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2010 Berkshire Hathaway Annual Meeting (Full Version)


51m read
·Nov 11, 2024

[Applause] Good morning. I'm Warren, he's Charlie, he can hear, I can see. We work together, for that reason, I'd like to make one correction: in the movie, my fastball was filmed in slow motion. They tried it the regular way, and you couldn't even see it. So, [Applause] 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 one o'clock. 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. Then we'll have the business meeting for those of you who are still around at that point, and at that time, we will have the election of directors.

But because not all of you may be here at that time, I would like to introduce the directors to you. 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—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—uh, they didn't hear the part about stay standing, but that's okay, they're generally fairly obedient.

But [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 directors. [Music] [Applause]

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? Okay, yeah. If you have any questions on these later on... what we're seeing in our businesses is that what was sort of a sputtering recovery a few months ago seems to have picked up steam in March and April. So in 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 of 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 in 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 on the earnings per share. We're not focused on that number in any quarter, in a year. We're focused on the build-up 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 seventeen and a half 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. 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.

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 extreme at Berkshire, but we always think of the enterprise as a whole. We think about building gains or losses. Charlie may want to weigh in on this one a bit.

Charlie: Well, I agree with you. That's… yeah, he is the perfect vice chairman. They don't come any better. Okay, with that preliminary… they don't come any better. Okay, with that preliminary, we probably ought to quit at that point. Actually, we're going to alternate the questions between a panel of three journalists here. We have Carol Loomis of Fortune Magazine 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 was 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. We're people who 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. So let's just start things off. Carol?

Carol: Well, since I won the alphabetical lottery, I get to make two very short statements. Also, one is that we received an awfully lot of questions. I we really don't know how many because some people sent their questions to all three of us, but I would guess we had something between fifteen hundred and two thousand 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 asked at, get to answer 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.

However, Warren and Charlie may be smart enough to have guessed that the first question will be about topic A, which is Goldman Sachs. 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 Feirman, Kaipan of Morgan Stanley, Brian Chan, and Vic Timono, here is the question: Warren, every year in the Berkshire movie, you did it again today. You use the clip from the Solomon crisis in which you tell Congress that you had warned Solomon's employees that if they lose a shred of the firm's reputation, you will be ruthless in your reaction.

Clearly, 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 Solomon experience, you would give Goldman's board of directors and management?

Warren: Okay, anytime you ask me, there's 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 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. I think they lost 90 or 100 million dollars 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 the 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. We lost a fair amount of money at that time because we guaranteed the credit of somebody that turned out to not be any good. It happened to be some syndicate at Lloyds 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 dollars 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 17 basis points; that's 17 hundredths of one percent. So they took on a 900 million dollar 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 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 ensuring 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 into the business of ensuring structured credits and all kinds of different other deals. I described their activities a couple of years ago in the annual report as being a little bit like Mae West, who said, "I was snow white, but I drifted."

And these bond insurers—and almost all of them did it—these bond insurers drifted into ensuring things they didn't understand quite as well but where they could make a little more money. ACA did it, MBIA did it, Ambac did it, FSA did it, and they all got into trouble. Every one of them. Now, is there anything wrong with a bond insurer ensuring a 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 ensured things that were almost identical to what ACA or others had ensured. The difference being that we thought we knew much 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 an RMBS deal or anything of the sort. But I want to give you an example of something we did ensure because I think it will help you understand better this Abacus transaction. So if the projectionist would put up Slide Number One, I'm going to describe a deal to you. And as you look at this— is it up there yet? Yeah. Somebody came to us a couple of years ago—I'll tell you a 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 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 a hundred million dollars in their case. So we are in the business of insuring bonds. Now, a couple of years ago, somebody came to us, a 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. I mean, 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 ten years? If any of the states don't pay, you have to pay as the insurer."

And I looked at the list, and see, Jane looked at the list, and we had to decide, A: whether we knew enough to insure them, and B: what premium we would charge. 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 dollars for a ten-year period. So we collected a premium of a little over 160 million. And somebody on the other side—the counterparty, they called it—somebody on the other side for ten years gets assurance that if these states don't pay, we will pay as if they did pay.

Now, this gets to the crux of the SEC's case or a 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, 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. So in effect, we did with these bonds exactly what the bonds that were presented to them. Now ACA said, with the bonds that were presented to them, now ACA said, with a list of 120 that was presented to them, they said there's about 50 of these that we are 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 Florida's or something like that. We didn't do it. We just took the list and 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 negotiations 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 mark—the housing bubble really mania blew, 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 deal with a couple of 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. I don't think he has any 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. Then 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 it—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 it any different 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, but—or if we take them alongside. I think before we get to the other part of Carol's questions, I'd ask Charlie to comment on this.

Charlie: 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 too, and not with the three who authorized the lawsuit. 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 research referred to as an investor. It's true that ACA had a management company; it was 100 percent owned by ACA. ACA was a bond insurer, pure and simple, and they had this very simple—was it as it turned out? And they had one part of the organization did this and that, but ACA lost money because they were a manager.

Carol: 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 Solomon experience and the threat of reputation.

Warren: [Music] Ironically, it's probably helped our investment in Goldman in a certain way because we have a five billion dollar preferred stock that pays us 500 million dollars a year. Goldman has the right, the legal right to call that at 110 percent of par, so anytime they want to, they can send Berkshire five and a half billion and get rid of this preferred stock which is costing them 500 million a year.

If we got that five and a half billion in, we immediately would put it in very short securities which probably wouldn't—under today's conditions—might produce 20 million a year or something like that. So every high that Goldman does not call our preferred is money in the bank. And it's been pointed out that our preferred is paying us 15 a second, so as we sit here, tick, tick, tick, that's 15 every tick.

I don't want those ticks to go away, I just love them. They go on at night when I sleep 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 the height of the crisis. The U.S.—I'm not sure what part of 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 preferreds 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 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 basically the Fed or whomever would continue to be quite tough in terms of letting Goldman call our preferred, but it wasn't going to go on forever. I think recent developments have probably delayed the calling of our preferred by some time, so the tick, tick, tick will go on and we will be getting 500 million dollars a year instead of 20 million dollars a year. We love the investment, and I would expect that in 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 heard a company hurting morale—nothing... it's not remotely mortal or anything like that, but it hurts. Incidentally, Goldman Sachs had a situation that in connection with the Penn Central 30, 40 years ago now, and that hurt at that time. They had a connection with one fellow, and in terms of Boesky, that hurt at that time.

And it was a 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 a emergent, I mean 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 Solomon 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. And, 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 hold against Goldman at all the fact that an allegation has been made by the SEC, and if it leads to something more serious, you know, then we'll look at the situation that time. But what I've seen in terms of the Abacus activity, I just don't see that that would be any different than me complaining about the list of municipals that were given to me to a couple of years ago.

Charlie: 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 is 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.

I would agree with that, but Charlie, do you think we should have done our municipal bond deal?

Charlie: I think it was a closer case than you do.

Okay, we insure probably 40 billion now or something like that of municipal ones, and we have done very little in the last year—not because of Charlie's views that he just expressed, but because 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've helped build Berkshire Hathaway. And we trade with them as well. We don't hire them as investment advisors. I mean, they have a big investment advisory business, and if you know, our reaction to that is no thanks. You know, we are in the business of making our own decisions, but we—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. I mean—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 our acquisition or 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 would 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, and if we could put slide 2 up there, I will direct your attention to this—this is an offering that was made in 1967. We just bought a department store. 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. And we went out to raise five and a half million dollars, and Charlie Heider of Omaha, 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's a group of underwriters listed below, and they're usually listed in the degree of their participation. I was 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 five and a half million dollars, and I called Gus Levy of Goldman Sachs, and I called Al Gordon of Kidder Peabody; those were two of the most prestigious firms on Wall Street at the time.

And I said, "Would you guys help me? We're trying to raise five and a half million, and there's nobody that wants to give Charlie and me five and a half million." And the underwriters we've lined up were having trouble getting it done.

Both Gus Levy and Al Gordon said to me, "Warren, we'll take a big piece." And 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.

They wanted to give us money under an assumed name, but 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. So you know 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 him for their participation, even though they did want to do it under an assumed name.

Okay, we'll go to area number one and we'll shorten the answers. 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?

Charlie: It's 1550 pages, so you take the first 1500; I'll take the last 50 pages.

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 dark 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 bluey. A system that is likely to go bluey—that is so important to the country—should be changed so it's less permissive in what 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 and say JP Morgan 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.

Based on what you know about the bill—and I know you haven't read all 1550 pages—but would you vote for it today or not?

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—

You want to get more specific than that, Al?

I was—that's quite a word picture! But they [Music] want to get more specific, Jeremy?

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 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 both commercial banks and investment banks are allowed to do. They should have a much simpler and safer mode of business.

When we owned the 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 alone stayed out of trouble.

But you give human beings the flexibility to 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.

Okay, on that cheerleading, we'll move to Becky. We received a lot of questions about the 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 existing 63 billion dollars of derivative contracts, and could Berkshire get too close to its minimum requirement of 20 billion dollars of cash on hand as a result?

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 for the requirements would be zero. If we were found, Berkshire were found to be a— 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 one percent in terms of notional value or liabilities or a lot of other ways of measuring it's one percent of that of several other very large institutions.

So I've really wondered if, if you use the word huge to describe our position, what you would use for a hundred 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 ten years ago when we bought Gen Re, and we proceeded promptly to get rid of all but less than 100 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 uncollateralized. So if I sell my house to you for a hundred thousand and wanted a hundred and twenty thousand if it were furnished, but you said, "I'll take it unfurnished for a hundred thousand," and then Congress comes along later and says, "All houses have to be sold furnished, and by the way, that's retroactive," then if I give you the furniture now, I want something for it.

I mean, 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 ten-year contract, by one of the very largest investment banking houses. The price that they would pay us was 7.5 million uncollateralized and 11 million dollars 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 they had been—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—if we'll put up slide number seven—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 and the way it reads to us, we do 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 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 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 up our Coca-Cola stock, then 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 pledged as collateral; we get the profit if it goes up.

Charlie: Well, yes, the 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 dubious constitutionality, and it would be both unfair and stupid.

I don't think the government is that crazy. Plus, I think what they would see—and there's a whole list. In fact, I think I've got a page even for that. There's a—yeah, well, let's put up slide number eight, and this is just a sample page of people who oppose putting up collateral—being required to put up collateral, respectively.

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.

And 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; Mid-American has energy contracts.

There was a story in Business Week 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 and 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.

Okay, we'll go to number two.

Good morning to all of you. Switching topics, Charlie and Warren, Norman Reintrop 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.

That's one of the best questions I've ever heard. Here's a question. Oh, okay, 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 Comet investment 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?

Yeah, I'm going to Charlie, and I have not talked about Greece actually recently, and so I'm going to be very interested in hearing his views on that.

I will say, 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. We don't—we 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 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 reinsure Equitas three or four years ago, three years ago maybe, we took on 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; you know, whether our net balance in euros or sterling or yen or whatever. I can't tell you how 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 not important 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 is going to explain to you exactly what that might be.

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?

Yeah, we're agnostic in terms of the relative values. We're not agnostic about where we think all currencies are headed, generally.

No, no, no, but the relative value. But 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, and one of the most constructive and intelligent foreign policy decisions ever made in the history of the world.

And we've 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 of 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 and 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.

Yeah, you should always—everything you read about country credits and currency, 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 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, I mean you could—you never default. You just—you just buy a new printing press or work 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 in the European monetary union.

I mean, it's a really interesting situation because Greece, you know, 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 twenty years or whatever it was ago, but 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, but I'll be watching. I 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 didn’t 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: 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 that'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 time 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 is 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. You know there is no possibility, none of default. If the world won’t take our obligations denominated in dollars, then you have a real problem.

But you don't default when you can print your own currency.

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 two or three 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.

Andrew, you've been very patient.

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. One individual sent three specific questions that I thought I'd ask. The first is, as a Berkshire shareholder who would you like to 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 that should have been disclosed? Would you have 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: Right on, 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 about 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 out of it. The answer is no contact from anybody, and I can't pronounce the name of the guy that runs Galleon.

The Wells Notice: I've talked to a number of lawyers about that, and I think when we got—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.

I mean, so lawyers tell me that if you regard it as material, you report it. I don't think if I had received something related 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: 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 it could happen with a lot of it.

It could happen with individualization, with other people.

Yes, and I don't 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 it would be material.

And then your other question about who would—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 funny, 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 and be running Goldman.

And when the event happened in connection with the Boesky 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 I, we've got strong feelings. There's plenty of stuff that goes on Wall Street that we don't like, but we do not think it's specific, and we know it isn't specific to Goldman.

Charlie: Well, there are plenty of CEOs I'd like to see gone in America, but Lloyd Blankfein is not one of them.

Okay, number three, I was afraid he might start naming names. [Laughter]

Hello, my name is David Clayman, 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 six million occur each year. You ensure 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 invisible 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, and I'd be happy if I could get these to you somehow.

Okay, I think we know your position. 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 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 BlackBerrys are among them. I think that, you know, 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 and doing all kinds of things, working usually in conjunction with other insurance companies.

I do not think that—I mean the Gates Foundation is 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: I've got nothing to add.

Carol, 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 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% of it will be turned over?"

Yeah, basically, there are five foundations I give money to every year, every July, and the amount I would be giving now—it's a 5% declining balance—the amount I would be giving now would amount to about 1.5% 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 1.5% of the shares being sold annually.

Now, if you contrast that with trading on the New York Stock Exchange which averages well over 100% of the amount of shares outstanding, it's not anything unusual at all in the way of sales.

And, you know, it is a free country. I mean, I could sell 10% 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 the 1.5% is—if 1.5% of the outstanding shares of Berkshire move the price down in a year, it probably deserves to move down.

Charlie: Well, of course, I regard that degree of stock distribution to aid charity as almost a non-event, and it may actually have been a constructive event in terms of getting Berkshire into the Standard & Poor's indexes and so on.

I think, excuse me, I think you've got more important things to worry about. If I had owned 100% of Berkshire for sure, it would not have been in the S&P 500. There it was always a problem of concentration.

So if by selling down, it enhanced—and it did to some degree—enhance the chances of Berkshire being in the S&P 500, that probably accounted for maybe 7% 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 diminishment 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 the stock would be selling a little higher or lower. I have no idea.

I think that's sort of an even money bet.

Okay, number four.

Hello, Mr. Buffett. Hello, Mr. Munger. My name is Byron Cushingberry. 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?

Charlie: Thank you for stirring that easy problem to me.

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?

Yeah, yeah, but beyond that, we can't help you very much because we really don't even—we don't have a global allocation system at Berkshire.

And this Warren is keeping it secret from me.

Not that one!

We did not buy Burlington Northern with the idea of moving it to China or India or Brazil, and we love that we love the fact that Burlington Northern is in the United States.

I mean, it's the biggest threat we have is some kind of a massive nuclear, chemical, or biological attack of one sort or another. And you know, if you 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 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 unleashes 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.

I mean, 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 there's no reason—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're 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 an 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 where I would not run from the United States.

Okay [Applause].

Becky: This is a question that has to do with the Berkshire succession plans. It comes from Craig Merrigan in Spruce Grove, who asks: "How did the four potential candidates for Berkshire 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?"

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.

In 2009, they did pretty darn well. It's not—I would say that the four that—it's not the same four; I would say that none of them, Charlie, I believe, may use leverage at all. Do you think so?

Well, the one which I'm most familiar made a little over 200% using leverage of zero.

Well, it narrows it down.

That 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.

I mean that, 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—if I wouldn't do it, the directors wouldn't do it. I won't be there, but they could wait a month, they could wait two months.

I mean, Coca-Cola isn't going to go away; Proctor & Gamble's not going 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 the new CEO who they would like to bring in—which they would like to bring in—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 the next day in terms of—although I did just have a physical; it came out fine.

[Applause] Charlie, my doctor isn't here today, so I'll tell you. It drives him nuts because I eat like I do, and he can't find anything wrong, and he wants to believe me.

And with that, I am not the most optimistic of the two people up here, and 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, and I really think—I mean we shouldn't be getting into superlatives, but I think we have as strong a culture and this 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 then, and we love it, and I think they'll love it after I’m gone.

Don't clap; there.

Okay, number five.

Hi, I'm Steve Fulton from Louisville, Kentucky. Once again, I gave up a box seat to the Kentucky Derby to come ask you a question, and I appreciate that opportunity. My questions 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 the 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.

Okay, 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, you know 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, we could put another 40 million in it, 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 earned operating earnings 2.2 billion dollars 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? 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. I mean, the world is not set up so that you can reinvest tens of billions of dollars in 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 more, 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 of 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 will—you know, 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: Well, I'm just as good at not knowing as you are.

Okay, Andrew, this question comes from Victor and Amy Liu, 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 dollars in Harley-Davidson at 15% interest instead of buying equity when the shares were 12? Today they're at 33."

Well, I would say that if I were writing that question now, I might write the same question, but I'm not sure he would have written in 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.

I don’t—you know, I kind of like a business where your customers tattoo your name on their chest or something. But figuring out the economic value of that—and you know, I'm not sure even going on questioning those guys I've learned much from them.

But I do know, or I thought I knew, and I think I was right that Harley Davidson was not going out of business and that 15% was going to look pretty damn attractive.

And the truth is we could probably sell those bonds right at the probably 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 we love buying equities, but we love buying—the Goldman's preferred at 10%.

Now let's say Goldman, instead of offering me the 10% preferred and warrants, that said you can have a 12% preferred non-callable, I might have taken that one instead. I mean, the callable—there's a trade-off involved in all these securities.

And obviously, if I can think I can make very good money, as we did on the 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 are their margins going to get squeezed somewhat and all of that?

I'll go with a simple decision.

Charlie: Well, of course, you're one good answer that you simply didn't know enough to buy the stock, but you did know enough to buy the bonds. It's a very good response.

The other side of that is, after all, we are a fiduciary for a lot of people, including people with permanent injuries and etc., etc., and to some extent we are constrained by how aggressively we buy stocks versus something else, and you mix those together, and 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 distressed situation, and by the bonds, you should have bought the stock.

So I think you're looking in a promising area.

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.

Area six.
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?

Well, I think it's a lot easier to build a new organization around the 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 of if you want to walk into, you know, whatever kind of organization you want to name—I 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 I 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 mills. 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 Solomon, I attempted to change a culture in terms of some respects, and I would not grade myself a plus in terms of the result.

Charlie: 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%.

Charlie started a law firm, you know, go back to what, 1962? Charlie, what was it?

Yeah, I could move out, but I couldn't change culture.

We can tell some interesting stories from the old law firm, but we'll go on to Carol now.

This question is from John Brandt of Rowan Knife 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 would expect National Indemnities' float to continue to grow or instead to unwind after he retires.

Well, of course, we don't think he will retire. Now 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 a sheet and the runoff profits from the deals he has already put on the books?

The company, his operation has competitive advantages that go beyond Ajit, but they've been developed by Ajit, and he's maximized them, and he knows how to use them in a way that's, far better than, in my view, than anybody else in the world could.

But they don't all go away. I mean, he has a cadre of about thirty people who are schooled in it in a way that would make the Jesuits look quite liberal in terms of what they let their membership do. I mean, they—Ajit, you can't imagine a more disciplined operation than Ajit has.

But a gene cannot be replaced. On the other hand—and 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 mean, I never see how we can add to it. And you know, it's up to 60 billion plus now, and we have things like Equitas that are run-offs.

I mean, every day in insurance some of the float runs off. It's just that we added at additional amounts, and like I said, I was ready to quit, you know at 20 billion, but—and think that we'd reached the apex of it, but it's over 60 billion, and things keep happening.

Berkshire has become, in my view, the premier insurance organization of the world, and we've got a lot of things. Good things come from that.

I don't see how, with 60-odd billion afloat, 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 or, you know, or that 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: Well, I agree with you, and I've got nothing to add.

Now in that case, we'll go to number seven.

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.

We have to call his great uncle. I'm Sabrina Chook from Los Angeles, and I'm 12 years old. My mom owns a bunch of Berkshire, which obviously I'm going to get one day.

My question is 17% of the world is Indian—that's one out of six people in the world. India's economy has been growing at seven, eight 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?

Well, it's a good question. 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 would—we've looked a lot, and mostly through Ajit, we've looked a lot at the possibility of being in the insurance business there. And

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