Wells Fargo Earnings and Charge-Offs:
Warren Buffett had expected Wells Fargo’s charge-offs to peak around the end of 2010, and the reported $5.4 billion charge-off was in line with his expectations. Buffett believes that Wells Fargo has largely met its expectations during the economic downturn and has been able to handle its losses effectively.

Wells Fargo’s Share Issuance:
Buffett did not approve of the government requiring Wells Fargo to issue shares to repay the government’s bailout funds. He acknowledges that the government’s actions were necessary to prevent a financial panic, but he criticizes the government’s decision to force Wells Fargo to raise capital through share issuance.

Berkshire Hathaway’s Share Split:
The decision to split Berkshire Hathaway’s class B shares 50 for one was driven by the company’s acquisition of Burlington Northern. Buffett wanted to give Burlington Northern shareholders a stock and cash option, and a lower-denomination stock would provide a fairer deal to smaller shareholders. Buffett is confident that the vote to approve the share split will be successful.

Berkshire Hathaway’s Potential Inclusion in the S&P 500:
Buffett acknowledges that Berkshire Hathaway’s market capitalization is significantly larger than any company not included in the S&P 500 index. He is unsure whether Berkshire Hathaway will be added to the index but believes it would be a positive development for the company’s shareholders.

Wells Fargo’s Revenue and Profit:
Wells Fargo reported better-than-expected revenue and profit in its recent earnings report, with revenue exceeding estimates and a profit despite a TARP repayment. Buffett attributes Wells Fargo’s strong revenue performance to its customer-oriented approach and the diverse range of services it offers to its customers. He believes that Wells Fargo’s revenue potential was underestimated during the stress test conducted in spring 2019.

Bank Tax to Fund GM Bailout:
Buffett expresses his disapproval of the proposed bank tax to fund the GM bailout. He believes that the government should not single out banks to bear the burden of the bailout and that the tax would be unfair to bank shareholders.

Banks’ Contributions to the Economy:
Carl Quintanilla argues that banks, such as Wells Fargo, Goldman Sachs, and J.P. Morgan, have already faced financial burdens due to government bailouts during the 2008 financial crisis. Dick Kovacevic, the former CEO of Wells Fargo, was forced to accept government assistance during the crisis.

Taxing the Beneficiaries of Government Bailouts:
Joe Kernen suggests that the auto industry, Fannie Mae, Freddie Mac, and other companies that benefited from government support should be taxed to recoup the government’s losses.

Government’s Role in Saving the Economy:
Carl Quintanilla emphasizes that the government’s actions in 2008 were intended to save the American economy and not to solely benefit banks or individuals. He argues that the banks have already repaid the government with interest and that further taxation on them is unjust.

AIG’s Contracts and Financial Obligations:
Carl Quintanilla discusses the government’s role in ensuring that AIG fulfilled its contractual obligations to policyholders and annuitants during the crisis. He mentions that Goldman Sachs received compensation for its contracts with AIG, but the government’s actions allowed AIG to honor millions of contracts.

Concerns about the Bank Tax:
Some experts, including Carl Quintanilla, express concerns that the proposed bank tax may be more symbolic than effective and could distract from addressing broader financial reform issues.

Bank Bailouts:
Carl Quintanilla criticizes the proposed tax on banks as a populist measure that ignores the fact that the FDIC, funded entirely by banks, is already taking care of failed banks. He highlights that banks are cleaning up their own mess and are not earning as much as they used to, contrary to the perception of obscene profits.

Compensation and Bonuses:
While compensation is coming back to pre-crisis levels, Quintanilla argues that it is mainly at investment banks and not commercial banks. He proposes eliminating compensation at banks, directing all profits to stockholders instead of bonuses.

Investment Banks and Government Backstopping:
Quintanilla believes that investment banks should not be backstopped by the government and cites the example of Goldman Sachs raising its own capital during the 2008 financial crisis. He suggests splitting investment banks from commercial banks to avoid systemic risks and the perception of “too big to fail.”

CEO Accountability:
Quintanilla proposes strict penalties for CEOs and directors of banks that require government bailouts. He envisions a scenario where CEOs and their spouses would be wiped out financially if their institution causes significant difficulty to the country. Additionally, directors would face substantial financial penalties. He argues that this approach would discourage risky behavior and promote responsible leadership.

Splitting Investment and Commercial Banks:
Quintanilla favors splitting investment banks from commercial banks to prevent the need for government bailouts and protect taxpayers. He believes that forced separation by Congress is necessary to address the issue effectively.

Financial Regulatory Reform:
Carl Quintanilla and Becky Quick discuss proposals for financial regulatory reform with an expert scholar. The expert emphasizes the need to restrict leverage in the financial sector to prevent crises, but notes that measuring leverage is complex and varies across different types of instruments. The expert suggests that a regulator, possibly the Federal Reserve, should develop sensible regulations for different kinds of instruments and potentially prohibit some activities for commercial banks.

Ben Bernanke’s Reaffirmation:
The expert strongly supports Ben Bernanke’s reaffirmation as the Federal Reserve Chair. He praises Bernanke’s actions during the financial crisis, particularly in September and October of 2008, when he took extraordinary measures to stabilize the economy. The expert believes that Bernanke’s non-reconfirmation would lead to a significant sell-off in the stock market due to concerns about Congress’s ability to manage the economy better than Bernanke.

Public Frustration with Congress:
The expert attributes the outcome of the Massachusetts election, in which a Republican candidate won a Senate seat previously held by a Democrat, to a combination of factors, including public frustration with Congress, the White House, the healthcare reform bill, and the economy. The expert notes that understanding the motivations behind voters’ decisions is complex and multifaceted.

Buffeted by Economic Woes:
Warren Buffett discusses how the American public’s expectations for the economy were likely too optimistic, leading to dissatisfaction with the slow pace of recovery.

High Hopes and Slow Progress:
Despite President Obama’s attempts to manage expectations, the prolonged economic challenges have eroded public confidence in the administration and Congress.

Unfulfilled Potential:
Buffett believes that the U.S. has not come close to fulfilling its potential, attributing the current economic difficulties to a rough patch that will eventually pass.

Stimulus Bill and Earmarks:
Buffett criticizes the stimulus bill for its large number of earmarks, which he sees as a form of old-style Washington politics that depresses the public.

Uncertainty and Hiring:
Buffett explains that businesses like Berkshire Hathaway are reluctant to hire employees without sufficient orders to support their workload, as seen in the decline of their carpet and brick businesses.

Jobs and Public Mood:
Buffett emphasizes the importance of job creation in improving the public mood, as unemployment remains a key factor influencing Americans’ sentiments.

Government Functioning and Disillusionment:
The inability to pass healthcare reform despite Democratic control of the White House and Congress raises concerns about the government’s ability to address long-term structural issues like Medicare and Social Security.

Cornhusker Husk Criticism:
Buffett criticizes the “Cornhusker husk” as a form of earmark that exemplifies the Christmas tree approach to legislation, where various legislators add their own items to a bill.

Bad Behavior and Lobbying:
Buffett argues that bad behavior in Congress, such as earmarking, begets more bad behavior, leading to the outsized influence of lobbyists and special interests.

Skepticism about Economic Stimulus Spending:
Carl Quintanilla expresses skepticism towards the claim that the Democratic candidate’s loss in Massachusetts was solely due to insufficient stimulus spending.

Leverage and Deleveraging:
Quintanilla emphasizes that the country’s high levels of leverage at individual, housing, and government levels have led to a painful and prolonged deleveraging process.

Kraft’s Acquisition of Cadbury:
Quintanilla feels financially diminished by Kraft’s recent acquisition of Cadbury.

Financial Implications of the Deal:
Kraft sold a pizza business for $2.5 billion, generating only $2.5 billion after taxes. Cadbury’s acquisition involves paying more than 13 times EBITDA, which is not the same as earnings. The deal includes an additional $1.3 billion in spending, making it more expensive than initially stated.

Buffett’s Disapproval of the Deal:
Buffett expresses his disapproval of Kraft’s acquisition of Cadbury, emphasizing that he would vote against the deal if given the opportunity.

Concerns Regarding Shareholder Value:
Buffett criticizes Kraft’s use of undervalued shares in the transaction, resulting in a higher multiple paid for Cadbury. He questions the accuracy of the reported deal multiple, suggesting it should be higher than the calculated 13 times earnings.

Lack of Transparency in Proxy Statement:
Buffett highlights the absence of directors’ views on Kraft stock’s value in the 78-page proxy statement issued by Kraft. He emphasizes the importance of disclosing directors’ opinions on the fairness of the share issuance to shareholders.

Buffett’s Admiration for Kraft’s Businesses:
Despite his disapproval of the Cadbury deal, Buffett praises Kraft’s portfolio of businesses, including its pizza business and brands like Oreo Cookies and A1 Sauce.

Criticism of Kraft’s Sale of the Pizza Business:
Buffett criticizes Kraft’s sale of the pizza business to Nestle, questioning the tax efficiency of the transaction and the undervaluation of the business.

Buffett’s View on Kraft’s Undervaluation:
Buffett maintains that Kraft is still undervalued, although not as much as it was three weeks prior to the interview.

Potential Negative Impact on Kraft’s Share Price:
Buffett acknowledges that his comments may negatively affect Kraft’s share price, but he believes Kraft remains undervalued.

Kraft Acquisition:
Kraft was undervalued before the deal, but issuing new shares at a low price, paying a high price, and selling a good business reduced its value. The exact valuation impact is difficult to quantify but is estimated to be in the range of $2 to $3 per share.

Cadbury Valuation vs. Wrigley Mars Valuation:
The Wrigley Mars valuation was high, and Berkshire Hathaway was a financing partner in that deal. Paying the same price for Cadbury just because Wrigley Mars sold at a high valuation is not a valid reason.

Burlington Northern Acquisition:
Berkshire Hathaway traditionally dislikes issuing shares for acquisitions. The Burlington Northern deal involves issuing shares, which Buffett compares to preparing for a colonoscopy. Berkshire Hathaway already owned 22.6% of Burlington Northern, acquired for cash. The deal allows Berkshire Hathaway to deploy $22 billion in cash effectively. The deal was close, and any additional stock issuance would have caused Berkshire Hathaway to walk away. Buffett does not consider the deal a bargain but believes it is a great long-term asset and an opportunity to use cash intelligently over the next century.

Kraft Heinz Merger:
Warren Buffett believes the Kraft Heinz merger was a bad deal for Kraft shareholders. He believes Kraft overpaid for Heinz and that the deal was motivated by deal momentum rather than sound business reasons. Buffett expressed respect for Irene Rosenfeld, Kraft’s CEO, but maintained his disagreement with the deal.

Buffett’s Investment Strategy:
Buffett acknowledged that he may be susceptible to deal momentum and paid too much for Burlington Northern Santa Fe. He emphasized the importance of careful evaluation and avoiding overpaying in acquisitions. Buffett feels that Irene Rosenfeld will do a good job as Kraft’s CEO, but he still questions the price paid for Heinz.

POSCO Investment:
Buffett clarified that he does not plan to buy more shares of POSCO, a Korean steel company, in the near future. He expressed admiration for the company but stated that he has no current plans to increase his investment.

Swiss Re Insurance Contract:
Buffett explained Berkshire Hathaway’s decision to take on a $1.25 billion insurance contract with Swiss Re. He believes the contract will be profitable for Berkshire Hathaway in the long term, assuming normal mortality rates in the United States. Buffett acknowledged that a significant increase in mortality rates could negatively impact the deal.

Housing Market:
Buffett discussed the current state of the housing market and the need to reduce excess inventory. He believes that temporarily low housing production is necessary to balance supply and demand. Buffett suggested a “cash for clunkers” program for houses to stimulate demand and reduce inventory. He criticized government programs aimed at easing the pain of the housing crisis, such as the mortgage tax deduction.

Key Points:

Overall, the government’s response to the financial crisis has been effective in preventing a much worse outcome.

The market has recovered significantly since the lows of March 2009, but it is still below the levels seen three or four years ago.

Trying to time purchases based on short-term economic forecasts is a mistake, as uncertainty is always present.

The toxic assets that caused the financial crisis are still present, but they are in better shape and are being cleaned up gradually.

The housing market is improving, with more homes being sold at reasonable prices and with buyers making larger down payments.

The economy is not being held together solely by government stimulus measures, and it is resilient enough to withstand normal shocks.

The chances of a second financial panic are extremely low, provided there are no major exogenous events.

CEOs in the financial sector are concerned about the political rhetoric and attacks on Wall Street, but they recognize that Washington is also critical of them.

Hiring and Economic Demand:
Quintanilla believes that businesses are not hiring more people because they do not see sufficient demand for their products or services. He emphasizes that businessmen make decisions based on self-interest, and they will only expand and hire more people when they see a rise in demand.

Consumer Demand:
Quintanilla states that there are few businesses that need more capital to support more business at the moment. He suggests that people are not taking out more loans because they do not see the demand for what they would use the money for. He also points out that lending money to businesses that are struggling financially is often not a wise decision, as it is unlikely to help them overcome their difficulties.

Banks’ Lending Practices:
Quintanilla asserts that banks are eager to lend money to businesses that have profitable operations and can ensure repayment. However, he cautions against lending to businesses that are using the money to cover operating losses, as this is often a risky practice. He emphasizes that banks have learned from their past mistakes and are more cautious about lending money to risky borrowers.

Concerns for the Economy:
Quintanilla’s biggest concern for the economy in the next year is a terrorist act, which could have severe consequences. He acknowledges that the economy is still recovering from excesses and high levels of leverage, and that this process will take time. However, he remains optimistic about the long-term prospects of the economy, expressing his belief that balance sheets will be cleaned up and the world will ultimately be better off.

Divergence of Markets and the Economy:
Quintanilla acknowledges that the stock market can sometimes diverge from the overall economy. He advises investors not to base their stock-buying decisions solely on short-term economic forecasts, as markets can behave differently from the economy.

Investment Strategy:
Warren Buffett focuses on long-term investments and is not concerned with short-term stock market fluctuations. He believes in buying companies based on their potential earnings over the next five to ten years, rather than quarterly or annual performance.

Shareholder Meeting:
Berkshire Hathaway will hold a special shareholder meeting to vote on the proposed stock split. The meeting is expected to be well-attended, with shareholders eager to participate in the Q&A session. The annual shareholder meeting will be held on May 1st and will feature an extended Q&A session.

Railroad Regulation:
Buffett supports reasonable regulation of the railroad industry to ensure necessary investments in infrastructure. He believes that enlightened regulation can provide a decent return on capital employed in the railroad business. Buffett emphasizes the importance of investing billions in preparation for the future needs of society.

Stock Split Vote:
Buffett is confident that Berkshire Hathaway shareholders will approve the proposed stock split. Burlington Northern shareholders will also vote on the split, but they have a higher hurdle rate to overcome.

Conclusion:
Buffett’s investment strategy emphasizes long-term thinking, while the upcoming shareholder meetings provide opportunities for shareholders to engage with the company’s leadership. The proposed stock split and discussions on railroad regulation highlight the ongoing developments within Berkshire Hathaway.