Economic Pearl Harbor - Buffett on 2008 Financial Crisis, GE Investment & TARP

Breaking news: Buffett announces $3B investment in General Electric on same terms as Goldman Sachs deal. 'Got a call this morning from a friend at Goldman Sachs saying they might be interested.' Known GE management for decades - Jack Welch before Jeff Immelt. 'GE is gonna be - it's been the longest running stock in the Dow Jones Industrial Average. It'll be 100 years from now, it'll be around.' Berkshire had 'a lot of money around over the last few years and we're seeing some things that are attractive now.' On cash deployment philosophy: 'When people talk about cash being king, it's not king if it just sits there and never does anything. There are times when cash buys more than other times and this is one of the times.' Classic quote: 'You want to be greedy when others are fearful and you want to be fearful when others are greedy.'

Buffett declares crisis 'Economic Pearl Harbor - that sounds melodramatic but I've never used that phrase before and this really is one.' Most fearful he's seen: 'In my adult lifetime I don't think I've ever seen people as fearful economically as they are right now.' Fear driven by credit markets seizing up, money market fund concerns, 8% of US bank deposits moved 'very skillfully within last couple weeks from institutions they thought were fine a few months ago.' Main Street feeling it: 'If you're an auto dealer you're feeling it, furniture retailer, jewelry retailer - I know some of these businesses because we're in them.' Will be felt 'big time more if we don't do something about it.' Key crisis indicator: '$40B of treasury bills sold at yield of one twentieth of one percent - whole country basically at point of putting money under mattress.'

On rescue plan: 'I don't think it's perfect but I don't know I could draw one that's perfect. But I'd rather be approximately right than precisely wrong and it'd be precisely wrong to turn it down.' Powerful metaphor: 'We have a terrific economy - it's like a great athlete that's had a cardiac arrest. It's flat on the floor and the paramedics have arrived and they shouldn't argue about whether they put the resuscitation a quarter of an inch this way or that way or start criticizing the patient because he didn't have blood pressure tests.' Congress criticisms: 'They get into certain arguments and start worrying about assessing blame and there's a little demagoguing but in the end, something that's important they'll do the right thing.' On deleveraging: 'Major institutions of the world all wanting to deleverage - only one institution in the world that can leverage up in a way that's at all a countervailing force - that's the United States Treasury.'

On government response to crisis: 'I think basically the right things have been done but no one saw the tsunami coming fully. When Bear Stearns came along it looked like if you stopped the flood at that point you didn't have to worry about being downstream from it - I really thought that would probably halt runs on other major institutions but it didn't. We have seen wave after wave.' Defends ad hoc approach: 'Admittedly there's been somewhat of an ad hoc response - I'd rather have an ad hoc response than no response at all.' On timing: 'I don't think the Treasury could remotely have gone to Congress 3-4 months ago and laid out the scenario of what's happened and been credible and gotten the necessary tools. I think it took a crisis like this.' Characterizes situation: 'It's been kind of like a tragic play to this point but at this point I think it's clear to Congress and the American people that there is only one countervailing force.'

Buffett praises FDIC Chair Sheila Bair: 'Most of the viewers have never heard of Sheila Bair but in the last two weeks has taken 8% of the deposits in the United States and seamlessly moved those over to sound institutions which in turn have gotten more capital into them. It's been a magnificent job - 8% of the deposits in the United States, tens of millions of depositors and nobody's ever heard of her.' Adds: 'She'll never get a golden parachute or anything to pay - she's done a great job. We've got some great public servants.' Also praises Hank Paulson: 'You've got the right person - he knows how corporations work, he knows money and he's got the interest of the country at heart.'

Buffett's confident prediction on TARP: 'If they buy mortgage-related securities at current market prices they're going to make money over time because the United States government has staying power and has a low cost of borrowing.' Offers personal bet: 'If I could take 1% of that $700B and take the gain or loss from it and be their partner and they would buy the stuff at market, I'd make a lot of money.' Provides example: 'You have hedge funds buying these assets to yield 15-20% - that's the buyer for these people trying to unload them. US Treasury has borrowing costs like nobody else, can borrow basically unlimited amounts, can stay there for years and years.' Merrill Lynch example: 'Sold a bunch of mortgage-related assets at 22 cents on the dollar - the buyer is going to make money and a lot more if it happens to be an institution like the US government with very cheap borrowing costs.' To taxpayers worried about $700B: 'I think all of your money back and maybe something else. I would bet on it. If I got a chance to take 1% of the deal either way I would make that bet.'

Personal example of crisis impact: 'I'm sitting with $6.5B we're going to use to close the Mars-Wrigley deal on October 6. I have to hand over that $6.5B on October 6. I have to be very careful about where I leave it in between now and then because they're expecting me to show up.' If he loses confidence in institutions: 'Their funds aren't available, they don't have it for the next day - the whole economy just comes to a grinding halt.' Powerful metaphor: 'Confidence in markets and in institutions is a lot like oxygen. When you have it you don't even think about it - it's indispensable. You can go years without thinking about it. When it's gone for five minutes it's the only thing you think about. That's exactly it - the oxygen has been sucked out of the credit markets and confidence and it's got to be given a jump start basically.'

Warning to Congress: 'I have argued with the senators, congressmen I've talked to - you don't want to be too little too late. They've been somewhat too late in my view but that's okay.' Extended Pearl Harbor metaphor: 'We're not going to argue for a few weeks after Pearl Harbor to decide whether it's really the Japanese that attacked or whether we should actually commit a few battleships.' On scale: 'The too little part - it could be a mistake. This has to be done on [a big enough scale]. It's whether people think it's too little when you get all through it. $700B is a lot of money and it will buy a lot of distressed property.' Critical requirement on pricing: 'You've got to buy at market. One way to do that is if some institution wants to sell you a billion dollars worth of mortgages, they might have to sell $100M in the market and then you'll buy the other $900M on the same terms. You don't want to have artificial prices being paid.'

Despite crisis, Buffett maintains long-term optimism: 'I will tell you this - this country is going to be living better 10 years from now than it is now. It'll be living better 20 years from now than 10 years from now.' Historical perspective: 'The ingredients that made this country the miracle of the world - we had a 7-for-1 improvement in the average American standard of living in the 20th century. Now we had the Great Depression, we had two World Wars, we had the flu epidemic, oil shocks - we had all these terrible things happen but something about the American system unleashes potential.' On what might never be the same: 'Confidence will come back.' Fundamental belief in American system's ability to overcome crises and continue improving living standards despite periodic setbacks.