Warren Buffett sees signs of recovery for a "sputtering" economy, defends Goldman Sachs against SEC accusations of fraud, and says of the Greek and European debt crisis, "I don't know how this movie ends." Munger argues that McDonald's has "succeeded better as an educator" than the nation's universities.
WARREN BUFFETT: Good morning. I'm Warren, he's Charlie.
He can hear, I can see. We work together for that reason. (Laughter)
Like to make one correction in the movie. My fast ball was filmed in slow motion. They tried the regular way and you couldn't even see it, so — (Laughter)
Our approach today will be to announce a couple of things, our earnings, and introduce you to the directors. But as soon as that's through, we'll move on to questions. We'll have those until noon.
We'll break for an hour and we'll come back at 1:00. Those of you who are in the overflow rooms may find that you can get into the main arena here at that time.
And we'll go till 3:30 with the questions and then we'll have the annual meeting, business meeting, for those of you who are still around at that point. And at that time, we will have the election of directors.
WARREN BUFFETT: But because not all of you may be here at that time, I would like to introduce the directors to you, and I'll ask them to stand.
And if you'll hold your applause until they're all done standing, or you can even hold it after that — (laughter) — it will make — it will make for a very orderly meeting.
So let's start in with Howard Buffett. I'm the next one alphabetically. Our new director, Steve Burke.
They didn't hear the part about stay standing, but that's OK. They're generally fairly obedient, but the — (laughter)
Susan Decker. Bill Gates. David Gottesman, Sandy Gottesman. Charlotte Guyman.
Don Keough is unable to be with us today. He's had a serious operation but he's recovering very well and he's got a lot of friends in this audience and he'll be with us next year.
Charlie, we've already introduced. Tom Murphy. Ron Olson, the manager in our movie. And Walter Scott.
Now you can go wild with applause for the group. (Applause)
WARREN BUFFETT: Now, before we start with the questions, we do have preliminary earnings figures for the first quarter.
And I'd like to ask the projectionist to put up slide A. There's nothing really very surprising in these numbers, but we'd like to give them to you. They up there OK? Yeah. If you have any questions on these later on.
What we're seeing in our businesses is that, in what was sort of a sputtering recovery a few months ago, seems to have picked up steam in March and April.
And our businesses that kind of serve broad industry, such as the railroad or Marmon or ISCAR, we're seeing a pretty good uptick. It's a long way from where it was a couple years ago, but what was very spotty in the recovery a couple of months ago, the trends really seem a fair amount stronger in the last few months.
And we always encourage you to focus on operating earnings. We have the figures there for our investments and derivative businesses.
We don't really think they mean anything on a quarterly basis. Obviously, they're meaningful over the years. I mean, we've piled up a lot of net worth over the years with capital gains. But in any quarter, they mean absolutely nothing.
And you'll notice another thing about our report. We don't even put down — we have to when we publish generally — but we don't even put down the earnings per share. We're not focused on that number in any quarter or any year.
We're focused on the buildup of value. And we really think that an undue focus on quarterly earnings, not only is probably a bad idea for investors, but we think it's a terrible idea for managers.
If I had told our managers that we would earn three dollars and 17 1/2 cents for the quarter, you know, they might do a little fudging in order to make sure that we actually came out at that number.
And there was a very interesting study that was published a few months ago where thousands of earnings reports were examined.
And instead of taking it out to the penny, which is customary in the reporting, they took it out one further digit. And of course if you go out one further digit, and it's four or less, you round downward, and if it's five or more, you round upward.
And they found out that a statistically impossible number of — small number — of fours showed up because if they got to four-tenths of a cent, somehow somebody in the accounting department managed to find another tenth of a cent so they could round upward. It was not an accident.
And, you do not want to have — in our view, we think it's terrible practice to be thinking about trying to report to some penny that you've whispered to Wall Street analysts in previous months.
And we probably carry that to an extreme at Berkshire. But we always think of the enterprise as a whole. We think about building value over time.
And we do not worry about earnings per share, and we don't worry about investment gains or losses.
Charlie may want to weigh in on this one a bit. Charlie?
CHARLIE MUNGER: Well, I agree with you. (Laughter)
WARREN BUFFETT: Yeah. He is the perfect vice chairman. (Laughter) They don't come any better. OK.
With that preliminary — we probably ought to quit at that point, actually. (Laughter)
WARREN BUFFETT: We're going to alternate the questions between a panel of three journalists here. We have Carol Loomis of Fortune magazine on the — on the far right. (Applause)
And we didn't do it quite alphabetically. We have Andrew Ross Sorkin from The New York Times. (Applause)
And Becky Quick of CNBC. (Applause)
Andrew's maneuvered for a seat there, apparently, to get earlier in the questioning order, but I'll probably stick with the alphabetical list.
And we will alternate between our journalists, and then we will go around the auditorium here where people have been chosen by chance to ask questions.
And we also will go to just I guess one of the overflow rooms; we have a whole lot of overflow rooms, but we'll not go to all of them.
WARREN BUFFETT: So let's just start things off. Carol?
CAROL LOOMIS: Well, since I won the alphabetical lottery, I get to make two very short statements also.
One is that we received an awful lot of questions. We really don't know how many because some people sent their question to all three of us. But I would guess we had something between 1,500 and 2,000 questions.
And obviously, we're not going to be able to ask all of those, and we're sorry for those we didn't get to ask. They were very good questions and we appreciate the work that people put into them.
The other thing I want to mention is that Warren and Charlie have had absolutely no hint as to what the questions will be so they will have to field them just as they come up.
CAROL LOOMIS: However, Warren and Charlie may be smart enough to have guessed that the first question will be about topic A, which is Goldman Sachs.
And I received several emails about the SEC's lawsuit against Goldman, all of them asking a different question about that problem.
I have combined the several thoughts in these questions, and with thanks to Greg Firman (PH), Kai Pan (PH) of Morgan Stanley, Brian Chan (PH), and Vic Timono (PH), here is the question:
Warren, every year in the Berkshire movie, you did it again today, you use the clip from the Salomon crisis in which you tell Congress that you have warned Salomon's employees that if they lose a shred of the firm's reputation, you will be ruthless in your reaction.
Clearly, Goldman Sachs has lost reputation because of the SEC's action. Could you tell us your reaction to the lawsuit, your reflections in light of it about Berkshire's large investment in Goldman?
And what advice, in light of your own Salomon experience, you would give Goldman's board of directors and management?
WARREN BUFFETT: OK. Anytime you ask me these multiple questions, I may go back to you to get all parts.
But, well, let's start with the transaction, because that's the important thing.
A few weeks ago on a Friday, a transaction described as ABACUS was made the subject of an SEC complaint. I think it ran about 22 pages. And I think there's been probably sort of misreporting, not intentional obviously, but misreporting of the nature of that transaction in at least — probably a majority of the accounts that I've read about it.
So, I would like — this will take a little time, but I think it's an important subject. I would like to go through that transaction first. And then we'll get further into the questions posed by the people that emailed Carol.
The transaction, the ABACUS transaction, there were four losers in, but we're going to focus on two of them.
Goldman itself was a loser. They didn't intend to be a loser, I'm sure. They couldn't sell the piece — a piece of the transaction — and they kept it, and I think they lost 90 or $100 million because they kept it.
But the main loser, in terms of actual cash out, was a very large bank in Europe named ABN AMRO, which subsequently became part of the Royal Bank of Scotland.
Now, what did ABN AMRO — why did they lose money? They lost money because they, in effect, guaranteed the credit of another company, ACA.
ABN AMRO was in the business of judging credits, deciding what credits they would accept themselves, what credits they would guarantee.
And in effect, they did something in the insurance world called fronting a transaction, which really means guaranteeing the credit of another party.
We have done that many times at Berkshire. We get paid for it. And people do not want the credit of the XYZ insurance company but they say they'll take a policy from XYZ if we guarantee it. And Berkshire has made a lot of money guaranteeing things over the years.
And Charlie can remember back to the early 1970s when we ran into some very dishonest people and we lost money, and we lost a fair amount of money at that time, because we guaranteed the credit of somebody that turned out to be not so good.
It happened to be some syndicates at Lloyd's, of all things. But they found ways not to pay when our name was on it.
So ABN AMRO agreed to guarantee about $900 million of the credit of a company called ACA. They got paid for that, and this is in the SEC complaint. It's not mentioned very often, but they got paid, what, 17 basis points, that's 17/100 of 1 percent.
So they took on a $900 million risk of guaranteeing credit. They got paid about a million-six. And the company whose credit they guaranteed went broke, and so they had to pay the 900 million. It's a little hard for me to get terribly sympathetic with the fact that a bank made a dumb credit deal.
But let's look at ACA, because they were sort of the nub of the transaction.
ACA, and you wouldn't really know this by reading most press accounts, ACA was a bond insurer. Now, they started out as a municipal bond insurer. They guaranteed various credits and they were like Ambac, they were like MBIA, they were like FGIC, they were like FSA.
And all of those companies — and we wrote about this a few years ago in the report — all of those companies started out insuring municipal bonds. Some of them started 30 years ago. And there was a big business in insuring municipal bonds.
And then the profit margins started getting squeezed in the municipal bond business. So what did they do? Instead of sticking to the business they knew and accepting lower profits, they went out and got into the business of insuring structured credits and all kinds of different other deals.
I described their activities a couple years in the annual report as being a little bit like Mae West who said, "I was Snow White but I drifted." (Laughter)
These bond insurers — and almost all of them did it — these bond insurers drifted into insuring things they didn't understand quite as well but where they could make a little more money.
ACA did it, MBIA did it, AMBEC did it, FGIC did it, FSA did it, and they all got into trouble, every one of them.
Now, is there anything wrong with a bond insurer insuring structured credit or something other than municipals? No. But you better know what you're doing.
Now, interestingly enough, Berkshire Hathaway, when these other guys got into trouble, went into the municipal bond insurance business.
And we insured things that were almost identical to what ACA or others had insured, the difference being that we thought we knew more about what we were doing. We got paid better than they got paid, and we stayed away from things we didn't understand.
We never insured a CDO; we never insured any kind of a RMBS deal or anything of the sort.
But I want to give you an example of something we did insure, because I think it will help you understand better this ABACUS transaction. So if the — if the projectionist would put up slide number 1, I'm going to describe a deal to you.
And as you — as you look at this — is it up there yet? Yeah. Somebody came to us a couple of years ago. I'll tell you the name a little later. But a large investment bank came to us a couple of years ago.
Now, we were insuring bonds regularly. We insured bonds here of the Omaha Public Power District that's familiar to many of you. We insured the bonds of the Nebraska — of the Methodist Hospital, which is six or seven miles from here.
We have told people that if the Nebraska Methodist Hospital does not pay its bonds, Berkshire Hathaway will pay them. And we've done that to the tune of about $100 million in their case. So we are in the business of insuring bonds.
Now, a couple of years ago, somebody came to us, large investment bank, and they said, "Take a look at this portfolio."
And as you can see, it's got the names of a whole bunch of states. Yeah, it's up there. And very different amounts. It's got a billion-one for Florida; it's only got 200 million for the State of California.
And they said to us, "Will you insure these states, that these bonds of these states, will pay for the next 10 years? If any of the states don't pay, you have to pay as the insurer."
And I looked at the list, Ajit Jain looked at the list, and we had to decide, A) whether we knew enough to insure them, and B) what premium we would charge, because that's what we're in the business for.
And we don't have to insure them. We can say, "Forget it. We don't know enough to make the decision." But we made the decision and we offered to insure those bonds for about $160 million for 10 years.
So we collected a premium of a little over 160 million, and somebody on the other side, the counterparty they call it, somebody on the other side, for 10 years, gets an assurance that, if these states don't pay, we will pay as if they did pay.
And this gets to the crux of the SEC's case — or complaint — in respect to Goldman. Somebody came to us with this list; we didn't dream up the list. Another party came to us.
Now, there's about four possibilities. Now I'll tell you who the party was that came to us two years ago: It was Lehman Brothers. So Lehman Brothers, there's four possibilities, roughly.
Lehman Brothers might own these bonds and want protection against the credit. They might just be negative on the bond market and, in effect, be shorting these bonds and using this method as a way of shorting it.
They might have a customer that owned these bonds who wanted to buy protection against the credit.
Or they might have a customer who was negative on these bonds and was simply wanting to short it.
We don't care which scenario exists. It's our job to evaluate the risk of the bonds and to determine the proper premium.
If they told me Ben Bernanke was on the other side of the trade, it wouldn't make any difference to me.
If I have to care about who's on the other side of the trade, I should not be insuring bonds. They could have told me Charlie was on the other side of the trade. (Laughs)
So, in effect, we did with these bonds exactly what ACA did with the bonds that were presented to them.
Now, ACA said, with the list of 120 that was presented to them, they said, "There's about 50 of these that we're willing to insure."
And then they went back and negotiated and took on 30 more of them.
We could have said, presumably, "We don't like Texas that well at a billion-150, and we'd rather have you give us more Floridas," or something like that.
We didn't do it. We just took the list that was submitted. So it was totally the other guy's list that we insured.
In the case of the ABACUS transaction, it was sort of a mutual — a negotiation — as to which bonds were included.
Now, in the end, the bonds that were included in the ABACUS transaction all went south very quickly.
That wasn't quite so obvious they were going to do that in early 2007, as you could see by studying something called the ABX Index.
But the housing bubble — really, mania — started blowing up in 2007.
Now, there could be troubles in these states that we insured. You can say they have big pension obligations, and maybe the guy who's shorting them on the other side knows more about that than we do, but, you know, that is our problem.
I mean, if we want to insure bonds, in the case of ACA, in the case of MBIA, they have teams of people do it. We just do it with a couple people at Berkshire.
But I see nothing whatsoever — I mean, if we lose a lot of money on these bonds, I am not going to go to the guy on the other side of the transaction and say, "Gee, you took advantage of me."
I don't care if John Paulson is shorting these bonds to me. He has no worries that I'm going to claim that he had superior knowledge about the finances of these states or anything of the sort.
So that was basically the ABACUS transaction. I think the central part of the argument is that Paulson knew more about the bonds than the bond insurer did.
My guess is the bond insurer employed more people than John Paulson did in his business, and they just made — they made what turned out, in retrospect, to be a dumb insurance decision.
And for the life of me, I don't see whether it makes any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal, or whether it was Berkshire Hathaway on the other side of the deal.
Let's say we had decided to short the housing market in some way in early 2007. I don't think anybody should blame us for taking our position if we did it. We didn't do it. Or if we'd taken the long side.
I think before we get to the other part of Carol's questions, I'd ask Charlie to comment as this as Charlie has a law degree, and in other ways is superior to me, so we'll get his views.
CHARLIE MUNGER: Well, my attitude is quite simple. This was a three-to-two decision by the SEC commissioners under circumstances where they normally act unanimously.
If I had been on the SEC, I would have voted with the minority two and not with the three who authorized the lawsuit.
WARREN BUFFETT: Carol, would you get to the three parts that we probably haven't answered yet? And then I'll tackle this one.
But I really feel it's important to understand the transaction. I have not seen — I have seen ACA referred to as an investor. It's true that ACA had a management company, but it was 100 percent owned by ACA.
ACA was a bond insurer, pure and simple. And they had this — very simple, as it turned out — and they had one part of the organization did this and that. But ACA lost money because they were a bond insurer.
CAROL LOOMIS: Well, I'm assuming that you have covered the part that says could you tell us your reaction to the lawsuit. So the next part was your reflections, in light of it, about Berkshire's large investment in Goldman.
And then the third was what advice you would have, given your Salomon experience and the thread of reputation that you have planted, those words you have planted. Those are the last two parts.
WARREN BUFFETT: Ironically, very ironically, it's probably helped our investment in Goldman in a certain way, because we have a $5 billion preferred stock that pays us $500 million a year.
Goldman has the right, the legal right, to call that at 110 percent of par. So anytime they want to, they can sent Berkshire 5 1/2 billion, and they get rid of this preferred stock which is costing them 500 million a year.
If we got that 5 1/2 billion in, immediately we'd put it in very short-term securities, which probably, under today's conditions, might produce 20 million a year or something like that.
So every day that goes by that Goldman does not call our preferred is money in the bank. It's been pointed out that our preferred is paying us $15 a second. So as we sit here, tick — (laughter) — tick, tick, tick, that's $15 every tick. (Applause)
I don't want those ticks to go away. (Laughs)
I just love them. They go on at night when I sleep — (laughter) — on weekends.
And frankly, Goldman would love to get rid of that preferred. I mean, they only agreed to sell us that preferred because it was sort of at the height of the crisis.
The U.S., I'm not sure what part of the government, probably the Fed, but they have been telling companies that took TARP money whether they could increase their dividends or not, whether they could redeem preferred, and all that.
Up till now, probably the Federal Government has been doing us a big favor by telling — even before this thing happened — they've probably been telling Goldman that, "You can't call that preferred until we tell you you can. And you can't increase your dividend."
They've been pretty strong with all of the TARP companies. That has not been publicized too much, but believe me that it's the case.
So I was just sitting here hoping that the — basically, that the Fed, or whomever, would be — continue to be — quite tough, in terms of letting Goldman call our preferred. But it wasn't going to go on forever.
I think that — I think recent developments have probably delayed the calling of our preferred by some time so the tick, tick, tick — (laughter) — will go on, and we will be getting $500 million a year instead of $20 million a year.
We love the investment, and I would expect that — the question about losing reputation.
There's no question that the allegation alone causes the company to lose reputation, and obviously the press of the past few weeks, they hurt. They hurt a company. They can hurt morale, a lot of things. Nothing — it's not remotely mortal or anything like that, but it hurts.
Incidentally, Goldman Sachs had a situation in connection with the Penn Central, 30 — 40 years ago now. And that hurt at that time.
They had a connection with one fellow in terms of Boesky that hurt at that time. And it was the source of great pain to John Weinberg, who was running Goldman.
But I don't believe that the allegation of something falls within my category of losing reputation. If something is proven, then you have to look at it.
My advice, in times of some kind of an emergent — when some transgression is either found or alleged, you know, basically, you saw Ron Olson in our movie, he was the manager of the team.
And back when we were working at Salomon together in a somewhat similar situation, we had as our motto, "Get it right. Get it fast. Get it out. Get it over."
But, "Get it right," was number one. I mean, you have to have your facts right, because if you go out with the wrong facts you get killed, and you can't redo it afterwards.
But that does mean sometimes some delay. You have to gather information from within your own organization, and you are on the defensive.
I would not — I do not hold against Goldman at all the fact that an allegation has been made by the SEC. And if it leads into something more serious, you know, then we'll look at the situation at that time.
But what I've seen in terms of the ABACUS activity, I just don't — I do not see that that would be any different than me complaining about the list of municipals that were given to me to insure a couple of years ago.
CHARLIE MUNGER: Well, I agree with all of that. But I also think that every business ought to decline a lot of business that's perfectly legal and proper to accept.
In other words, the standards in business should not be what's legal and convenient. The standards should be different.
And I don't think there's an investment bank in America of any consequence that didn't take too many scuzzy customers and deal in too many scuzzy securities.
WARREN BUFFETT: I would agree with that. But, Charlie — (applause) — do you think we should have done our municipal bond deal?
CHARLIE MUNGER: I think it was a closer case than you do.
WARREN BUFFETT: (Laughs) OK.
We insure, probably, 40 billion now, or something like that, of municipal bonds. And we have done very little in the last year, not because of Charlie's views that he just expressed, but basically because the price isn't right, the premiums are wrong.
And the reaction of other people when premiums are wrong is to take more risk. And our reaction when premiums are wrong is just to go play golf or something and tell somebody to call us when premiums get right again.
I do want to — Charlie and I will give our views on a lot of the activities that have gone on on Wall Street, and we do think plenty has been wrong.
I do want to point out, though, that our experience with Goldman goes back 44 years. And during those years, we've bought more businesses through them than through any other Wall Street investment bank. We've probably done more financing.
They have helped build Berkshire Hathaway. And we trade with them as well.
We don't hire them as investment advisors. They have a big investment advisory business, and, you know, our reaction to that is, "No, thanks." You know, we are in the business of making our own decisions.
But when we trade with them, they can very well be shorting to us a stock we're buying. You know, they can be buying for their own account some stock we're selling.
They do not owe us a divulgence of their position any more than we need to explain to them our reasoning or what we are doing in our position.
We are acting there in a non-fiduciary capacity, and they are operating in a non-fiduciary capacity, in my view, when they are trading with us.
Now, if they're working on our behalf on an acquisition or a financing, that's a different story.
But I would say that we have had a lot of very satisfactory transactions with Goldman Sachs.
And I don't want to prolong this. I won't do this on any more questions. But I'd like to — some people here will remember this — I'd like to take you back to the very first bond issue that Charlie and I ever did.
This was our maiden voyage back in 1967, I believe. Yeah. And if we could put slide 2 up there, I will direct your attention to the —
This is an offering that was made in 1967. We'd just bought a department store and we had a company called Diversified Retailing. Now, Diversified Retailing only owned one retailing operation, but we were sort of imaginative in those days, so we called it Diversified Retailing. (Laughter)
And we went out to raise $5 1/2 million. And Charlie Heider of Omaha, whom many of you know, helped me in the financing.
And you will notice our tombstone ad there has on the top two lines "New York Securities" and "First Nebraska Securities."
They were the lead underwriters. And as customary with tombstones, there are a group of underwriters listed below, and they're usually listed in the degree of their participation.
In other words, the more that they're involved, the higher up in the list they are, with the lead underwriters on top. And that's been true of every tombstone I've ever seen, except this one.
And what happened in this one was that we were having trouble raising $5 1/2 million. And I called Gus Levy of Goldman Sachs, and I called Al Gordon of Kidder Peabody. Those were two of the most prestigious firms in Wall Street at the time.
And I said, "Would you guys help me? We're trying to raise 5 1/2 million and there's nobody that wants to give Charlie and me 5 1/2 million. And the underwriters we've lined up are having trouble getting it done." And both Gus Levy and Al Gordon said to me, "Warren, we'll take a big piece."
And if you'll put — if you put up slide number 3, you will see the list of underwriters, and Goldman Sachs highlighted and Kidder Peabody highlighted were actually the next-largest underwriters. But they were so ashamed of being associated with our dinky little company that they asked us to leave their names off. (Laughter)
They wanted to give us money under an assumed name. (Laughter)
But they did — they did come through for us. They did come through for us. And believe me, a lot of people weren't coming through for us then. I do have a long memory for people that have taken good care of Berkshire over time.
And Al Gordon died last year at the age of 107. He worked until he was 104. He was a remarkable man. Gus Levy was a remarkable man. And I thank them for their participation, even though they did want to do it under an assumed name. (Laughter)
WARREN BUFFETT: OK, we'll go to — we'll go to area number 1 and we'll shorten the answers. (Laughs)
AUDIENCE MEMBER: Good morning, Mr. Buffett and Mr. Munger. My name is Guy Pope and I'm from Portland, Oregon.
I'm curious about your thoughts on financial reform that Congress is currently working on. Specifically, what are the good ideas that you think are out there that should be included in the bill, and what are the bad ideas that you think should be left out?
WARREN BUFFETT: Charlie, it's 1,550 pages so you take the first 1,500, I'll take the last 50 pages. (Laughter)
CHARLIE MUNGER: Well, I don't think anybody in America right now, including the people in Congress, know what's going to happen. And my guess is that most of them have not read the bill, either.
So I think we're all in the doubt — (applause) — as to what's going to happen.
To me, one thing is perfectly clear and that is that our governmental system, which regulates the big investment banks, was so permissive and the investment banking culture had a nature, that together helped arrange that, under stress, every big investment bank except Goldman Sachs was going to go blooey.
A system that likely to go blooey, that is so important to the country, should be changed so it's less permissive in what it allows the banks and the investment banks to do. And people are thinking about that right now.
The banks and investment banks just hate the idea of losing investment flexibility. For instance, on maintaining the biggest derivative book in the world at, say, JPMorgan Chase.
They hate giving that stuff up. That doesn't mean that it's good for the country that they be allowed to continue to do as they have done.
WARREN BUFFETT: Based on what you know about the bill, and I know you haven't read all 1,550 pages, but would you vote for it today or not?
CHARLIE MUNGER: I simply don't know enough about it. I know what I would do if I were the benevolent despot of America. And I would make Paul Volcker look like a sissy. (Laughter and applause)
WARREN BUFFETT: You want to get more specific than that? That's quite a word picture. (Laughs)
Want to get more specific, Charlie?
CHARLIE MUNGER: Well, I would reduce the activities that are permitted. If you're de facto using the government's credit to help your business run, you shouldn't have a bunch of financial statements in the trillions, which you can't really understand even if you're a partner in the business.
This is crazy. The complexity that has come into the system is quite counterproductive. And of course, the people have proven they can't really control it.
So I think what we need is a new version of Glass-Steagall that drastically limits what — (applause) — what both commercial banks and investment banks are allowed to do.
They should have a much simpler and safer mode of business.
When we owned a savings and loan association, it had a very restricted repertoire that it could use. And of course, it had government credit for its deposits.
And by and large, as long as the repertoire was quite limited, the savings and loans stayed out of trouble. But you give human beings the flexibility the do any damn thing they please with absolutely unlimited credit under the repo system and other systems, and they will go plum crazy. And of course, they did.
WARREN BUFFETT: OK. On that cheery note, we'll move to Becky. (Laughter)
BECKY QUICK: We received a lot of questions about the financial regulatory impending legislation. This question comes in from Jay Gelb, who wants to follow up on the point that Mr. Pope just made.
"What's the anticipated impact of pending financial reform legislation on Berkshire? In particular, how much additional collateral may need to be posted on Berkshire's existed $63 billion of derivative contracts? And could Berkshire get too close to its minimum requirement of $20 billion of cash on hand as a result?"
WARREN BUFFETT: Yeah. As I understand the bill now, the one that got presented a couple of days ago — and I could be wrong but I think I understand it and I've read the sections — the requirements would be zero.
If we were found — Berkshire were found — to be a — and I don't know the exact term in the bill — but basically, dangerous to the system, by the secretary of the treasury, or I believe some commission, then we could be required to post collateral on retroactive contracts — on contracts that were written in the past.
I think the chances of us being regarded as a danger to the system when we have 250 contracts and other companies have a million contracts — our position was described in the Journal not long ago as "huge."
You know, our position is 1 percent, in terms of notional value or liabilities or a lot of ways of measuring. It's 1 percent of that of several other very large institutions.
So I — I've really wondered if you use the word "huge" to describe our position, what you would use for 100 times that position?
That must be some adjective that lurks out there someplace to be attributed to those other positions.
We had 23,000 positions 10 years ago when we bought Gen Re. And we proceeded promptly to get rid of all but less than a hundred that are left.
So we have absolutely, in my view, we have no problems.
If for any reason though, the Treasury or this commission should go back and maybe in some more sweeping declaration decide that they wanted all past contracts to be collateralized, we would comply, obviously.
We also would feel that we were due substantial money because, in negotiating those contracts, there was one price for collateralized contracts and there was another price for un-collateralized.
So if I sell my house to you for $100,000 and wanted $120,000 if it were furnished, but you said, "I'll take it unfurnished for $100,000," and then Congress comes along later on and says, "All houses have to be sold furnished, and by the way, that's retroactive," if I give you the furniture now I want something for it. A little unreasonable, maybe.
We do think — well, just a week ago we were offered an equity put contract that's identical, basically, it's a 10-year contract, by one of the very largest investment banking houses.
The price that they would pay us was 7 1/2 million un-collateralized and $11 million collateralized. So there's a very different — there's a price to be paid for having a collateralized contract.
And we elected to forgo probably a billion dollars of extra premiums we could have received in the past for our contracts if we had agreed to have them collateralized.
And with a few exceptions, we declined that. And we would feel, if we ever had to collateralize them, we would be entitled to fair compensation for it, and we would like that language to be in the bill.
And incidentally, Secretary Geithner — we'll put up slide number 7. We have his testimony before the Senate Ag Committee on December 2nd. And as you can see, he testified very strongly, in terms of the sanctity of past contracts.
But if the bill passes tomorrow, the way it reads to us and to our attorneys, we would not have to put up a dime.
And I would think there might be some other companies that would be determined to be dangerous to the system before Berkshire Hathaway would be.
So I really — I don't see any — I don't see any consequences unless there's some sweeping declaration that any company of a certain size that has derivatives shall be required to put up collateral.
And if that's required, we will, and it would be no problem. It would — it would have a cost to us in terms of the opportunity cost, but then of course we would argue about what collateral was proper and so on.
And if we could put our Coca-Cola stock, you know, we're going to hold our Coca-Cola stock anyway. So it really changes nothing. We still get the dividends from the Coca-Cola stock if it's placed as collateral, we get the profit if it goes up.
CHARLIE MUNGER: Well, yes. If collateral requirements were inserted by fiat of the government into existing contracts, it would be just like having a contract to buy a house for a million dollars, and the government passing a law saying, "No, you've got to pay $2 million."
I mean, it would be of dubious constitutionality, and it would be both unfair and stupid. I don't think the government is that crazy. (Laughter)
WARREN BUFFETT: Plus, I think what they would see — there's a whole list, in fact I think I've got a page even for that. Yeah, let's put up slide number 8.
And this is just a sample page of people who oppose putting up collateral — being required to put up collateral — prospectively. And you'll see IBM, you'll see Ford Motor, you'll see 3M, you'll see HCA.
I mean, there's all kinds of companies that don't want to do it in the future. We don't care what we do in the future as long as we get paid for it.
So this is not anything that is peculiar to Berkshire at all. In fact, we happen to be in a different position than the IBMs and the 3Ms and those of the world, in respect to this. As long as we get paid for it, we're indifferent to what the rules are going forward.
But considering the fact that we took lesser premiums in the past, we would not like something retroactively to take money out of our pocket.
But bear in mind, Burlington Northern, when we buy it, it has some fuel contracts. MidAmerican has energy contracts.
There was a story in Businessweek about Anheuser-Busch a couple of weeks ago. And, you know, they say, "We don't want to take money out of our business and send it to Wall Street as a deposit on collateral."
And I think when — if they really saw that the net effect of this would be to send a whole lot of money to be held by Wall Street that was otherwise employed in operating businesses, there might be a little less congressional enthusiasm.
WARREN BUFFETT: OK, we'll go to number 2.
AUDIENCE MEMBER: Good morning to all of you. Switching topics, Charlie and Warren, I'm Norman Rentrop from Bonn, Germany. I want to first give you a big thank you and then a question.
"Come by train," you wrote in the shareholder letter, and that is how I came to Omaha for the first time back in 1997.
I deliberately took the train from Denver to experience Omaha as a railroad city, and I immediately liked Omaha a lot. But the train ride, I saw room for improvement. So thank you very much for taking the future of American railroads into your gifted hands. (Applause)
WARREN BUFFETT: That's one of the best questions I've ever heard. (Laughter)
AUDIENCE MEMBER: Oh, here a question.
WARREN BUFFETT: Oh, OK. (Laughter)
AUDIENCE MEMBER: It's about Greece, the future of the euro, and the fiscal discipline all over the world, and what we have to prepare for as investors.
In the past, you have been warning us about structural weaknesses of the U.S. dollar. Now we see Greece, and potentially other European countries, in crisis.
Berkshire has significant investments in the eurozone, the big ones like Cologne Re, Munich Re, and even small ones like ISCAR's (inaudible) in Hamburg.
How are you preparing Berkshire Hathaway for potential currency failures? And what are your thoughts on the sustainability of the euro? And what is your advice for us as investors?
WARREN BUFFETT: Yeah. I'm going to — Charlie and I have not talked about Greece, actually, recently, so I'm going to be very interested in hearing his views on that. I will — I'll answer the last part of your question first.
We have a lot of exposure in various countries on both the asset and liability side. In other words, we do own stock in Munich Re, and they've got lots of assets, majority, probably, in the euro.
We have Cologne Re, a subsidiary of General Re, which has a substantial net worth that is basically tied to the euro.
On the other hand, we have very substantial liabilities that are denominated in other currencies, including fairly big time in the euro around the world.
For example, when we reinsured three or four years ago, three years ago maybe, Equitas, we took on many, many, many billions of liabilities around the world. And we were paid by, in effect, Lloyd's. And we took that money and invested it in dollars.
So we keep those liabilities for all kinds of old insurance claims arising from Equitas in foreign currencies.
And if the euro depreciates against the dollar, we benefit on that side, but we lose, as you point out, on other sides.
I can't tell you, and it's something I'm not concerned about, whether our net balance in euros or sterling or yen or whatever, I can't tell you what it is on any given day. Some of it enters into our equity put options and things of that sort.
But we have no dramatic exposures in any other currency. That doesn't mean that other currencies are unimportant to us, because what happens with the Greek situation and what may fall out from that can be quite important, in terms of the world's economy.
And Charlie's going to explain to you exactly what that might be. (Laughter)
CHARLIE MUNGER: Yeah. Well, generally speaking and with rare exceptions, of course, we're agnostic about currencies. We simply do our business and we take those fluctuations as they fall, wouldn't you agree with that?
WARREN BUFFETT: Yeah. We're agnostic in terms of the relative values, of —
CHARLIE MUNGER: Yes. Yes.
WARREN BUFFETT: — course. Yeah, we're not agnostic about where we think all currencies are headed, generally.
CHARLIE MUNGER: No, no.
WARREN BUFFETT: But the relative value —
CHARLIE MUNGER: But —
WARREN BUFFETT: — agnostic.
CHARLIE MUNGER: — Greece presents an interesting problem, of course. What's happened is that the past conservatism of a place like the United States gave it wonderful credit, a combination of success and conservatism.
And we used that credit to win World War II, and help revive Germany and Japan in one of the most constructive and intelligent foreign policy decisions ever made in the history of the world.
And we used that credit to help assure prosperity for all these decades in which Berkshire has flourished.
And now, of course, the government does not have quite as good a credit as it had before it started using it so heavily. And that's happened pretty much all over the world.
And so Greece is just the start of a very interesting period, and of course, it's more dangerous to civilization when governments push their credit so hard.
Because if you need credit to help civilization function, and you've blown it by your own aggression in using it in the past, that's not a good thing.
And I think in this country, and in other countries too, responsible voices are now realizing that we're nearer trouble from lack of government credit than we've been, well, in my lifetime.
WARREN BUFFETT: Everything you read about country credits, currency, you always want to make a — you always want to distinguish between countries that are borrowing in their own currency pretty much exclusively, like Japan has or the United States, and countries that are being forced for one reason or another, because the world doesn't trust them, to borrow in other countries' currencies.
I mean, in the past, you know, if you were some South American country and you were borrowing in your own currency, you never default, you just buy a new printing press or work it a little harder.
But the world doesn't like that sort of thing. So with weaker credits, and countries with poorer reputations, they force those countries to borrow in other currencies, frequently the United States currency.
And that can really put you out of business very quickly because, you can't — if you're some South American country, you can't print U.S. dollars, although you can print your own currency. And that's what's caused failures among countries.
The European Monetary Union, it's a really interesting situation, because Greece, they are a sovereign country, in terms of their own budget. But they can't print their own currency, you know, they've got the euro.
And this is — you know, the euro was regarded as quite an experiment 20 years or whenever it was ago, or less than that. But you may be seeing sort of a test case play out here of a country that is not using its own currency, in effect, or using a common currency, and yet is sovereign, in terms of making its own promises to its citizens.
And I don't know how this movie ends. That doesn't mean I'm forecasting disaster or anything, I really just don't know how this movie ends. And I try not to go to movies like that, if I can. (Laughter)
But I'll be watching. Really, this will be high drama, in my view, what happens here.
The one thing, Charlie says we're agnostic on currencies, and we don't make big currency plays. We did make one a few years ago and we did all right on it. But we very seldom will develop a strong view on one currency versus another.
I would say this though, that events in the world of the last few years would make me more bearish on all currencies, in terms of their future — holding their value over time — than previously. But it's not unique to the United States, it's not unique to the United Kingdom.
If you really could run budget deficits of 10 percent of your GDP and do it for a long period of time, believe me, the world would have been doing it a long before this. I mean, that is — that's a lot of fun if you can keep it up.
And the reason it hasn't been done in the past, I think, is probably that most people understand that it can't be kept up.
And how the world weans itself off huge deficit financing by country after country after country — it's going to be easy — I mean, it's going to be interesting — to watch.
You do not need to worry; as long as the United States government borrows in U.S. dollars, there is no possibility, none, of default. If the world won't take our obligations denominated in dollars then we — then you have a real problem.
But you don't default when you can print your own currency.
CHARLIE MUNGER: Well, yes. And of course, the published statistics are quite misleading because the debts of the currencies — of the countries — are normally stated in terms of the government bonds outstanding, and the unfunded promises of the various governments are much greater than the government bonds outstanding.
So whatever you think this problem is when you read the statistics, it's miles bigger.
And those unfunded promises don't bind if you keep growing GDP at 2 or 3 percent per annum, per person, or something like that. You can afford the unfunded promises.
But if you get to where the growth stops, then you're going to have enormous social strains. And God knows what the effect will be on government policy and on currencies.
WARREN BUFFETT: Andrew, you've been very patient.
ANDREW ROSS SORKIN: I've received over 300 questions just related to Goldman Sachs, and I know we've covered it already but there are a couple outstanding questions and one individual sent three specific questions that I thought I'd ask.
The first is, since Berkshire is a Goldman shareholder, who would you like the see run Goldman Sachs if not Lloyd Blankfein?
Were you made aware of Goldman's Wells notice, or anything about the case, prior to it being brought?
Do you think the Wells notice constituted material information and should have been disclosed? Would have you disclosed it?
And finally, have you been contacted as part of the Galleon investigation and the allegation that a Goldman Sachs board member passed inside information about your pending investment in Goldman in 2008 at the height of the crisis to Galleon?
I know there's a lot of pieces to that, but I thought we'd get Goldman out of the way —
WARREN BUFFETT: OK, good.
ANDREW ROSS SORKIN: — right now.
WARREN BUFFETT: Good. Yeah. Well, let's answer the third one first.
We've not been contacted in any way about Galleon. I read about that in the paper and the allegation, apparently, of a contact between a Goldman director and Galleon.
And I think in one of the stories, I read something about, presumably, Galleon trading on it. But the answer is no contact from anybody. And I can't pronounce the name of the guy that runs Galleon. (Laughter)
The Wells notice, I've talked to a number of lawyers about that. And I think — when we got a — we didn't get the Wells notice, but when the Gen Re executives got the Wells notice, I'm quite sure we stuck that in the 10-K or 10-Q that came up.
And maybe we filed an 8-K announcing it. That was not us receiving it ourselves but certain executives receiving it.
I have been on the board of at least one well-known company over the past 40 years, and I won't narrow it down any more than that.
But before, they received a Wells notice and they didn't publicize it, and, in truth, it was nothing. So lawyers tell me that if you regard it as material, you report it.
I don't think if I'd received something relating to the ABACUS transaction, based on what I know about it, I would have considered it material to a company that was making many, many, many billions of dollars a year.
CHARLIE MUNGER: Well, I wouldn't have regarded it as material, either.
If every company reported every little thing that might happen with what they regarded a tiny probability, we'd just have unlimited confusing reports.
There has to be some materiality standard. And you don't want to give blackmail potential to people that are mad at you and make claims. I'm not saying that's what the SEC was doing, but —
WARREN BUFFETT: No, but it could happen with a lot of — (laughter) it could happen with individual —
CHARLIE MUNGER: It could happen with other people, yeah.
WARREN BUFFETT: And I know what percentage of Wells notices result in something that's material to the company. But my guess is that there are plenty of them that wouldn't be.
And of course, the bigger the company, the less likelihood that it would be material.
And then your other question about who I would want running, if Lloyd wasn't running it?
I guess if Lloyd had a twin brother, I'd go for him. But I've never given that a thought.
We think about who would run Berkshire — (laughs) — but there's really no reason to think about that.
There wasn't any reason to think about, in my view, back in 1970, when they had the Penn Central problem whether somebody other than Gus Levy should be running Penn Central — be running Goldman.
And when the event happened in connection with the Boskey thing, John Weinberg was running it then. And I thought that John Weinberg was a terrific manager of Goldman.
So I just don't see this as reflecting on Lloyd.
I think, as Charlie — and we've got strong feelings. There's plenty of stuff goes on Wall Street that we don't like. But we do not think it's specific — we know it isn't specific — to Goldman.
CHARLIE MUNGER: Well, there are plenty of CEOs I'd like to see gone in America. (Laughter)
But Lloyd Blankfein is not one of them.
WARREN BUFFETT: OK, number 3. (Laughter)
I was afraid he might start naming names. (Laughter)
AUDIENCE MEMBER: Hello. My name is David Clayman (PH) and I come from Chicago, Illinois. This question is for Mr. Buffett and Mr. Gates, principally as Berkshire shareholders, but also as Bill and Melinda Gates Foundation trustees.
The leading cause of death for Americans my age are motor vehicle crashes. Over 6 million occur each year and you insure a significant number of these crashes.
The World Health Organization ranks motor vehicle crashes as the 11th leading cause of death in the world.
A new category of technologies are reaching the market. These technologies not only reduce driver distraction but also deliver positive feedback to drivers to help make drivers aware of how well they're driving or how much better they could be doing.
Will GEICO or the Gates Foundation make an aggressive and visible bet on driver feedback technologies to stimulate road focus and save life, liberty, property, and insurance premiums?
I have a note here for Mr. Gates and Mr. Buffett. I'd be happy if I could get these to you somehow.
WARREN BUFFETT: OK, I think we know your position. (Laughter)
The Gates Foundation, I think, has a fairly major initiative, along with Mayor Bloomberg, in terms of cigarette smoking. And I think you'll find a whole lot more people have been affected by that than auto accidents.
Auto accidents per mile driven, auto deaths, have diminished. I thought I heard a figure of six — I thought the figure was more in the 30,000 to 40,000 range actually, but it's diminished over the years.
You know, there have been a lot of things done to make cars safer. I'm not sure that cell phones and BlackBerries are among them. (Laughter)
And I think they actually are — there will be more people die in auto accidents because the cell phone and various other instruments were invented than would otherwise be the case. I don't know how significant that item will be.
But everybody has an interest in bringing down fatalities. And GEICO has a very active safety program, testing cars, doing all kinds of things, working usually in conjunction with other insurance companies.
I do not think that — The Gates Foundation has fairly specific and intelligent, in my view, guidelines as to where they direct their activities, and they believe in focus, so they are not going to try and solve every problem in the world.
But I can assure you that the insurance industry, as well as auto companies generally, are continuously working to make cars safer.
CHARLIE MUNGER: I've got nothing to add. (Laughter)
WARREN BUFFETT: OK.
WARREN BUFFETT: Carol?
CAROL LOOMIS: This question also concerns the Gates Foundation but it's entirely different.
"One of your owner-related business principles says that you will attempt, through your policies and communications, to keep Berkshire's stock price rational.
"Yet every year, you give large amounts of your Berkshire stock to the Gates Foundation. And my understanding is that more will go to the foundation when you die."
By the way, I forgot to say this is from Michael McLaughlin (PH) of Omaha, who continues: "Already, we have seen that foundation regularly sell Berkshire stock, and it will sell more because its purpose is to give money to charities not hold the stock forever.
"Won't the foundation selling create a downward pressure on the stock because as much as 25 percent of it will be turned over?"
WARREN BUFFETT: Yeah. Basically, there's five foundations I give money to every year, every July.
And the amount I would be giving now, it's a 5 percent declining balance, the amount I would be giving now would amount to about 1 1/2 percent of the shares outstanding annually, something like that.
So if they sell, and they will, that stock fairly promptly after receipt in order to make charitable gifts, you basically have 1 1/2 percent of the shares being sold annually.
Now, if you contrast that with trading on the New York Stock Exchange, which averages well over 100 percent of the amount of shares outstanding, it's not anything unusual at all in the way of sales.
And it is a free country. I mean, I could sell 10 percent of the company if I wanted to. I've never sold a share in my life, and I never plan to sell a share in my life. And I won't sell a hell of a lot of shares after I die either, probably. (Laughter)
If 1.5 percent of the outstanding shares at Berkshire move the price down in a year, it probably deserves to move down.
CHARLIE MUNGER: Well, of course, I regard that degree of stock distribution to aid charity as almost a nonevent, and it may actually have been a constructive event, in terms of getting Berkshire into the Standard and Poor's indexes and so on.
WARREN BUFFETT: Excuse me.
CHARLIE MUNGER: I think you've got more important things to worry about. (Laughs)
WARREN BUFFETT: If I'd owned 100 percent of Berkshire, for sure it would not have been in the S&P 500. It was always a problem of concentration.
So if by selling down it enhanced — and it did to some degree — enhanced the chances of Berkshire being in the S&P 500, that probably accounted for maybe 7 percent or so of the capitalization, some number like that.
So that was extraordinary, you might call it, buying that was brought in, to some extent because of the diminution of my own holdings.
As Charlie said, I would say if none of the stock had been given away in the last four years, I don't know whether — I have no idea — whether the stock would be selling a little higher or a little lower. I think that's sort of an even money bet.
WARREN BUFFETT: OK, number 4.
AUDIENCE MEMBER: Hello, Mr. Buffett. Hello, Mr. Munger. My name's Vern Cushenbery. I'm from Overland Park, Kansas.
What do you see as the biggest challenge facing the United States economy relative to other countries? And what are the implications of that with regard to investing globally over the next decade?
WARREN BUFFETT: Charlie? (Laughter)
CHARLIE MUNGER: Thank you for steering that easy problem to me. (Laughter)
I think the answer to that is that by and large we haven't made our way in life by having great global allocations systems.
Berkshire's attitude, generally, is to find things that seem sensible to us and to concentrate, to some extent, in those matters. And then let the world economy and the world's currency fluctuations fluctuate as they will.
I do think we'd prefer some countries to others, and the more responsible the countries seem, the more comfortable we are. Wouldn't you agree with that?
WARREN BUFFETT: Yeah. But we —
CHARLIE MUNGER: But beyond that, we can't help you very much because we really don't have a global allocation system at Berkshire, unless Warren is keeping it secret from me. (Laughter)
WARREN BUFFETT: Not that one. (Laughter)
We did not buy Burlington Northern with the idea of moving it to China or India or Brazil — (laughter) — and we love that. We love the fact that Burlington Northern is in the United States.
The biggest threat we have is some kind of a massive nuclear, chemical, or biological attack of one sort or another.
And if you would say what are the probabilities of that over a 50-year period, it's pretty high. Over a one-year period, it's very low.
But if you talk about whether the qualities that have led to the last 220 years of incredible progress, with a lot of hiccups, but incredible progress, you know, in the status of mankind that we've experienced in these two centuries compared to any two centuries you want to pick out in history, this country is remarkable and its system is remarkable.
And it does unleash human potential like has never been seen before.
This crowd here is not smarter than a similar crowd 200 years ago, and they don't work harder.
But, boy, do they live differently. And they live differently because this system has enabled fairly ordinary people, over a period of time, to do extraordinary things. And that game isn't over.
There is nothing that says we have come close, in my view, to the limits of what humans can achieve.
We probably don't even know our own potential, any more than the people in 1790 knew their own potential. I mean, they thought it would be great if somebody finally came along with some farm tool that let them work 10 hours a day instead of 12 hours a day.
So I — there's no reason — you know, I hope the rest of the world does well, and I think they will do well. And it is not a zero-sum game. If China and India do well, that does not mean we do worse; it may mean we do better.
So we are not — it's not what they get is taking it away from us. But I would be perfectly content if Berkshire Hathaway were forced in some way to limit its investment to the opportunities available in the United States.
We would have plenty of opportunities. I'd rather have the whole world, obviously, in terms of opportunities, but there will be ample in this country. I would not run from the United States. OK. (Applause)
WARREN BUFFETT: Becky?
BECKY QUICK: This is a question that has to do with the Berkshire succession plans. It comes from Craig Merrigan in Sprucegrove who asks, "How did the four potential candidates for Berkshire's CIO position perform over the course of 2008 and 2009?
"Did any of the four employ leverage? And have any of the four now been excluded from consideration?"
WARREN BUFFETT: Yes, the answer to that is that, in 2008, I reported to you last year that they didn't, I think we got a question like that last year, they did not distinguish themselves. 2009, they did pretty darn well.
It's not — I would say that the four — it's not the same four. I would say that none of them, Charlie, I believe you may use leverage at all. Do you think so?
CHARLIE MUNGER: Well, the one with which I'm most familiar made a little over 200 percent using leverage of zero.
WARREN BUFFETT: Well, that narrows it down. (Laughter)
The potential investment people, that list will be subject to more movement around than probably the CEO succession.
And it's really far less urgent. If I die tonight, there will be a new CEO in place in Berkshire within 24 hours, and all the directors know who it would be, and they're all comfortable with it.
And there should be somebody in place within 24 hours.
The investments, they don't need anything done next week. I can go on vacation on investments. And we could go — we wouldn't do it, or the directors wouldn't do it, I won't be there — but they could wait a month, they could wait two months.
I mean, the Coca-Cola isn't going to go away, Procter & Gamble's not going to go away, American Express. There's no great need to be doing things day by day. We don't do things day by day.
So they can be fairly leisurely in working out, probably in conjunction with a new CEO, who they would like to bring in, how they would like to compensate them, what the number might be.
That is not fixed in stone at all. The one thing I can tell you is that there are some very able people who would like very much, I think, to be managing money for Berkshire, and who would do a good job, and who are familiar to at least some of the directors. And that problem would get solved.
The CEO problem — which is not a problem — but the CEO question, you want an answer for right now and you want to be prepared to implement it, you know, the next day, although I did just have a physical. (Laughs) Came out fine. (Laughter)
My doctor isn't here today so I will tell you, it drives him nuts because I eat like I do and he can't find anything wrong — (laughs) — and he wants to, believe me. (Laughter)
And with that —
CHARLIE MUNGER: Well I'm — (Laughter)
I am not the most optimistic of the two people up here. And — (laughter) — yet, I'm quite optimistic that the culture of Berkshire will last a long, long time and will outlast, greatly, the life of the founder. I think it's going to work.
WARREN BUFFETT: I really think — I mean, we shouldn't be getting into superlatives — but I think we have as strong a culture, and as distinctive a culture, in terms of managers, ownership, the whole works, of any really large company in the country.
And it's taken a long time to develop, but it becomes self-reinforcing after a point. And we love it, and I think they'll love it after I'm gone. (Applause)
Don't clap there. (Laughter)
WARREN BUFFETT: OK, number 5.
AUDIENCE MEMBER: Hi, I'm Steve Fulton (PH) from Louisville, Kentucky. Once again, I gave up a box seat to the Kentucky Derby to come ask you a question. (Laughter)
And I appreciate that opportunity.
My question's focused on the shift, if you will, to investing in the capital-intensive businesses and the related impact on intrinsic value.
You again stated in the annual report that best businesses for owners are those that have high returns on capital and require little incremental capital.
I realize this decision is somewhat driven by the substantial amounts of cash that the current operating companies are spinning off, but I would like you to contrast the requirement for this capital against the definition of intrinsic value, which is the discounted value of the cash that's being taken out.
And just for all of us to be aware, you've mentioned the fact that you think these businesses will require tens of billions of dollars over the few decades, and just the time value of that, I'd like to understand a little bit more of your insight into that.
WARREN BUFFETT: OK. Although it's clear you understand the situation quite well, and it's — as important a question as you could ask, virtually, I would say, at Berkshire.
We are putting money into good — big money — into good businesses from an economic standpoint. But they are not as good as some we could buy when we were dealing with smaller amounts of money.
If you take See's Candy, it has 40 million or so of required capital in the business, and, you know, it earns something well above that.
Now, if we could double the capital, if we could put another 40 million in at anything like the returns we receive on the first 40 million, I mean, we'd be down there this afternoon with the money.
Unfortunately, the wonderful businesses don't soak up capital. That's one of the reasons they're wonderful.
At the size we are, we earn operating earnings, $2.2 billion, or whatever it was in the first quarter, and we don't pay it out, and our job is to put that out as intelligently as we can.
And we can't find the See's Candies that will sop up that kind of money. When we find them, we'll buy them, but they will not sop up the kind of money we'll generate.
And then the question is, can we put it to work intelligently, if not brilliantly? And so far, we think the answer to that is yes.
We think it makes sense to go into the capital-intensive businesses that we have. And incidentally, so far, it has made sense. I mean, it's worked quite well. But it can't work brilliantly.
The world is not set up so that you can reinvest tens of billions of dollars, and many, many tens over time, and get huge returns. It just doesn't happen.
And we try to spell that out as carefully as we can so that the shareholders will understand our limitations.
Now, you could say, "Well, then aren't you better off paying it out?"
We're not better off paying it out as long as we can translate, as you mentioned, the discounted value of future cash generation. If we can translate it into a little something more than a dollar of present value, we'll keep looking for ways to do that.
In our judgment, we did that with BNSF, but the scorecard will be written on that in 10 or 20 years.
We did it with MidAmerican Energy. We went into a business, very capital intensive, and so far, we've done very well, in terms of compounding equity.
But it can't be a Coca-Cola, in terms of a basic business where you really don't need very much capital, if any, hardly. And you can keep growing the business if you're lucky, if you've got a growing business.
See's is not a growing business. It's a wonderful business, but it doesn't translate itself around the world like something like Coca-Cola would.
So I would say you've got your finger right on the right point. I think you understand it as well as we do. I hope we don't disappoint you, in terms of putting money out to work at decent returns, good returns.
But if anybody expects brilliant returns from this base in Berkshire, you know, we don't know how to do it.
CHARLIE MUNGER: Well, I'm just as good at not knowing as you are. (Laughter)
WARREN BUFFETT: OK, Andrew? (Laughter)
ANDREW ROSS SORKIN: This question comes from Victor and Amy Liu (PH) who are shareholders from Santa Monica, California.
And they ask, "When you made investments during the financial crisis in February of 2009, why did you lean towards debt instruments rather than equity?
"For example, why did you invest $300 million in Harley-Davidson at 15 percent interest instead of buying equity when the shares were at $12? Today, they're at $33.
WARREN BUFFETT: Well, I would say that if I were writing that question now, I might write the same question. But I'm not so sure you would have written the same question in February.
Now, there were different risk profiles, obviously, in investing. And the truth is, I don't know whether Harley-Davidson equity is worth $33 or $20 or $45. I just have no view on that.
You know, I kind of like a business where your customers tattoo your name on their chest or something. But — (laughter) — figuring out the economic value of that, you know. I'm not sure even going out and questioning those guys I'd learn much from them. (Laughter)
But I do know, or I thought I knew, and I think I was right, that, A) Harley-Davidson was not going out of business. And that, B) 15 percent was going to look pretty damned attractive.
And the truth is, we could probably sell those bonds, I don't know, probably at 135 or something like that. So we could have a very substantial capital gain, a lot of income.
I knew enough to lend them money; I didn't know enough to buy the equity. And that's frequently the case. And, you know, we love buying equities, but we love buying the Goldman preferred at 10 percent.
Now, let's say Goldman, instead of offering me the 10 percent preferred and warrants had said, "You can have a 12 percent preferred, non-callable," I might have taken that one instead. I mean, the callable — so there's a tradeoff involved in all these securities.
And obviously, if I think I can make very good money, as we did on Harley-Davidson, with a very simple decision, just a question of, "Are they going to go broke or not?" as opposed to a tougher decision, "Is the motorcycle market going to get diminished significantly? And, you know, are the margins going to get squeezed somewhat?" And all of that. I'll go with a simple decision.
CHARLIE MUNGER: Well, of course your one good answer, that you simply didn't know enough to buy the stock but you did know enough to buy the bond, is a very good response.
The other side to that is, after all, we are a fiduciary for a lot of people, including people with permanent injuries and et cetera, et cetera. And to some extent, we are constrained by how aggressively we buy stocks versus something else. And you mix those together, why, you get our investment policy.
I think, generally speaking, you raise a very good question. I think very often, when you're looking at a distress situation and buy the bonds, you should have bought the stock. So I think you're looking in a promising area.
WARREN BUFFETT: Yeah. Ben Graham wrote about that in 1934, actually, in "Security Analysis," that in the analysis of senior securities, the junior securities usually do better, but you may sleep better with the senior securities.
And we, as Charlie points out, we have 60 billion of liabilities to people in our insurance operation that, in some cases, extend out for 50 years or more.
And we would never have all of our money in stocks. I mean, we might have very significant amounts, but we are running this place so that it can stand anything.
And a couple years ago, we felt very good about where that philosophy left us.
I mean, we actually could do things at a time when most people were paralyzed, and we'll keep running it that way.
WARREN BUFFETT: Area 6.
AUDIENCE MEMBER: Mr. Munger and Mr. Buffett, thanks for having us here.
I recently joined a new organization and for me to succeed there, the culture of the organization needs to change.
So I'm interested in hearing your thoughts about how do you change culture of an organization? And if you're building a new organization, then how do you make sure you have a strong and unique culture?
WARREN BUFFETT: Well, I think it's a lot easier to build a new organization around a culture than it is to change the culture of an existing organization. It is really tough. And I like that fact, in the sense of Berkshire.
I mean, it would be very tough to change the culture of Berkshire. It's so ingrained in all our managers, our owners. Everything about the place is designed, in effect, to reinforce a culture.
And for anybody to come in and try and change it very much, I think the culture would basically reject it.
And the problem you describe, if you want to walk into, you know, whatever kind of organization you want to name — I've got to be a little careful here — it is tough to change cultures.
Charlie and I have bucked up against that a few times. And I would say if you have any choice in the matter, I would much rather start from scratch and build it around it.
But that was the — I've had the luxury of time with Berkshire. I mean, it goes back to 1965, and there really wasn't much of anything there, you know, except some textile miles, so I didn't have to fight anything.
And as we added companies, they became complementary and they bought into something that they felt good about, but it took decades.
And, you know, at Salomon, I attempted to change the culture, in terms of some respects, and I would not grade myself A+ in terms of the result.
CHARLIE MUNGER: Well, I'm quite flattered that a man would say that he's in a new place where he can't succeed unless he changes the culture and he wants us to tell him how to change the culture.
In your position, my failure rate has been 100 percent. (Laughter) And —
WARREN BUFFETT: Yeah, Charlie started a law firm. Go back to, what, 1962, Charlie, what was it?
CHARLIE MUNGER: Yeah. I can move out but I couldn't change the culture. (Laughs)
WARREN BUFFETT: We can tell some interesting stories from the old law firm, but we'll go on to Carol now.
CAROL LOOMIS: This question is from Jon Brandt of Ruane, Cunniff in New York City.
"You have emphasized many times how important Ajit Jain is to Berkshire and National Indemnities reinsurance operations. So I'm wondering whether you expect National Indemnities' float to continue to grow or instead to unwind after he retires?"
Well, of course we don't think —
WARREN BUFFETT: No.
CAROL LOOMIS: — Ajit will retire.
"Another way of asking that is whether National Indemnity has competitive advantages beyond Ajit, or is all of its value, above book value, tied up in Ajit and the runoff profits from the deals he has already put on the books?"
WARREN BUFFETT: His operation has competitive advantages that go beyond Ajit, but they have been developed by Ajit, and he has maximized them, and he knows how to use them in a way that's far better, in my view, than anyone else in the world could.
But they don't all go away. I mean, he has a cadre of about 30 people who are schooled in it, you know, in a way that would make the Jesuits look quite liberal, in terms of what they let their membership do.
Ajit — you can't imagine a more disciplined operation than Ajit has. But Ajit cannot be replaced. On the other hand — well, I'll state that absolutely, categorically — it would be a huge loss to Berkshire if anything happened to Ajit.
But it would not mean that the Berkshire Hathaway reinsurance operation would not continue to be an extremely special place that would do large deals that nobody else would do, that could think and act quickly in ways that virtually no other insurance organization can.
We've got something very special in that unit, and then we've got the most special of leaders in Ajit.
As to our float, every year I think our float has peaked. I never see how we can add to it. It's up to 60 billion-plus now. And we have things like the Equitas deal that are runoffs.
Every day, in insurance, some of the float runs off, it's just that we add additional amounts. And like I say, I was ready to quit, you know, at 20 billion and think, you know, that we'd reached the apex of it.
But it's over 60 billion. Things keep happening.
Berkshire has become, in my view, the premiere insurance organization of the world, and we've got — a lot of good things come from that.
I don't see how, with 60-odd billion of float, I don't see how we can increase it significantly unless we would make some very significant acquisition. And I don't rule that out, but there's nothing imminent on that.
But we will not organically grow the float of Berkshire at a fast clip from here. It can't be done. And we may fight to stay even.
But we may come up with something out of the blue. I mean, who would have known that Equitas was going to come along three years ago? There are various things that could happen of a positive nature.
But when I tell you about the value that Ajit has added to Berkshire, believe me, if anything, I've understated it.
CHARLIE MUNGER: Well, I agree with you, and I've got nothing to add.
WARREN BUFFETT: Well. (Laughter)
WARREN BUFFETT: In that case, we'll go to number 7. Here we are.
AUDIENCE MEMBER: Good morning, Warren and Uncle Charlie. I have to call you Uncle because my parents are from India and we call anybody older than us Uncle or Auntie.
WARREN BUFFETT: You may have to call us great uncle. (Laughter)
SABRINA CHOOG: I'm Sabrina Choog (PH) from Los Angeles and I'm 12 years old.
My mom owns a bunch of Berkies, which obviously I'm gonna get one day. (Laughter)
My question is, 17 percent of the world is Indian. That's one of six people in the world.
India's economy has been growing at 7-8 percent per year. At this rate, it will surpass total U.S. GDP in 2043.
Can you please tell me why aren't you investing in India?
WARREN BUFFETT: Well, it's a good question — (applause) — and we have connections there, obviously.
But it hasn't — in the insurance field, there have been very distinct limitations on what a non-Indian company — a non-Indian-owned company — can do.
We've looked a lot, mostly through Ajit. We've looked a lot at the possibility of being in the insurance business there.
And actually, as of yesterday, I agreed next March to go to India because our ISCAR business — (applause) — is doing very well there.
But, I don't know what they think I can do additionally, but in any event they said, "Come on to India in March and see if we can't expand it substantially."
India is going to grow dramatically, and ISCAR belongs in every industrial country in the world. I mean, we are very basic to industry, and we've done wonders for our customers all over the world.
And we have a good-sized operation in India. But ISCAR management hopes that if we take a trip over there in March, we might land a few more accounts.
We do not rule out India, believe me, in looking at either direct investments or marketable securities.
In fact, POSCO, Charlie can describe the POSCO situation better than I, but they have big plans for India.
CHARLIE MUNGER: Yeah, the one trouble that India presents is that its governments tend to have a fair amount of paralysis, endless due process, endless objection. Zoning is hard, planning permissions are hard, et cetera.
And that has caused the very wise founder of modern Singapore to say that China is going to grow much faster than India, because their government causes less paralysis.
So these countries are different in the opportunities they present.
But of course we like India, and we — kind of admire the democracy that causes the paralysis, but we still don't like the paralysis.
WARREN BUFFETT: It's not ordained, however. You know, if you'd looked at China 40 years ago, you wouldn't have dreamt of what would happen.
So countries do learn from each other, I mean, and they should. I mean, I think they've learned many things from the U.S. that they adapt — I'm not talking about India specifically, I'm talking about other countries generally.
They don't take on everything we have. But if you looked at a country that was as successful as this country has been over a couple hundred years, you might figure that there could be a few good ideas you could steal.
And I think that you're seeing that around the world, and maybe they can improve on us.
So I don't think I would feel that any impediments to growth that existed now are necessarily ones that have to be permanent. Indian — we ought to figure out a lot of ways to do business in those countries.
My preference is, obviously, in something like insurance, which I understand, and where we've got terrific people. Both China and India do limit us right now quite significantly in what we can own of a company.
And I really hate to take some of our managerial talent and put them to work for something we only own 25 percent of. I'd rather have them working on something we own 100 percent of.
So it will depend on the laws. But people in India are going to be living a lot better 20 years from now than they are now, as they are in China, and as they are in the United States.
WARREN BUFFETT: OK, Becky.
BECKY QUICK: This question comes from Jonathan Marsh (PH) in Sydney, Australia.
He says, "Many shareholder letters in the 1970s and 1980s discussed various aspects of inflation and its potentially destructive effects on investment.
"The 2008 letter mentioned the current Federal Reserve's quantitative easing could again bring about inflation, yet the 2009 letter made no mention of this threat.
"What are your current thoughts on the risk level of higher inflation in the United States?"
WARREN BUFFETT: Well, I may be a little biased on this because I've always worried a lot about inflation, and there's been a lot of inflation.
You know, Charlie's pointed out, you know, since I was born in 1930, the dollar's depreciated by well over 90 percent. But as he also points out, we've done OK. So it isn't the end of the world, necessarily.
I think that the prospects for significant inflation have increased, you know, with what — not only here, but around the world, with the situation that governments have either been forced into or elected to embrace.
And they may well have been the correct responses, but we may find that weaning ourselves from the medicine was harder than solving the original illness. And the medicine, you know, has been massive dosages of debt. And, like I say, not only here, but elsewhere.
And I don't see any way that countries running very high deficits, relative to GDP, don't have a significant diminution in the value of their currency over time.
Now, it could be done for a while. I mean, we've done it through wars and everything else, and maybe we will correct the situation.
But if we don't, I wrote an op-ed piece in The New York Times about a year ago on this.
And I do think that if you wanted to bet on higher or lower inflation, bet your life on it, I'd bet on higher, and maybe a lot higher.
CHARLIE MUNGER: Well, again, I agree. (Laughter)
WARREN BUFFETT: OK, number 8.
AUDIENCE MEMBER: My name is Lucas Rineswell (PH) and I'm from Whangerei. And in case you don't know where Whangarei is, it's in New Zealand.
At the moment, it's quarter past 4 in the morning in New Zealand, so I'd be safe to say that my wife will be sound asleep.
So I'm an idealist. What can be done to educate the children about the sage of Omaha's philosophy of successful money management, and to prevent another reoccurrence of the financial mayhem that we've all seen and experienced in the 2007 and 2008 years?
WARREN BUFFETT: We will see financial mayhem, as you put it, from time to time. I hope we reduce it, I hope we reduce the magnitude, et cetera.
But people do crazy things, and it's not a function of IQ, and sometimes it's not a function of education.
In fact, I would argue that some of the problems, and not a small part of what's occurred in the last 30 years, has been because of what became the prevailing conventional wisdom in the leading business schools.
So, I'm not particularly positive about modifying the madness of mankind from time to time.
The first part though, however, is the kind of thing in our movie. I really do believe that getting good financial habits — other kinds of habits, too, but what I'm thinking about here is primarily financial habits — getting those early in life is enormously important.
I mean, Charlie and I were probably lucky that we grew up in households where we were getting all kinds of unspoken lessons, even, in terms of how to handle our life, but in particular, how to handle finances.
And not everybody gets that. And Andy Heyward, who did a terrific job with "Liberty's Kids" in teaching about the history of America three or four years ago, has come up with this idea of "The Secret Millionaires Club."
And if we get through to 2 or 3 percent, or 5 percent, or whatever it may be, of the kids, in terms of giving them some ideas they might not otherwise have, and they build some habits around it, you know, it isn't going to change the world, but it could be a plus in their lives.
It's very important to get the financial habits. And really, Charlie's a big fan, and so am I, of Ben Franklin's. And he was teaching those habits a couple hundred years ago. So we're just going to try and take Ben Franklin's ideas and make them entertaining for children's stories, in effect.
And I think that's about what you should be doing. I don't think — I think it's much more important to have good learning at the elementary level than, frankly, to have it in terms of advanced degrees and graduate schools.
CHARLIE MUNGER: Yeah, there are other great educational institutions in America to help handle this problem. One of the ones I admire most is McDonald's.
I had fun once at a major university when I said I thought McDonald's succeeded better as an educator than the people in the university did.
And what I meant was McDonald's hires a lot of people who are quite marginal at the very start of their working career. And they learn to show up on time for work and observe the discipline.
A lot of them go on in employment to much higher jobs. And they've had an enormous constructive effect about educating into responsibility a lot of people who were threatened with not making it.
So I think we all owe a lot to the employment culture of McDonald's. And it's not enough appreciated.
WARREN BUFFETT: I learned a lot from a paper manager at The Washington Times-Herald named John Daley (PH).
CHARLIE MUNGER: Yeah.
WARREN BUFFETT: And probably 13 years old or 14 years old, and I was lucky to run into him.
Basically, my life would have been somewhat different if I didn't get those lessons from a guy that taught them to me in a very enjoyable manner. He wasn't preaching them to me, he just told me I'd do better if I did this and that, and it worked.
So you're lucky if you've got the parents to teach you that. But anything that brings it into a broader teaching environment, I'm for.
And like I say, I really think Andy has got a terrific project in this and we'll see how it goes.
WARREN BUFFETT: And speaking of Andrews or Andys, Andrew? (Laughs)
ANDREW ROSS SORKIN: So we received about a dozen questions, at least I did, on the subject of your taxes, Mr. Buffett, from shareholders no less. And I chose what I hope is the most polite version of the question.
WARREN BUFFETT: I hope so, too. (Laughter)
ANDREW ROSS SORKIN: This one came from Tom Cornfeld (PH).
And he says, "Mr. Buffett is often quoted as saying that his assistant pays at a higher tax rate than he does, because of the disparity between the long-term capital gain and ordinary income tax rates.
"The implication is that taxes should be much higher on people like himself.
"However, I note that Mr. Buffett has donated virtually 100 percent of his estate to charitable organizations. Because he has owned his Berkshire shares for many, many years with no dividend distributions, it is virtually certain that the bulk of his estate will therefore never be subject to taxation by the U.S. government.
"My question is that, if Mr. Buffett feels that he should pay more taxes, how should the tax system be changed?"
WARREN BUFFETT: Well, you could have a wealth tax, would be one way. I mean, you could tax — I don't know how many countries do that now, Charlie.
In effect, you have that with a property tax in certain ways, but you could have a wealth tax. I would say this: he is absolutely correct. If you want to give away all of your money, it's a terrific tax dodge. (Laughs)
Although, I will say this also. In the tax return I just filed, on the "charitable contributions" line, I have an unused carry-forward of something over $7 billion that I haven't gotten a deduction for. (Laughter)
But I welcome the questioner or anybody else following my tax dodge example and giving away their money. They will save a lot of taxes that way, and the money will probably do a lot of good. (Laughs) (Applause)
Taxes — if we continue to spend 25 percent or 26 percent of GDP, as a country, and we made those elections through our representatives, we are not going to be able to keep taxation at 15 percent of GDP.
Now, we've got a deficit commission. You couldn't have two better guys than Erskine Bowles and Alan Simpson heading it. You have got two classy individuals there. They're smart, they're decent. People like to work with them. I mean, the president made a great choice in picking those two.
But in the end, they're either going to — they're going to have to recommend, and it will be some combination of taxes quite a bit higher, and expenditures quite a bit lower, and then they won't be quite as popular as they are today.
And I doubt very much if you're going to be able to increase taxes significantly as a percentage of GDP and do it, essentially, from taxing lower income people a higher amount. So it's going to be an interesting equation to solve and I wish them the very best. They're two terrific fellows.
Charlie, what do you have to say about taxes?
CHARLIE MUNGER: Well, I think those who worry about your unfairly low taxes should be consoled by the fact that eventually you pay 100 percent. When you die and they ask, "How much did old Warren leave?" the answer will be, "I believe he left it all."
WARREN BUFFETT: And I hope they emphasize old. (Laughter)
No, it's kind of interesting. I mean, just take Berkshire. You know, essentially, I will never sell a share of Berkshire.
But I've known that for a long, long, long time. So basically, that's fine.
If I was a trustee for some trust and they owned Berkshire, which, in effect, I am, you know, it's a lot of fun to run and everything. And I've got everything in life I could possibly need, and I always will.
And, you know, in the end, because Berkshire's done well, we can give away the rest.
Now, if you want, you can argue that if I gave it all to the federal government instead of giving it to the charities, society would be better off, but I don't think many of you would want to hold that position. (Laughter)
WARREN BUFFETT: Number 9. (Applause)
AUDIENCE MEMBER: Hello.
WARREN BUFFETT: Hi.
AUDIENCE MEMBER: Mr. Buffett, my name is Jeff Chen (PH) from San Francisco.
I wanted to ask you a little bit more detail about the inflation question, wanted to know what are the key metrics you look at when you evaluate future inflation and your valuation methodology?
And what are some of the catalysts that's going to cause the inflation to rise in the future?
WARREN BUFFETT: You give me credit for more brain power than I actually bring to the question.
I don't think you can look at any given metric in any given month and figure out exactly what that's going to do to inflation rates because, so much — if it gets going so much, it creates its own dynamic.
You know, we saw that in the late 1970s and early 1980s until Volcker came along with a sledgehammer to the economy.
But we had people running from money at that time, and, of course, we got the prime rate up to 21-and-a-fraction percent, and we got governments up to very close to 15 percent.
So we had a little demonstration project 30 years ago in this country of what happens when people get fearful about money.
And if we were to continue the policies we have now, I would think something — a rerun of that, you know, could be fairly likely.
But, you know, trend is not destiny. We have the power to do things, and Congress has the power. And that's why I wrote that op-ed piece a year ago, to sort of flash a yellow light.
We have the power to control our future, and we do it through elected representatives.
I will just go back to the conclusion that, based on what I see happening, American people, government around the world, I think currencies are a poorer bet than they have been for some time. But I have no idea what that means in terms of rates of inflation. And I hope I'm wrong on it.
I would say if inflation ever really gets in the saddle, that it gets very unpredictable as to how fast it can accelerate and how faith in institutions can break down. A lot of things — a lot of bad things could happen with it.
CHARLIE MUNGER: Yeah. The best defense, of course, is to contribute as much as you can to the civilization and expect to counter inflation's effects by your own merits.
That's the safest antidote. The idea that just by outsmarting other people you can somehow profit from the inflation is a much more dangerous course of action.
WARREN BUFFETT: Yeah. Your money can be inflated away but your talent can't be inflated away. If you're the best brain surgeon in Omaha, or the best painter, or whatever it may be, you will always command your share of the resources around you, you know, whether the currency is seashells or $10 million notes, or whatever it may be.
Talent is a terrific asset to deal with any kind of a monetary situation. But Charlie and I have to fall back on money.
WARREN BUFFETT: Carol? (Laughter)
CHARLIE MUNGER: Too late for talent.
WARREN BUFFETT: Yeah.
CAROL LOOMIS: This question comes from Douglas Ott of Banyan Capital Management in Atlanta.
"In your recent letter to shareholders, you wrote that it was clear you failed us in letting NetJets descend into such a condition that it has recorded an aggregate pre-tax loss over the 11 years we have owned the company.
"What specifically were the errors committed by you and the previous CEO? What have you learned? And how will you prevent such a thing from happening with any of our other businesses in the future?"
WARREN BUFFETT: Well, I probably won't. (Laughs)
We'll make mistakes from time to time, and some of our managers may make mistakes. And sometimes you run into conditions that are really extraordinary.
But the mistake, the biggest mistake made with NetJets is essentially we kept — we were buying planes at prices that were fictitious, in terms of the price at which we would later be able to sell them. And there's a certain time lapse involved in buying fractional shares.
There's a lot of explanations for it. But in the end, we didn't properly prepare for what was obviously happening. And we lost a lot of money, a good bit of which was attributable to the write-down of planes, which you could call is our inventory, where we bought them at X and we couldn't sell them at X or 90 percent of X.
Some of those were new planes that we should not have taken on, and many of them were planes coming back from owners.
We also let our operating costs get out of line with recurring revenues.
But, you know, I've made plenty of mistakes. I stayed in the textile business for 20 years. I knew it was a lousy business. Charlie was telling me it was a lousy business in the first year, the second year.
And 20 years later, I woke up. I was like Rip Van Winkle. I mean, it's kind of depressing when you think about it. (Laughter)
But the one thing we will guarantee, we'll make some mistakes. It was a big mistake at NetJets, $711 million is the figure.
We are now operating at NetJets at a very decent profit. The figures you saw there on the screen reflect a pretax profit of well over $50 million in the first quarter, and that's not with any big boom in plane sales or anything else. It's just with a business plan that involves not an iota of diminution of safety or service, but just got things in line that needed to be in line.
And I give Dave Sokol enormous credit. I mean, he turned that place around like nobody could have, and all the shareholders here owe him a big vote of thanks for that.
CHARLIE MUNGER: Yes, but I believe that the episode ought to be reviewed in context.
If we buy 30 big businesses and generally let the people who run them successfully and before run them with very little interference from headquarters, and it works out 95 percent of the time very well, and we have one episode when the basic franchise was protected but we lost profit opportunities for a while, it's not a big failure record.
Nor does it indicate that we should stop being pretty easy with the remarkable people who join us with their companies.
WARREN BUFFETT: No, it does not change our management approach at all. I think that we have gotten performance, overall, from managers that are beyond the dreams I would have had when I was first putting this company together.
So, it's been a — we let managers do their stuff. And I think —
CHARLIE MUNGER: It's worked for us, net.
WARREN BUFFETT: Oh, it's worked — it's worked very well for us, net. And we're going to keep doing it.
WARREN BUFFETT: Number 10.
AUDIENCE MEMBER: Mr. Buffett and Mr. Munger. This is Eric Chang from Beijing, China.
First, thanks for the occasion for us to engage with you like this, and also for inspiring young people to learn. Mr. Munger has described you as an incredible learning machine in terms of learning new areas, and expanding your circle of competence.
So I would like to understand is if you can make it more concrete, recently you make investment in BYD, a company in China that makes batteries and also electric cars which are, arguably, technology companies.
So can you sort of go through that example and see how you sort of like analyzed the case and asked questions that helped you make a decision to invest in such a company? Thank you.
WARREN BUFFETT: Charlie deserves 100 percent of the credit for BYD, so I'm going to let him answer that.
CHARLIE MUNGER: Well, it's an interesting example because Berkshire would not have made an investment in BYD if the opportunity had come along five or 10 years earlier. And it shows that the old men are continuing to learn, and that's absolutely essential.
Berkshire would have a lower potential than it does if we had stayed the way we were. And — so you are absolutely right in calling attention to this episode.
Again, Dave Sokol helped. I wasn't at all sure I could get Warren to do this all by myself so I inveigled Dave into going over to China, and the two of us were able to help the learning process. (Laughter)
WARREN BUFFETT: Well put. Well put.
WARREN BUFFETT: Becky?
BECKY QUICK: This question comes from Mark Wares (PH) and it has to do with Berkshire's compensation.
He says, "How does Berkshire structure the performance based-compensation of the CEOs of its subsidiaries? Please because as specific as you can regarding the metrics on which you focus the most, and how the degree to which those are attained translates into compensation."
WARREN BUFFETT: Yeah, well, the first thing we do is we never engage a compensation consultant. (Applause)
And we have, whatever it may be, 70-plus or whatever number businesses we have.
They have very different economic characteristics. To try to set some Berkshire standard to apply to businesses such as insurance, which has capital as a bulwark but which we get to invest in other things we'd invest in anyway, so there's minus capital involved, to a BNSF or our utility business where there's tons of capital involved, or in between See's where there is very little capital involved.
We have other businesses that are basically just so damn good that a, you know, a chimpanzee could run them, and we have other business that are so tough at times that, you know, if we had Alfred P. Sloan back, you know, we wouldn't be able to do very well with them.
So there's enormous differences in the economic characteristics of our business.
I try to figure out what — if I owned the whole business — what is a sensible way to employ somebody and compensate them, considering the economic characteristics of the business. So we have all kinds of different plans.
It doesn't take a couple of hours of my time a year to do it. We have managers who stay with us, so they must be reasonably happy with the plans.
And, you know, it is not rocket science, but it does require — it requires the ability to differentiate.
If we had a human relations department, it would be a disaster. They would be attending conferences and people would be telling them all these different things to put in equations and so on. It just requires a certain amount of common sense.
And it requires, incidentally, an interaction with the managers where, you know, I listen to them, they listen to me, and we sort of agree on what really is the measure of what they're actually adding to the company.
And — what do you — what do you say to that, Charlie?
CHARLIE MUNGER: Well, I think the U.S. Army and General Electric have centralized personnel policies that probably work best for them, and we have just the opposite system, and I think it clearly works best for us.
And practically nobody else is entirely like us, which makes us very peculiar. And I like it that way, don't you?
WARREN BUFFETT: Yeah, we really like it that way. We get worried when people agree with us. (Laughter)
We pay people — we pay some very big money. We have managers that have made and will make in the tens of millions annually, and we have managers that, you know, when we suffer, they suffer.
But you've got to treat people fairly. Even though they don't need the money, everybody wants to be treated fairly.
And so the rationale for how you're doing it should be understood, but there is no cross-Berkshire rationale at all. I mean, if you run See's Candy, to put a cost of capital factor in or something like that, what the consultant would tell you, it's nonsense.
It isn't going to make any difference whether there's 40 million or 43 million or 37 million of capital in the business.
The main thing to do is, in terms of market position and all that sort of thing, the real thing I really want to pay managers for is widening the moat that separates our business from our competitors' businesses over time. Now, that gets very subjective, so I don't have any perfect way of doing that. But that is always going through my mind in trying to design compensation systems.
So far, like I say, I don't think — I can't — can you recall any manager that's ever left us over compensation, Charlie?
CHARLIE MUNGER: I think it's amazing how simple it's been and how little time it has taken and how well it has worked.
There's this idea that headquarters can do these wonderful things. Headquarters, in a conglomerate kind of a company, is frequently hated in the field. We don't want to be hated in the field. We don't want an imperial headquarters with big costs that's imposed everywhere.
And averaged out, it's worked wonderfully well for us.
WARREN BUFFETT: Yeah, we make no headquarters charges. We charge for our credit with a couple of companies, but — most companies are allocating a couple percent of sales, maybe, or whatever it might be, to all their different operations. And usually it's resented out in the field. And —
CHARLIE MUNGER: Is it ever.
WARREN BUFFETT: Yeah. So we don't do it.
WARREN BUFFETT: Number 11.
AUDIENCE MEMBER: Thank you. My name is Joe Bob Hitchcock. I'm a winemaker from the Napa Valley in California.
I would like to suggest that the next time you and Charlie have a steak at Gorat's that you accompany it with a new health food, a Napa Valley red wine. (Laughter)
WARREN BUFFETT: We just went in the wine distribution business, as you may know. (Laughs)
AUDIENCE MEMBER: Excellent.
CHARLIE MUNGER: Warren is helpless, but I'm with you.
AUDIENCE MEMBER: OK. (Laughter)
I'll send you a bottle.
One of the keys to the success of Berkshire is your policy to allow the managers of the various Berkshire Hathaway companies to operate with minimal interference from Omaha.
But if you became aware of unethical or illegal activities at a Berkshire Hathaway-owned company, would you directly and personally intervene?
WARREN BUFFETT: Sure. We have to jump in.
We have a hotline, which I think was a very good invention of — it wasn't an invention, but a good policy embodied in Sarbanes-Oxley. And, you know, that's been a plus to us. I get letters directly sometimes.
So I want to hear about problems. I hope somebody else has heard about them first and already gotten them solved, but if they don't get solved someplace else, I want to hear about them.
And we have an internal audit function, which is important at Berkshire. And anything that comes in, you know, when somebody calls in on the complaint line and says, "The guy works next to me has bad breath," I tend to skip over those.
But if anything comes in that relates to alleged bad behavior, it's going to get investigated at Berkshire. And it does.
And every now and then, there have been some important transgressions that have come to us via either letters to me, or calls on the hotline, or maybe letters to the audit committee, whatever. We encourage that.
CHARLIE MUNGER: Yeah. We care more about that than business mistakes, way more.
WARREN BUFFETT: We have a letter that goes out every roughly two years; it's the only communication. I probably ought to put a copy of it in the annual report sometime so that the shareholders see it.
But it's a page and a half long. It asks the manager to tell me who, if something happened to them that night, who I should consider putting in charge of the place the next day.
Doesn't mean I'll follow their advice, but I want to know their reasons and the pluses and minuses.
But it starts off basically and it says, "Look, we've got all the money we need." We'd like to make more money. We love making money.
But we don't have a shred more reputation than we need, and we won't trade reputation for money.
And we want that message to get out. It's the reason we stick that Salomon thing in the movie every year. I mean, you can — probably some of you can recite it by now, but I don't think it can hurt to keep repeating that story.
And the one thing we tell — we tell them that message, and then I've added a new line in this. And I say, if the reason you're doing something, the best reason you can come up with, is that the other guy is doing it, it's not good enough.
There's must be — there's got to be some other reason besides, "The other fellow's doing it," or you're in trouble. And I tell them, "Call me if anything's questionable. You think it's close to the line, give me a call."
By saying that, nobody gives me a call because they — (laughs) — they know that the very fact that they think it's that close to the line probably tells them it's over the line.
But I want to hear about stuff. We can cure any problem if we hear about it soon enough and take action soon enough. But if it's allowed to fester out someplace and people cover it up — and sometimes they have — then we've got a problem.
And we will have more of that in the future, there's no getting around it, you know. If you have 260,000 people, there can be some things going on. I just hope we hear about them fast.
And I hope their managers hear about them even faster and do something before it even gets to us. But we want very much to protect the reputation of Berkshire. It's the right thing to do.
CHARLIE MUNGER: Well, it is absolutely essential. And Berkshire, averaged out, has a very good reputation, as you can tell by the ratings from major media and surveys.
And that is absolutely precious to us. In a sense, you people are part of the culture, too.
The ideal is not to just make all the money that can be legally be made without causing too much legal trouble. The idea is bigger than that. It's that we celebrate wealth only when it's been fairly won and wisely used.
And if that idea pervades the culture of a place, including the shareholders, we think that's very helpful to us. (Applause)
WARREN BUFFETT: Andrew?
ANDREW ROSS SORKIN: This question relates to your investment in Burlington Northern, and it comes from Josh Sanbules (PH), who I believe is in New York City.
And he asks, "You mention in your annual letter that regulators of the railroad industry need to provide, quote, 'certainty about allowable returns,' unquote, in order to make huge investments. If you were going to help the regulators calculate, quote, 'allowable returns,' how would you suggest they do it?"
WARREN BUFFETT: Well, I think the Service Transportation Board — and maybe Matt Rose could help give more details — but I think they've adopted something like 10 1/2 percent, or thereabouts, on invested capital.
And if you had a major enough change in interest rates or something, you could argue that there should be some adjustment, perhaps, in one direction or another.
Usually, in the case of regulated utilities, they talk about return on equity. And you have different amounts in different states, but some states it may be 11 percent, in some states it may be 12 percent or something like that. It's usually in that range.
With the railroads, they've gone toward this return on invested capital, which includes debt as an adjusted figure.
And I don't think that's a crazy, crazy standard. I mean, the railroad, unlike the electric utility, when you get an allowed return in the electric utility you're almost certain of earning it, I mean, if you behave yourself. And your demand is never going to fall off that much, probably, that you'll go way below your return.
The railroad's got more downside in it if you run into a terrific industrial recession, so you're not as protected on the downside.
But there should be some figure, and I would argue that the 10 1/2 percent, or whatever it may be on invested capital, that's been achieved by the four big railroads in recent years, something close to that or right around that figure.
And you want the railroads investing a whole lot more than depreciation, and I would think that would be — it's certainly an inducement to me to invest money in improving the transportation system.
And on the other hand, if that return were far lower than that, it would be crazy to put money, because you can't change that railroad system and do something else with it.
So I think the country and the railroad systems have a very common interest in not earning exorbitant profits or anything like that, but getting a decent return on what is sure to be much needed investment over the next 10, 20, 30 years.
And I'd go along with — if the Service Transportation Board says 10 1/2 percent, or some number like that, I think that's not a crazy number.
CHARLIE MUNGER: Well, yeah, the railroads have been a hugely successful system, in terms of a regulated business. If you stop to think about it, the railroads of America have been essentially totally rebuilt in the last 30 or 40 years.
They've improved the tracks, they've changed the size of the tunnels, they've improved the bridges. The average train can be more than twice as long and twice as heavy.
And you can hardly imagine a business that's done a better job in adapting to the needs of the rest of us than the American railroad industry. And that's by and large been a system of wise regulation accompanied by wise management. And that was not always the case.
If you go back a long time, neither the management nor the regulation was all that wise. But the existing system has worked very well for all of us.
WARREN BUFFETT: OK, number 12.
AUDIENCE MEMBER: Hello, my name is Ashish Texali (PH). I am from New Delhi, India.
First of all, I would like to thank Kelly Bruce (PH) and Carol from American Express to the help they've extended to make this event possible.
The question regarding General Re and reinsurance business.
As the insurance business uses complex models, how is Berkshire more comfortable that insurance business models are not exposing you to significant risks like the models did for Wall Street?
Also, if it is not confidential, is there concentration of risk? That is, what are those few events which can cause significant loss for insurance businesses?
WARREN BUFFETT: I'm not sure I got all of that, but we run significant risks from earthquakes. We had, in the Chilean quake — I don't know how much would have been in the first quarter. When you read our 10-Q there will be a number in there. But we insure 20 percent of Swiss Re. We will take 20 percent of their loss from that.
We have various other exposures in something like that. We included our best estimate in those figures I put up earlier.
Our peak risks now, in terms of earthquakes or hurricanes — which are the two biggest natural catastrophes, in terms of frequency and severity — are probably down quite considerably from a few years ago, not because of any diminished appetite for risk. But we just haven't felt that the rates were that attractive in those areas.
But if we thought the rates were attractive, we're perfectly willing to take on a group of risks where, if something very close to worst case happened, you know, we would lose $5 billion or something like that.
We lost 3 billion-plus in Katrina. We lost well over 2 billion, I think quite a bit more than that actually, on 9/11.
There will be things come along like that. Nothing that ever remotely comes close to making us uncomfortable, though, in terms of the level. I don't know whether I got his full question there or not, Charlie, but you —
CHARLIE MUNGER: Well, pretty close. I would say that the main difference between our practice and that of most other people is that we are deliberately seeking a method of operation which will give us occasional big losses in a single year, big overall losses.
And everybody else is trying to avoid that. And we just want to be rich enough so a big loss in a single year is a blip.
And that's a competitive advantage, that willingness to endure fluctuating annual results. Big advantage, wouldn't you say?
WARREN BUFFETT: It's a huge advantage. It's a huge advantage. And it's one that no one else is going to pick up on. I mean, they know what we do, they just don't want to do it, or they're unable to do it, in terms of financial resources.
So, I would say that comes very close to a permanent and substantial advantage at Berkshire.
I don't — forget about — you shouldn't forget about it, but forget about the human suffering and all that. Just the financial consequences of a Katrina, you know, when we lose 3 billion in that, I don't feel any different the next day than I felt the day before, financially. I mean, it just doesn't make any difference, because we are in that particular game.
And as long as we make the right decisions over time, in terms of the premiums we get, and as long as we never expose ourselves to a loss that would really shake up our capital structure or anything, you know, that is a game in which we have a huge competitive edge. And it gets wider every year.
So, you know, risk — we are in the business — in insurance, we are in the business of taking the other guys' desire to smooth their earnings, and, in exchange, get what we think are larger, lumpy earnings over time. We like the business.
Carol? Oh, go ahead, Charlie.
CHARLIE MUNGER: I was going to say Warren has a different position than a lot of other people in the insurance business. After a year in which Berkshire has a big loss, he can look into his shaving mirror and say, "Your shareholder still loves you." (Laughter)
WARREN BUFFETT: That's right.
CHARLIE MUNGER: Other people are not in that position.
WARREN BUFFETT: Charlie and I knew a guy from Omaha who, 40 or 50 years ago, was one of the richest guys in the United States, named Howard Ahmanson. And Howard had a fetish about owning 100 percent of everything that he came in contact with.
And so he said, when asked why, he said, "I like to look in the mirror and say, 'All my shareholders love me.'" (Laughter)
And I'm not quite that extreme, but I like to look in the mirror and say, "Enough of my shareholders love me." (Laughter)
WARREN BUFFETT: Carol.
CAROL LOOMIS: This question is about derivatives.
"What useful function do derivatives serve in our economy? We got along quite well without them for many years. If they serve no useful purpose, and in fact, have demonstrated that they can do considerable damage to the economy, why are they not made illegal, especially the naked ones? There is precedent for that.
"I believe that short selling of stocks that one does not own or has managed to borrow is illegal."
WARREN BUFFETT: Charlie has — he can get worked up more on this than I can, so I'm going to let him answer that. (Laughs)
CHARLIE MUNGER: Well, I think the usefulness of derivatives has always been overrated. If we didn't have any derivatives at all, including contracts to buy and sell grain that were traded on exchanges, we'd still have plenty of oats and wheat.
I mean, I think it is slightly more convenient for people to be able to hedge their risks of farming by using derivative markets and commodities.
And the test is not, "Is there any benefit in derivatives?" The question is, is the net benefit versus disadvantage from derivatives useful? Or would we be better off without it?
My own view is that, if we went back to having nothing but derivative trading in commodities, metals, currencies, safely conducted under responsible rules, and all other derivatives contracts vanished from the earth, it would be a better place. (Applause)
WARREN BUFFETT: We'll take a current example. Burlington Northern has hedged diesel fuel, which they use a lot of, over the years. And then they also have fuel adjustment clauses in a lot of their contracts for transportation.
With Matt Rose, who does a wonderful job of running Burlington, I basically say, "Look at. If I were running the place, I wouldn't bother to hedge them," because if you hedge it — if you hedge it for a million years, you know, you're going to be out the frictional costs, probably, of doing it, unless you're smarter than the market generally on diesel fuel. And if you're smarter than the market on diesel fuel generally, we'll go into the business of speculating on diesel fuel.
I mean, if we've really got an edge, you know, why bother to run the trains? Let's just speculate diesel fuel.
But I also say, you know, they've got — and if you have an organization where you have somebody in charge of that activity, it's going to take place.
On the other hand, Matt Rose has done a fabulous job, as well as his management team, in running Burlington Northern. If they are more comfortable, or they find it useful in any way, in terms of pricing contracts, or anything, to hedge it, that's fine with me, too.
I mean, it's his company, he can figure out the best way of running it. I'll hold him responsible for how it does over time. And, you know, I would do it one way and somebody else would do it another way. I don't think that's —
I would not condemn anybody that's running a railroad for hedging diesel fuel, nor would I condemn anybody that runs an energy company, like we do at MidAmerican, for hedging energy costs in certain ways.
But I do think, if we could put up a presentation, number 4 on the screen, please.
I think it was said very well in 1935. In fact, chapter 8 of Keynes's General — chapter 12, I'm sorry — chapter 12 of Keynes's "General Theory" is, by far, in my view, probably Charlie's too, the best description of the way capital markets function, the real way people operate. It's prescriptive, it's descriptive.
Everybody should read chapter 12. It's a little — it starts a little slow in the first few pages.
But Keynes — I'm going to read this because I don't think Charlie has it in front of him.
The first part of it is very familiar to people. I mean, this quote has been used a lot. But every word in this, to me, is right on the money.
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation."
You can change that to "gambling" if you want to.
"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." That's the famous part of the quote.
Keynes went on to say, "The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism - which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object."
That was written in 1935. I don't think there's been anything better written about how government, how citizens, should look at Wall Street and what it does and it doesn't.
It's always had this mixture of a casino operation and a very socially important operation.
And when derivatives became popular, and academia was behind them 100 percent. They were teaching more about how to value an option than they were about how to value a business. And I witnessed that and it drove me crazy.
But in 1982, Congress was considering, really, the expansion of a derivative contract to the general public in a huge, publicized way. It was the S&P 500 contract. That changed the whole derivatives game.
At that point, basically, Wall Street just said, "Come on in, and everybody can speculate in an index. Not any real company, just an index. And you can buy it at 10 o'clock in the morning and sell it at 10:01, and you're contributing to this wonderful society by doing it."
And I wrote a letter to Congressman Dingle, and we'll put up exhibit 5. I just excerpted a few of the statements I made there. This was one month before they put in trading in the S&P 500, April. They put it in April, 1982, in Chicago; did a little in Kansas City first.
And I went through four pages of things and I just pulled out a few things. But I think that, to some extent, what I forecasted then has turned out to be the case.
And then it got squared and all of that, as both the people in Wall Street kept dreaming up new and new ways for people to gamble.
And as I say, academia was applauding all along the way and getting hired as consultants to various exchanges to tell them how wonderful they were, in terms of their social purpose.
I think that — well, it's up there for you to read. I'd be glad — the whole letter was reprinted, I believe, in Fortune at one time, Carol. Was it—?
CHARLIE MUNGER: By the way, if I remember right, this was like the only letter in opposition to this uniformly acclaimed new world of better gambling in things related to securities. Warren wrote the letter —
WARREN BUFFETT: And it's a —
CHARLIE MUNGER: — all those years ago, and it was the only letter —
WARREN BUFFETT: Incidentally —
CHARLIE MUNGER: He basically said the idea's insane. It will do more harm than good. Then, as now, people didn't pay that much attention to him.
WARREN BUFFETT: And I'll venture that very few people in this room know — you all know that if you buy a stock, you have to hold it for a very long period of time to get a special capital gains treatment on it.
If you buy an S&P 500 contract at 11 o'clock and sell it at 11:01 and have a profit, it's taxed 60 percent as a long-term capital gain, and 40 percent as short-term capital gain.
So you really get better tax treatment if you're gambling on an S&P 500 derivative, which is what it is, in Chicago, than you do if you invest for four or five months in some security and then have to sell it for some reason.
It's a tribute to the lobbying power of a rather small group that has done very well off this particular activity.
Charlie, can you think of any reason why it's 60 percent long-term gain if you hold something for 30 seconds? (Laughs)
CHARLIE MUNGER: Well, of course it's crazy. It's neither fair nor sensible.
But if a small group with a lot of money and influence cares a great deal about something and the rest of us are indifferent, why, they tend to win before our legislative bodies.
That's just the way it is. I always liked Bismarck's remark that you shouldn't watch two things: sausage making and legislation making. (Laughter)
WARREN BUFFETT: OK, with those hopeful words — (laughter) — we're going to break for lunch. Before we break for lunch, I made a charitable wager with a group, Protégé Partners, two years ago about the behavior of funds of funds that they would select, hedge funds, and the S&P index fund.
The duration of our wager is ten years, and whichever one loses, the money goes — well the money from both goes to the winner's charity, is what it amounts to.
Interesting firm out on the West Coast that supervises what they call these long bets. So if we'll put up exhibit 6, you can see at this point I'm behind.
And have we gotten exhibits? Yeah. Let's go to lunch. OK. (Laughter)