Warren Buffett on the Business and Government Connection

Warren Buffett rolled up his sleeves on the Fox Business Network in a very candid interview with the channel's Liz Claman, in which he discussed CEOs of failing banks, reconfirming Ben Bernanke, and his Berkshire company.

On the Bank Situation

"You'll always have banks that are too big to fail. We can't operate in this world without very big banks…If they are toppling the government will have to do something about it." This is contrary to conventional wisdom and of this writer. After a year we see that banks had more money than expected (witnessed in the pace in which they paid off their bailouts) and these government programs have done little to increase the pace of loans, since banks have found a way to get "money for nothing." Why risk their resources if they are washed in capital from Uncle Sam?

Furthermore, these policies have only undermined moral hazard at a time it is so greatly needed. The US cannot be in the business of rewarding bad decision making."If I were running things if a bank had to go to the government for help, the CEO and his wife would forfeit all their net worth…I think you have to change the incentives. The incentives a few years ago were try and report higher quarterly earnings. It's nice to have carrots, but you need sticks. The idea that some guy who's worth $500 million leaves and only has $50 million left is not much of a stick as far as I'm concerned." This was actually the highlight in the Buffett interview. We need a restoration of moral hazard in banking and that will only come when those responsible for bad decision making suffers for those choices."The CEO has to be the chief risk officer for a bank." This is a great observation and a view that needs to be restored. This is best achieved, in my opinion, by letting banks fail. Any executives behind such will find themselves looking for something else to do for a living.

On members of Congress who feel Ben Bernanke should not be reconfirmed:

"They ought to get down on their knees every night and thank the Lord that Bernanke was there through this. He took some unprecedented actions…He took the actions that were necessary to prevent panic from paralyzing this country." "Unprecedented" often means unconstitutional and has led to the expansion of government like we have never seen in our history, even in the Great Depression. What he has done is created instability in our monetary policy by pumping dollars into the economy at a pace we have never seen. Furthermore, his bailouts of large corporations have undermined the normal functions of a free market economy, such as moral hazard. He has created an economy without risk, which is far from free market in design. What he has done is criminal...two thumbs up for those members of Congress who wish to see him go.

On the future of Berkshire Hathaway's business acquisition

"We'll keep buying businesses, as long as I'm alive we'll keep buying businesses…we'll try to buy them for cash, sometimes we may have to use some stock, but we'll use as little stock as possible." If the US economy continues to reel from the unstable monetary and fiscal policies of the Obama administration, large corporations like Berkshire Hathaway will continue to benefit from them. It should be no wonder that, when questioned about Tim Geithner, he replied "I think he's terrific." Maybe for Buffett, but not the rest of the country.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Buffet is Bullish on Trains

There has been a great deal of buzz this week about Warren Buffet discussing a recent purchase by his company. Buffet is noted for his candor, which makes him one of the more credible voices when it comes to the status of the economy and Wall Street in particular.

Recently, Buffet was found on the Fox Business network visiting with anchor Liz Claman. In particular, he was discussing his Berkshire Hathaway's gamble into the railroad business. Just recently the company purchased Burlington Northern Santa Fe in a deal worth about $44 billion.

This is a bold move for Buffet in a shaky economy, but typical of a person who has learned to take advantage of sales that can be found when a business environment is in decline. Furthermore, with the move towards reducing energy costs in order to support the environment and save dollars, trains are a very smart form of transportation. Buffet does not buy things he is not comfortable with and had already owned 25 percent of the company before he acquire the rest of it in a recent meeting in Fort Worth, Texas.

Why trains versus trucks or other forms of transportation? Buffet told Claman that "the rails move a freight at a much more environmentally friendly way than the truckers do. And they also only use about a third of the fuel. So, it's helping...It helps in terms of the atmosphere. It is a very, very efficient, effective, environmentally friendly way of moving freight. And, you know, our rail system is a huge asset to the country."

Claman covered a topic that is extremely important to anyone concerned about transportation. She noted that trains are, in transportation, the "cheapest, best way. But then there's cap-and-trade, Warren. Some analysts are very skittish about coal and a possible backlash if cap-and-trade goes through. You mentioned now -- you said, we're going to see a diminishing of coal use. But what do you think cap-and-trade would do to the business if that went through?"

Buffet can not easily dismiss the topic, but noted "It won't change the composition of what utilities are doing tomorrow or next week or next year. The utilities over time are going to use less coal and probably more nuclear. Our own utility, for example, uses wind very substantially in Iowa. So, over time, coal is going to diminish somewhat. Now, I think that will hit Eastern coal more than Western coal, but that's a fact of life over a considerable period of time. And that's true whether there's cap-and-trade or not, yes."

One of the things that caught my eye in the interview was Buffet's discussion of his view of the dollar in this current economy, stating "You're seeing us get rid of a lot of dollars today in exchange for a lot of assets. So, I would rather own physical assets than own dollars." Why? Because of the rapid decline of the value of dollars through the printing of money. Those of us who cannot afford to purchase railroads, might want to consider precious metals as a part of an investment strategy.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Is Buffett Bearish on Banks?

It appears that Warren Buffett and his Berkshire Hathaway, Inc. have become more than a little concerned about the health of banks. Reuters reported this morning that his insurance firm has "told one of its units to stop insuring bank deposits above the amount guaranteed by the U.S. federal government, the Wall Street Journal reported. The subsidiary, Kansas Bankers Surety Co, is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds."

This is a fairly far reaching move. After all, companies offer insurance products as a means of making profit. Furthermore, firms such as Hathaway are in the risk management and assessment business. This sends the message that this insurance company believes that the risks are greater than the profit potential, when it comes to this form of policy.

Typically before ending a product, insurance companies usually raise rates first. There is no word if Hathaway pursued such first. Also, there is no word yet if this is going to be an industry trend, since there is a small group of other companies who offer similar policies and no announcement from them on future plans or recent increases.

This policy was very important to banks that pursued wealthy customers who found insurance from the federal government of up to $100,000 in deposits inadequate. Much of the concern stems from the fact that the US has seen eleven banks fail in 2008 alone, the most since 2002 which some attributed to larger national financial problems following September 11th. More banks seem poised for failure, which only adds fuel to concerns.

This will force some of those wealthy depositors to do more research on where they bank, strengthen the positioning of smaller community banks (which tend to keep a closer eye on banking activities), and require customers to continue to pursue alternatives to banks for larger deposits (which often bring higher risks, costs, or both).

This policy change follows the federal government's bolstering of mortgage lenders Freddie Mac and Fannie Mae. This move by the government led to a huge rally on Wall Street, but appears to have done little for Buffett in placating his concerns.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Get his commentaries in your email box by contacting Info@HoustonBusinessShow.com.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.