments

WARREN BUFFETTArea 10?

AUDIENCE MEMBERGentlemen, Patrick O'Donoghue (PH) from Cork in Ireland. So I suppose I should start by saying I'm sorry you've had such a tough time in my otherwise wonderful little country.

WARREN BUFFETTI love the Irish. We've got some — we've had great luck with the Irish. It was my mistake. (Laughs)

AUDIENCE MEMBEROK. Now, I'd like to grow my investment in Berkshire Hathaway. And I think we've established it's a wonderful company. So I'm left with a couple of other issues, which, for a foreigner, are maybe a little different for people domestically, the first of which is that any gains in Berkshire Hathaway may be wiped out by a slide in the dollar versus the euro. And we're talking a long-term investment here, obviously. The second is, perhaps you could discuss the — your — global acquisitions, which will reduce your dollar dependence and increase your foreign-source income. I've lost the third. If you could discuss those, please.

WARREN BUFFETTSure, yeah, and if it comes to you, that'll be fine. The — predicting the euro versus the dollar, I'm no good at. You —

CHARLIE MUNGERYou did pretty well.

WARREN BUFFETT(Laughs) Yeah, we did make a couple billion. But the — (Laughter) You could, if you wished — I'm not suggesting this at all — but euro/dollar is an easy thing to hedge. I'm not recommending that. I'm just telling you that that is an option, if you're worried about a major currency. It's hard to do with smaller-country currencies. But when you're talking the euro/dollar thing, you can keep hedging that, if you want to. But like I say, we don't normally do that sort of thing. And that could be a pain in the neck to you. I would say, in terms of Berkshire's earnings, we will just keep doing things that make — we think make sense. Now, if we own — We own over 8 percent, for example, of Coca-Cola. Coca-Cola, you know, makes 80 percent or more of its money outside the United States. We own a lot of Procter & Gamble. They make a lot of their money out of the United States. Kraft makes a lot of money out of the United States. So we have a lot of indirect sources of earnings. And then we have a lot of direct sources of earnings outside the United States. ISCAR makes most of its money — it makes money in the United States, but it makes a lot of money elsewhere. And we have other businesses like that. We do not have a predetermined goal at all of developing X percent of our earnings here or there or that place. We just keep, you know, every day, we go to work. And we don't know whether the phone call will come from Israel or from Indiana, in terms of a chance to invest some money. We want all of our subsidiaries to be looking at opportunities everyplace. And some of them will find them abroad. And some of them won't. So it — we are not a — we are not heading anyplace, in terms of sources of earnings. There are a lot of countries we feel comfortable with. And we would be happy to put money into those countries. But we don't wake up in the morning saying that we would like to have more money in Germany or Spain or whatever, or that we would want to take money out of those countries. And Charlie, have any more?

CHARLIE MUNGERYeah. People look at a modern, liberal democracy. And it's very easy to conclude that it's messy and full of defects. And I think that's a correct view. But it's not at all clear to me that the messy defects that we have are worse than the messy defects of Europe. I am an agnostic about these things. I think there's plenty wrong and plenty right on both sides of the Atlantic.

"Nobody gets any joy" from layoffs

WARREN BUFFETTOK, Andrew?

ANDREW ROSS SORKINSo this question comes from three shareholders who happen to be employees of Berkshire portfolio companies. They've asked not to be named in the — they ask the following question. They say, "We are concerned with both the financial condition of the company and the stability of our jobs. Could you discuss your attitude towards the use of layoffs as a means of responding to short-term downturns in company profits?"

WARREN BUFFETTYeah, these are investee companies or subsidiaries?

ANDREW ROSS SORKINThese are — I imagine they are investee companies. They —

WARREN BUFFETTYeah.

ANDREW ROSS SORKINAnd they are shareholders and employees.

WARREN BUFFETTYeah, I wouldn't have a different attitude. I was just clarifying it. The — there's no question that business conditions can change such as to necessitate temporary or permanent layoffs. I mean, there's — scales of businesses change. We're fortunate, in a place like GEICO, where our business is expanding. So we'll probably add at least, I would guess, a thousand jobs, net, at a GEICO. But at the same time, we probably have close to half of our brick plants closed in the Southwest, because people just aren't building houses now. Now, that business will come back. And we'll rehire people. On the other hand, our textile business never came back. And we employ fewer people at the Buffalo News than we did a year ago. And we are not going to regain those or get back to previous levels. So there are some businesses that may permanently contract. And you have to face up to that, in terms of layoffs. There's other businesses that have severe cyclical-type contractions, and they are going to face significant layoffs. There are other businesses that are suffering a little bit during a period like this, but very little. And we will resist the idea of having layoffs. We — you know, nobody gets any joy out of it. And generally, you do it, probably, a little too late, even, because you keep hoping the business will bounce back up or something of the sort. But, you know, it — if the business changes in a material way, you'd better change your business model. Or, you know, somebody else will. And then you'll even have more changes facing you. On balance, we hope we get into businesses that don't face those kind of problems. But certainly, in our construction-related businesses — we've had layoffs at Shaw, we've had layoffs at Johns Manville, we've had layoffs at Benjamin Moore, we've had layoffs at Acme Brick, and there's really no alternative. I mean, it — and our competitors all have had also. And you know, in the textile business, we got into it in 1965. In the end, we laid off everybody. I mean, it — we — it had contracted enormously before we got there. We tried all kinds of things. And we finally gave up. You know, there — capitalism — you know, is creative destruction. And sometimes, you're on the short end of that. This year, in terms of the businesses we have, you know, our employment will probably be reduced even — I'm almost sure it will — even though GEICO will expand. It will not be reduced dramatically, because it just hits in certain areas. But it will be reduced. And our managers have to look at the reality of the current situation. Charlie?

CHARLIE MUNGERYeah. Some of our businesses have a shared-hardship model, where they don't layoff, at least not yet. And the businesses with that model tend to be very strongly placed, economically. So I guess it shows that Benjamin Franklin was right, when he said, "It's hard for an empty sack to stand upright." And, so we're all over the map on that, and so is all of industry. And — But I do think the — an ideal model would be a business so strong that it could operate in the shared-hardship mode instead of the layoffs.

WARREN BUFFETTYeah, some are doing that, where they — you know, you give up hours. And — but a lot of operations don't lend themselves to that very well, either. So —

CHARLIE MUNGERISCAR's operating that way.

WARREN BUFFETTYeah, ISCAR's operating that way. And, in other cases, you basically have to close down whole plants. I mean —

CHARLIE MUNGERYeah, sure.

WARREN BUFFETTYeah, that's just the nature of it. It's better — you really can't operate every plant at 50 percent and have it work as effectively as shutting down the least-productive plants.

CHARLIE MUNGERIn a world where you sometimes have to amputate a limb to stay alive, you can't expect that every business can stay exactly as it is.

Fight egregious CEO pay with embarrassment, not legislation

WARREN BUFFETTOK, area 11.

AUDIENCE MEMBERHi, Ralph Witkin from Greenwich, Connecticut. I was first here in 1995. And I really appreciate the way you handle this meeting. I've been to dozens of others. And I know you're not obligated to do this. And I thank you for it, both of you. My question is very similar to number 9's, regarding executive compensation. Not so much your view on the compensation, but how we, as shareholders, can make some attempt to try to correct this and bring it back into some level of balance. Thank you.

WARREN BUFFETTI had a senator call me just the other day. And, his constituents, obviously, are enraged about executive comp. Probably — you know, AIG really had a huge impact, although, you know, you can take the Merrills and all the rest of them, also. But that story was huge with people. And it was probably — in a certain sense, the outrage was disproportionate to what happened. But in any — it doesn't make any difference. The people are enraged about it. So this senator called me. And he said, you know — he was essentially saying, "Tell me about a statute we can enact that will make my constituents happy about executive compensation." And my advice to him was that he probably couldn't, and that the last time Congress got into this was in the early days of the Clinton administration, when they passed a bill that said, as I remember, for the top five officers, that you couldn't get deductibility for comp in excess of a million dollars annually, unless it was tied to performance in some way. That was probably the most counterproductive piece of legislation that Congress has ever come up with, which is quite a statement to make in itself. (Laughter) The net result of that was that when the tax was imposed, of course, the stockholders paid it and the officer didn't. So it penalized the shareholder, who was already getting penalized by the comp. It led to all kinds of arrangements that were designed to dance around this, which involved lots of lawyering and lots of consultants and lots of pages of proxy statements, the net effect of which was to ratchet up compensation very dramatically. Compensation increased far more, in my view, because that was put on the books than otherwise. So I suggested to him that the first thing they would do — should do — is probably repeal that and say, "We were wrong," and then figure out whether they should do something right. But that did not go over very well. (Munger laughs) So I would say that — I've always proposed this. It never has gone anyplace. But that won't stop me from continuing to propose it. All you need in this country is the top half dozen or so investment managers who manage, you know, we're talking hundreds of billions, trillions, in some cases, of assets. If they would just speak out on the most egregious cases. Just — you know, there's a lot of stuff about "say on pay" and everything. But half a dozen of them, they get lots of publicity — they wouldn't have to worry about getting their views out. The way they get big shots to change their behavior is to embarrass them, you know, basically. And the press has great opportunities to do that. And — but they need the cooperation of the big investors. So if you've got three or four of the biggest investors, when the XYZ Company comes out with some crazy plan, to step up and just say, "This is outrageous," it would change behavior. And it would — The directors don't like to look foolish. They don't like their names in the paper looking foolish. And you would see some real changes. I think that the legislation for it is going to be — I just don't know how to write the stuff, you know? I mean, you read the case recently at Chesapeake Energy, you know, $75 million for kind of a re-signing bonus and some — there were some other things involved, too. I mean, it just — you wonder what people are thinking. You know what the CEO is thinking. And it just — I don't think you can write the statute that stops it. And like I said, the one they tried to write just screwed everything up royally. But I do think big institutions — if they spoke out — you'd only need three or four of them that spoke out jointly. And they don't have to do it on every corporation at all, just when it's egregious enough. But if they get a reputation for speaking out when it's egregious, every now and then, it would act as — I think there would be some restraining factor that might set in in corporate America. Because the restraining factor is not there then — not there now. I mean, right now, every consultant comes in and brings along what the people at so-called pure companies are making. And they — Nobody wants to say their CEO is in the bottom quartile or something. So they just keep comparing themselves to the higher quartiles. And then they ratchet up from there. And, you know, it's a game that works wonders. I call it the honor system. You know, the shareholders have the honor and the executives have the system. (Laughter) Charlie?

CHARLIE MUNGERYeah, well, I don't — I'm not too optimistic about fixing it from the big investor standpoint. The big investor groups contain many an investment manager making $20 million a year for insignificant contributions. He's like a man in a glass house that starts throwing stones. And the public pension funds are dominated, in many cases, by left-wing politicians and by labor unions who tend to have an agenda of their own that doesn't really relate to good management. So, sometimes, the cure is worse than the disease.

We don't hire potentially great managers

WARREN BUFFETTWell, on that hopeful note, we'll move on to Carol. (Laughter)

CAROL LOOMISThis is a question from Peter Poulson, spelled P-O-U-L-S-O-N. He says, "When you acquire companies, they come equipped with managers. And in general, Berkshire has done a great job putting the right leaders in the right roles. “But occasionally, you have to hire someone for an executive spot. Please describe an interview that you might have with a prospective Berkshire operating executive. What do you look for? How do you evaluate a person's potential to become a great manager?"

WARREN BUFFETTWell, usually, we hire people that have already proven they're great managers. I mean, when we buy a business, very — a very high percentage of the time, the management comes with it. When we buy an ISCAR, you know, we get the group that had been knocking the ball out of the park for years and years and years. And the real question we have to ask ourselves is, you know, will they be with us in the future? Will they keep — will they be feeling the same way after the deal as they did the day before the deal? And we've made occasional mistakes on that. But overall, that does come through. So it's — we've had good luck with managers, not perfect. And, the toughest part is, since we have no retirement age, is when managers lose the abilities that they had at an earlier age. And that — it doesn't relate to — there's no yardstick you can use up and down the line for that. So it's — people age, at least in business ability, they age in very different ways and at different paces. And Charlie and I have the problem of figuring out, sometimes, when somebody has — does not have the same managerial ability that they had at an earlier time. And then we have the responsibility for doing something about it. And we hate it. But it's —

CHARLIE MUNGERBy the way, we've been slow in those.

WARREN BUFFETTWe've been slow every time.

CHARLIE MUNGERWe've been slow. If we really love the guy, we're really slow. (Laughter) We are far from ideal.

WARREN BUFFETTYeah, well, it's very — well, we had a manager, you know, a wonderful — I mean, a guy we both loved at Wesco. And he got Alzheimer's. I mean, it — you know, and we didn't want to face it. We finally did. But it took us probably an extra year, year and a half, didn't it, Charlie?

CHARLIE MUNGERSure.

WARREN BUFFETTYeah. It's the only part of my job that I don't like, basically. I mean, I hate it. But — I'd pay a lot of money not to have to do it. But occasionally, it happens. Fortunately, it doesn't seem to happen that often at — We find people who love their businesses, you know? I love Berkshire. I — you know, I go to work every day, and I'm excited about it. And we — you can spot that in people. I mean, I think most of you would probably realize that that's the way I feel about it. And I realize that's the way the managers of our subsidiaries feel about it. I mean, Tony — Tony Nicely — went to work at GEICO when, you know, he was a teenager. And he's as excited every day about GEICO as I am. It hit me the first time — I saw him yesterday at lunch. And the first thing he does is hand me the figure, which he knows I'm waiting for. You know, "(Inaudible), we're up 505-thousand," and he carries it out all the way, "policyholders." And, I mean, I get excited about those numbers. He gets excited about them. You know, we talk about state-by-state, whatever it may be. And, you can't put that into somebody. But we do recognize it when it's there. And we do our best to make sure that we don't do anything that dampens that in any way.

Don't try to time the market

WARREN BUFFETTOK, area 12.

AUDIENCE MEMBERGood afternoon, Mr. Buffett, Mr. Munger. Jimmy Chong (PH) here from Dayton, Ohio. Mr. Buffett, in October of last year, you wrote, in a New York Times op-ed piece, that you were moving your personal portfolio to a hundred percent U.S. equities. My question is, is that move complete? If not, are you still buying? And in addition to that, how would you rank the recent market downturn in terms of investing opportunities in stocks during your investment careers?

WARREN BUFFETTWell, it's certainly not as dramatic as the 1974 period was. Stocks got much cheaper in 1974 than they are now. But you were also facing a different interest rate scenario. So you could say they really weren't that much cheaper. You could buy very good companies at four times earnings or thereabouts with good prospects. But interest rates were far higher then. That was the best period I've ever seen for buying common equities. The country may not have been in as much trouble then as we were back in September. I don't think it was. But stocks were somewhat cheaper then. In the recent period, I — you know, I bought some equities. And then corporate bonds looked extraordinarily cheap. The spreads were very, very wide. So I bought some of those, too. But the cheaper things get, the better I like buying them. I mean, if I was buying hamburgers at McDonald's, you know, the other day for X, and they reduced the price to 90 percent of X tomorrow — not likely — but if they did, I'm happy. I don't think about what I paid yesterday for the hamburger. I think I'm going to be buying hamburgers the rest of my life, you know? The cheaper they get, the better I like it. I'm going to be buying investments the rest of my life. And I would much rather pay half of X than X. And, the fact that I paid X yesterday doesn't bother me, if I get — as long as I know the values in the business. So on a personal basis, I like lower prices. I realize that that is not the way all of you feel when you wake up in the morning and look at quotes. But, it just makes sense that when things are on sale, that you should be more excited about buying them than otherwise. And lately — when I wrote that article in the Times, I did not predict what stocks were going to do. Because I never know what they're going to do. But I do know when you're starting to get a lot for your money. And that's when I believe in buying. Charlie?

CHARLIE MUNGERWell, if stocks go off 40 percent on average, they're obviously closer to an attractive price than they were before. And, of course, interest rates have gone down a lot recently, at least short-term interest rates. It's nothing like '73-4. I knew when that happened that that was my time and my only time. I knew I was never going to get another trip to the buy counter like that one. Unfortunately, I had practically no money available, which is — (Laughter)

WARREN BUFFETTThat's why it happened.

CHARLIE MUNGERThat's why those times occur.

WARREN BUFFETTYeah.

CHARLIE MUNGERSo, if I were you, I wouldn't wait for 1973-4.

WARREN BUFFETTNo, we don't try to pick bottoms or you know — We don't have an opinion about where the stock market's going to go tomorrow or next week or next month. So to sit around and not do something that's sensible because you think there will be something even more attractive, that's just not our approach to it. Anytime we get a chance to do something that makes sense, we do it. And if it makes even more sense the next day, and if we've got money, we may do more. And if we don't, you know, that — what can we do about it? So picking bottoms is basically not our game. Pricing is our game. And that's not so difficult. Picking bottoms, I think, is probably impossible, but — When you get — when you start getting a lot for your money, you buy it. And as I say, after I wrote that, stocks did get cheaper. Corporate bonds — the corporate bond market got very, very, very disorganized. And we bought some fairly good-sized pieces of bonds for Berkshire. And I also bought a few little things for myself. But I spend 99 percent of my time thinking about Berkshire. That's —

CHARLIE MUNGERWarren, by now, don't we have our small life insurance companies pretty well full of desirable debt instruments at 10 percent?

WARREN BUFFETTWe certainly have got a lot more of it than we had, yeah. (Laughs) No, we've — we got a chance to buy some corporate bonds very, very cheaply — at least in my view — a few months back. And we had money in life companies that can't be used in certain other areas and for which this was an ideal time to just barrel in. And anytime we like to do something, we really like to do it. I mean, our idea is not to tiptoe into anything. So we buy them as fast as we can, when prices are right.

CHARLIE MUNGERYeah, that bond thing didn't last very long, but —

WARREN BUFFETTNope.

CHARLIE MUNGER— there were perfectly safe bonds that yielded 9 percent or more with very fancy call protection.

WARREN BUFFETTYep.

CHARLIE MUNGERAnd some of those bonds are up 20, 25 percent. So the opportunities are frequently under shell A, when you're looking at shell B.

WARREN BUFFETTYeah. We try to look at all the shells.

CHARLIE MUNGERYeah, we look at all the shells.

"Decent" rates of return from regulated utilities

WARREN BUFFETTBecky?

BECKY QUICKThis question is from Jim Mitchell from Costa Mesa, California, who wants to know from both of you. He says, "Years ago, you taught us to beware of capital-intensive businesses, like electric utilities, that may be overstating profits due to understating depreciation. “Now that you are investing in utilities and gas pipelines, have you discovered the secret of long life for power plants? Or do we need to discount your utility earnings?"

WARREN BUFFETTWell, the utility earnings, pretty much, come about through a return on equity capital allowed by the jurisdictions in which you operate. So, for example, if something like pension costs or something of the sort, you get surprises on, you do get to earn that back over time. But you don't get any bonanzas, either. So I would say the capital-intensive businesses that scare me more are the ones outside of the utility field, where you just pump in more money without knowing that you're going, in a general way, to get, more or less — within a range, anyway — a guaranteed return. So I do not have — there's no way we get rich on our utility investments. But there's no way we get poor, either. And we get decent rates of return on the equity that we leave in it. And we'll probably get those returns with or without inflation. Now, inflation may diminish the value of getting an 11 or 12 percent return on equity, if you get into very high rates of inflation. So in that sense, I'd agree with Jim, who I know, incidentally. He used to work with my daughter out there at Century 21. He's a good investor. But the — on balance, if you can find a good business that's not capital intensive, you're going to be better off than in a capital-intensive business over time. I mean, the world, they're hard to find. But the best businesses are the ones that don't require much capital and, nevertheless, make good money. They've got some moat protecting them, other than the capital required as entry in the business that's protecting them. And if you can find those that are durable, you've got a great investment and one that will do the best in inflation, which, as we mentioned earlier, seems fairly likely to come along. Charlie?

CHARLIE MUNGERYeah, unfortunately, a lot of moats have been filling up with sand lately, you know, the daily newspaper, the network television station, all these castles with their lovely moats. The moats are filling up.

Surprise marriage proposal from Buffett's great-nephew

WARREN BUFFETTWell, on that cheery note, we have time for just one more question. And Marc Hamburg, I believe you said there was somebody who wanted to finish this off. Marc, where are you?

MARC HAMBURGRight here. Right here, Warren.

WARREN BUFFETTOK, I can't — I still can't see you. But I can hear you.

MARC HAMBURGHe's right up in front.

WARREN BUFFETTRight up in front. OK, good. Oh, I see you now.

ALEX ROZEKHi, Warren. It's Alex from Boston. I just wondered if you could give us some advice on how we could improve the economy, as we leave.

WARREN BUFFETTWhat was your name?

ALEX ROZEKAlex, from Boston.

WARREN BUFFETTAh. Well, the obvious thing to do is to do what our government tells us to do, which is to go out and spend. And as I mentioned, household formations are important to developing — to getting past this overbuild in residential construction. So does — I don't know whether that gives you any ideas or not. But… (Laughter)

ALEX ROZEKI think so. Mimi, you're my best friend. Would you be my wife? (Applause)

MIMI KRUEGERYes? (Applause)

VOICEMimi, you’ve got to say yes.

MIMI KRUEGERI said, yes. Yes!

WARREN BUFFETTI have just two —

ALEX ROZEKThanks, Warren.

WARREN BUFFETTOK. I have two comments to make. Alex is my sister Doris' grandson, my great-nephew. And Mimi is terrific. So on that note, we'll end the meeting. And we'll be back in 15 minutes for the board meeting. Thank you. (Applause)

Berkshire Hathaway formal meetings begins

WARREN BUFFETTOK, now we're going to hold an annual meeting. The meeting will now come to order. I'm Warren Buffett, chairman of the board of directors of the company. I welcome you to this 2009 annual meeting of shareholders. I will first introduce the Berkshire directors that are present in addition to myself. We've got Charles Munger. We've got Howard Buffett, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott. Also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning the firm's audit of the accounts of Berkshire. Mr. Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings. Ms. Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The main proxyholders for this meeting are Walter Scott and Marc Hamburg.

Berkshire shares outstanding and quorum

WARREN BUFFETTDoes the secretary have a report of the number of Berkshire shares outstanding entitled to vote and representing at the meeting?

FORREST KRUTTERYes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 4, 2009 — being the record date for this meeting — there were 1,057,573 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting — And 14,749,861 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to 1/200th of one vote on motions considered at the meeting. Of that number, 821,400 Class A shares and 10,298,152 Class B shares are represented at this meeting through proxies returned through Thursday evening, April 30th.

WARREN BUFFETTThank you. That number represents a quorum. And we will therefore directly proceed with the meeting.

Last meeting's minutes

WARREN BUFFETTFirst order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTTI move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.

WARREN BUFFETTDo I hear a second?

VOICEI second the motion

WARREN BUFFETTMotion's been moved and seconded. Are there any comments or questions? We will vote on this question by voice vote. All those in favor, say, "Aye."

VOICEAye.

WARREN BUFFETTOpposed? Motion's carried.

Election of Berkshire Hathaway directors

WARREN BUFFETTThe first item of business is to elect directors. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles, who will furnish a ballot to you. Will those persons desiring ballots please identify themselves, so that we may distribute them? I now recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTTI move that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Tom Murphy, Ron Olson, and Walter Scott be elected as directors.

WARREN BUFFETTIs there a second?

VOICEI second the motion.

WARREN BUFFETTIt's been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. Miss Amick, when you are ready, you may give your report.

BECKI AMICKThe ballot of the proxyholders in response to proxies that were received through last Thursday evening cast not less than 859,366 votes for each nominee. That number of — that number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxyholders in response to proxies delivered at this meeting, as well as any cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Miss Amick. Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors.

Shareholder motion on working conditions at Russell Athletic plant

WARREN BUFFETTThe next item of business is a motion put forth by Berkshire shareholder Joseph Petrofsky. Mr. Petrofsky's motion is set forth in the proxy statement and would request Berkshire Hathaway to prepare a sustainability report for shareholders. The directors are recommended that the shareholders vote against the proposal. We will now recognize, I believe it's Mr. Billenness — Mr. Petrofsky's representative — to present the motion. To allow all interested shareholders to present their views, I will ask Mr. Billenness to limit his remarks to five minutes. The microphone at zone 1 is available. Well, we go first to Mr. Billenness.

SIMON BILLENNESSThank you very much, Mr. Buffett. My name is Simon Billenness. And I represent Mr. Joseph Petrofsky, the shareholder who filed this year's resolution asking for a publication of a sustainability report. I will move that shareholder resolution. Miss Norma Mejía Castellanos (PH) will then second the resolution. And then I will ask for a preliminary count of the shares voted. As shareholders, we are proud that, in so many ways, our company is a leader. A prime example is the emerging success story on the Klamath River. This may result in the largest river restoration project in U.S. history. And this makes economic sense for PacifiCorp and for us, as shareholders. However, when it comes to managing environmental and human rights risk, and disclosing those risks to shareholders, our management is sadly a laggard. Two respected proxy advisory firms, PROXY Governance and RiskMetrics, have advised shareholders to vote in favor of this resolution on the grounds that management badly lags other companies in disclosing these risks to shareholders. Last week, CalPERS, the California retirement system, announced that it would vote close to half a billion dollars' worth of stock in favor of this resolution. Consider the situation today with Russell, the subsidiary of Fruit of the Loom and a Berkshire Hathaway company. Collegiate licensed apparel — sweatshirts bearing university logos, for instance — is a $5 billion a year market. Russell has admitted to repeatedly committing serious labor rights violations in Honduras. And now, over 50 universities, including Harvard, Stanford, and the entire University of California system, have decided to terminate Russell's license to make clothing bearing their college logos. This particular sweatshirt, which I'm holding up right here, is University of North Carolina. This was made in a Berkshire Hathaway factory. But the university has since ended their licensing agreement. The treatment — the management of Russell, through its actions, has put $5 billion of potential business at risk. The management of Berkshire Hathaway should provide proper disclosure of that risk to us, the shareholders in this company. Now, I will pass over to Ms. Mejía Castellanos. She is a sewing machine operator who worked in the factory in Honduras that is the center of these problems. And after she has spoken, I will ask for a preliminary vote count for this resolution. NORMA MEJÍA CASTELLANOS: Yo trabajó como operadora de una maquila de costura en la fábrica Jerzees Honduras.

INTERPRETERI used to work as a sewing machine operator at the factory, Jerzees de Honduras. NORMA MEJÍA CASTELLANOS: En 2006, cuando Fruit de Loom compró la empresa, las condiciones empeoraron.

INTERPRETERIn 2006, when Fruit of the Loom bought my factory, conditions got much worse. NORMA MEJÍA CASTELLANOS: La empresa empezó hacer acumulación de personal esto para ahorrarse mas y no pagar renta.

INTERPRETERFruit of the Loom began to consolidate personnel in order to save more on rent. NORMA MEJÍA CASTELLANOS: Esto ocasionó mucho molestar de salud en los trabajadores, como ser dolor en la espalda a causa de maquinaria de esta muy cerca, y esto provoca un recalentamiento.

INTERPRETERThis created many conditions in the factory that caused health problems for workers, such as pain in our backs being caused by the heat from the sewing machines, which were now pressed into our backs, because of the limited space. NORMA MEJÍA CASTELLANOS: Esto significa una inseguridad en un momento de evacuación.

INTERPRETERThe close proximity also made it very dangerous in the case of an emergency evacuation. NORMA MEJÍA CASTELLANOS: En nuestra fabrica, la ventilación era tan mala que esto nos provocaba enfermedades respiratorias como el cáncer del pulmón.

INTERPRETERIn part, because of the overcrowding, as well, the ventilation was so poor that it caused many respiratory illnesses, including lung cancer. NORMA MEJÍA CASTELLANOS: El agua de los filtros era contaminada.

INTERPRETEREven the filtered water was dirty. NORMA MEJÍA CASTELLANOS: Trabajamos de la 6:30 de la mañana hasta las 5:30 de la noche, con tan solo 15 minutos para almorzar.

INTERPRETERWe worked from 6:30 in the morning until 5:30 at night with only 15 minutes for lunch. NORMA MEJÍA CASTELLANOS: Nuestros salarios eran demasiado bajos que no nos alcanzaba para pagar una niñera y la empresa no respeta el código de trabajo de nuestro país, porque no brinda guarderías de niños.

INTERPRETEROur wages were too low to afford childcare. And the management refused to provide onsite childcare, even though it was required by Honduran law. NORMA MEJÍA CASTELLANOS: Por eso, decidimos organizarlos para obligar el gerente que nos escuchara y que respetara nuestros derechos.

INTERPRETERBecause of all of this, we decided to organize to compel management to clean up our factory. NORMA MEJÍA CASTELLANOS: Entonces, fue cuando despidió 145 trabajadores ilegalmente por organizarse a un sindicato.

INTERPRETERIn retaliation, Russell illegally fired 145 workers for organizing a union. NORMA MEJÍA CASTELLANOS: Russell tenía que respetar el sindicato, constituido por la ley. Y entonces, Russell dijo que por causa al sindicato, iba a cerrar la empresa y que nos íbamos a quedar aguantando hambre.

INTERPRETERAfter we finally legally established our union, Russell said that because of the union, they would close down the factory and leave the workers to starve. NORMA MEJÍA CASTELLANOS: Fue cuando empezamos hacer amenazados a muerte los directivos.

INTERPRETERAnd this is when we started to receive death threats. NORMA MEJÍA CASTELLANOS: Me dejaban mensajes y dibujos en los baños y en el puesto de trabajo, diciéndome que me iban a cortar la cabeza.

INTERPRETERThey would leave me notes and illustrations in the bathroom and at my workstation threatening to cut off my head. NORMA MEJÍA CASTELLANOS: Finalmente, Russell siguió y cumplió con su dicho, y cerro la planta el 30 de enero de este año.

INTERPRETERFinally, Russell Athletic did follow through with their threat and shut down the factory in January of this year. NORMA MEJÍA CASTELLANOS: Russell sostiene que nos ayudara a encontrar nuevos puesto de trabajo, pero en cambio la lista negra que tiene con nosotros y nos han impedido la búsqueda de nuevos empleos.

INTERPRETERNow, Russell has been claiming that they will help us find new jobs. But instead, they have blacklisted us, preventing us from finding work elsewhere. NORMA MEJÍA CASTELLANOS: Es por que tantas universidades han cortados su contratos con Russell y porque esto se ha convertido en un problema para esta empresa.

INTERPRETERThis is why so many universities have stopped doing business with Russell and why this has become such a problem for Berkshire Hathaway. NORMA MEJÍA CASTELLANOS: Y por tanto, yo voto a favor de la resolución y exhortó que a los accionistas voten a favor. Gracias.

INTERPRETERAnd therefore, I second this resolution and urge that shareholders vote in favor. Thank you.

WARREN BUFFETTOK. I'd like to ask Mr. John Holland, the CEO of Fruit of the Loom, to respond to the comments just made, and after which, we will act on the motion.

JOHN HOLLANDFirst, I need to give you a little background. Russell was a public company listed on the New York Stock Exchange prior to the time that we acquired them in August of 2006. The acquisition consisted of 47 facilities with a little over 14,000 workers. And, as we began to get involved with the Russell operations and how they were conducted, to integrate those into our operations, we found that there were a couple of plants in Honduras that had some problems. And we began — we acknowledged the problems. And we began immediately to remedy these problems. A little later, we had a letter from the WRC, the Workers Rights Commission (Consortium), indicating that there had been some abuses of the employees and that some had been terminated because they were involved in union activities. We were unaware of the union activities. And we investigated the abuses. But we thought it best to contact an independent third-party organization to do an audit. And we contacted the Free (Fair) Labor Association, which is kind of a worldwide organization that's grouped with a group of businesses and the leading universities in the U.S. to try to make certain that workers' rights are adhered to on a worldwide basis. We asked them to conduct the audit. And they conducted the audit. And all of the abuses that we had been charged with, they said, through the independent audit — they were nonexistent. But they did tell us that there were two supervisors who had conducted some abusive language with the employees and, also, that it was very likely that some employees might've been terminated due to their union activity. So as a result, they gave us a list of items that they would like us to follow to remedy the situation. The supervisors, as well as the management of the facilities, were eliminated. And we have started immediately, progressively, to implement all of the recommendations of the Free Labor Association's independent audit. And part of that was that the workers that they felt might have been terminated due to union activities, that we reinstate the workers. The plant had not been organized at that point. So we voluntarily engaged the union and acknowledged them and accepted the union. And we rehired all of the workers that we could locate into a facility that was across the street from this particular plant. And since then, we have followed all of the recommendations of the Free Labor Association. And they have a monitoring process. And after about three months, there was another audit by the Free Labor Association and the Workers' Rights Commission, which is another related organization. And they said that the activity that we engaged in, they were very well pleased with the progress. And as I said previously, we acknowledged the union and began negotiations. There was approximately 48 issues that they wanted to discuss. And we reached agreement on 24 of those. And we — the union even agreed that we had had very good relationships, that we had approached the negotiations openly and fairly. There were some other points that they wanted to move to arbitration on that — or mediation — that we could not agree on. And by that time, the time had passed till we reached the midyear of 2008, when the recession in the apparel industry dramatically affected our particular business. And over the course of the next few months, we had to close nine of our facilities. One of those was the Jerzees de Honduras plant that they have referred to. And there was a total of 12,780 employees involved in the plant closures. And out of that group, about 310 people, which has been acknowledged by the union, that were union employees, because in Honduras, under the laws there, only 30 people are required to form a union and be acknowledged as a union. And up until that time, there had been no indications of any issues that had been brought up by the union that were not solved. Now, beyond that, I would like to tell you a little about how we conduct business worldwide in our plants. We have been in Honduras since 1993. All of our plants are air conditioned, excellent ventilation in all of those facilities. Our wages in those plants are 26 percent, on the average, above the minimums in Honduras. We offer 11 paid holidays. We have paid vacations. We have free life insurance. We have a doctor and nurse in each one of those facilities. And the reference to the filtered water, when we acquired that plant, that particular plant had its own filtration systems, which was different from all of our other plants, which we used bottled water. We immediately had that water tested. Although there was some discoloration, it was tested as pure. But we immediately shut down the filtration system and went to bottled water that we have in the other plants. Now, we have paid maternity leaves, we have a breastfeeding hour, we celebrate the employee birthdays, in fact. And also, the — we have a children's day. And that, I think, our benefits, I'm proud to tell you, I think are far and above any that you'll find in most other apparel facilities throughout the world. And there have been no death threats. We have tried to conduct our business with honesty, integrity. And quite frankly, I've been with this company, I'm in my 48th year, and I would tell you that I'm very proud of how we operate our particular plants. We have met with a number of the leading universities to try to tell the other side of the story. We've invited those presidents of the universities and the administration to come to see for themselves what our plant facilities are like. And we've had two acceptances that were down this past week, the representatives from Princeton and also from the University of Arizona. And we welcome putting all of this into an open spotlight. We also have a website. That's www.russellsocialresponsibility.com — that all of this activity that we're responding to the recommendations of the Fair Labor Association is posted on that website. It's there for the world to see. And we continue — Fair Labor Association has a three-step process of continued monitoring. And then they do independent audits periodically to see what our progress is. And all of that is posted on that website. Thank you.

WARREN BUFFETTThank you, John. The motion is now ready to be acted upon. (Applause) If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of election. Miss Amick, when you're ready, you may give your report.

BECKI AMICKMy report is ready. The ballot of the proxyholders, in response to the proxies that were received through last Thursday evening, cast 49,251 votes for the motion and 702,963 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Miss Amick. The proposal fails.

Berkshire formal meeting adjourns

WARREN BUFFETTDoes anyone have any further business to come before this meeting, before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTTI move that this meeting be adjourned.

WARREN BUFFETTIs there a second? Motion to adjourn has been made and seconded. We will vote by voice.