Berkshire Hathaway 2009 Annual Meeting Audience Question # 39

Why Berkshire invested in GE and Goldman Sachs

Warren Buffett:

Andrew?

Andrew Ross Sorkin:

OK, this question comes from John McDonald.

And he asks, “Warren, in your General Electric and Goldman Sachs investments, do you think you’ve picked attractive businesses or simply attractive securities?

“Ben Graham’s ‘Security Analysis’ suggests that the most frightening things an executive management can do is manage earnings, which it could be argued both of these firms do. What is your reaction to that?”

Warren Buffett:

Well, I can say that I could argue that a very substantial percentage of American industry over the last 15 years, at one time or another, has managed earnings. And I’ve witnessed it and argued against it and gotten no place.

So, I don’t regard that as a malady that’s limited in its experience. I don’t know anything. I would not get into the specifics of those companies.

I felt good about those companies, in terms of the quality of the businesses they had and the quality of the management. But it was the terms, primarily, that caused us to make those deals.

I mean, those were made in a period when markets were in chaos and you should’ve gotten very good terms for committing money then.

Very people were either willing, or in some… many… most… cases, able to commit major sums on short notice. And it took good terms in order for us to do it. It…

And like I say, I’m not sure there was any second possibility in those cases. It was a really extraordinary period.

We were happy to do it. I feel good about the deals, obviously, because we got a very good coupon. But considering the circumstances under which the deals were made, I don’t think there was an alternative.

So if they wanted 5 billion and 3 billion, respectively, on those deals, I think we were the low bid, in effect. But I also think we made very decent deals.

And you know, could we have done something better with the money at that time? I don’t… as I measured at that time, I could not find anything that I liked better. It was the terms of the deals overwhelmingly, although we obviously liked the businesses.

I know the managers, the CEOs, of both companies very well. And I think they are terrific people. I think they’re smart people.

And I think they’re very… they’ve been very straight with us, straight with us long before we made a deal with them. So we’re very happy with those deals.

Charlie?

Charlie Munger:

Yeah, you know, there’s been a lot of criticism of investment banking in this arena, starting with that movie. But Berkshire itself has had marvelous services from all of its investment bankers, which is interesting.

Warren Buffett:

Think of what we’d be saying, if we’d been mistreated.

We’ve done a lot of business with Goldman Sachs over the years. And my experience goes back to when I was 10 years old and met Sidney Weinberg, who was running the firm and was a legendary Wall Street… well, he was “Mr. Wall Street” for a long, long time.

And I was a friend of Gus Levy’s. And Gus Levy also did some really nice things for us, including when we had a little nothing company, called Diversified Retailing, which Charlie and I and Sandy Gottesman jointly formed.

Gus came in on an underwriting of a $6 million issue brought by New York Securities, which he wouldn’t have dreamt of coming in, you know, for… in that kind of a deal, under most circumstances. And he had Goldman Sachs join in at that time.

So there have been a lot of things that have made for a very happy relationship with Goldman Sachs. I feel good about them.

And of course, we do lots of business with General Electric. We’ve bought I don’t know how many of those wind turbines from them.

But GE… you know, is a very, very important American institution. We’ll do… we’ll sell them a lot of things. We’ll buy a lot of things from them. And we’ll make money on our investment. So that keeps me happy.

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Q&A with Warren Buffett and Charlie Munger: A Compilation of All Shareholder Questions and Answers from The Berkshire Hathaway Annual Shareholder Meetings

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