2009: How does Berkshire strong balance sheet and credit rating give it advantage when interest rates are zero?

BECKY QUICK: This question comes from Rita Addison (PH), who says, “How does Berkshire’s strong balance sheet and credit rating help take advantage of buying opportunities when even weak financial companies can now borrow more cheaply than Berkshire by using U.S. government guarantees of their debt?”

WARREN BUFFETT: Yeah, well, as I pointed out in the annual report, we are at a significant disadvantage in any financing-type business where we are competing against people who are getting their funding and their financing with a government guarantee.

Our raw material costs us a lot more money. And that’s particularly applicable at Clayton where we have 10- or $11 billion of, really, mortgage paper on mostly manufactured homes.

And it’s exceptionally good quality portfolio. Kevin Clayton and the people at Clayton Homes have done a great job in terms of lending responsibly. Our borrowers have behaved very well.

But the raw material to fund that portfolio — money — costs us a whole lot more than some bank that’s in trouble.

And that’s a real problem for us. And it’s forcing us to try to come up with various other sources of funding that portfolio where, one way or another, we get people with government guarantees involved in the program.

That’s just a fact of life with us now. There are the blessed who have government guarantees. And there’re the ones that aren’t.

And of course, you see that dramatically, in the case of some companies that have a government guarantee for part of their money and then sell other money — and then sell other bonds — that aren’t guaranteed.

I mean, just the other day, as I remember, I may be wrong on this, but I think Goldman Sachs sold something with a 400 basis point spread that wasn’t guaranteed. Whereas their guaranteed paper would be hundreds of basis points underneath that.

General Electric sold something earlier this year that wasn’t guaranteed. And the spread between the guaranteed and the un-guaranteed was huge.

We don’t have anything guaranteed to sell, so we are not in that favored class in any way. And we can’t become a bank holding company. So as long as the situation goes on, we have to figure out ways that we adjust.

We only really use borrowed money — we use it in our utility business. But other utilities are not in this favored class. I mean, the utility industry generally.

So our utility borrows money quite well, compared to most utilities. MidAmerican’s credit is regarded as very good.

And generally speaking, we’ve raised our money at a lower rate, which benefits our customers in the utility business.

We don’t use much money in the rest of our businesses, except for the financing at Clayton. And we won’t use much money.

So we get our money by float, basically. And our float is — it was $58 billion. I mentioned a little while ago, that Wells Fargo raises its money in the first quarter at, I think, 1.12 percent — 112 basis points — which is very cheap.

But our money’s cheaper. We can’t get as much of it as Wells does. But we do have 58 billion — in fact, we have more now — that you would think will cost us less than zero over time, although there will be given periods when we have a cost to it.

But we don’t have an answer for going head-to-head against a government-sponsored business that gets — can raise money with a government guarantee. We do not have a way of going head-to-head with them at any business, no matter how prudently we conduct our operations.

Charlie?

CHARLIE MUNGER: Well, of course we’re at a funding disadvantage. But on the other hand, we aren’t regulated like a bank or a bank holding company.

I think we’d be pretty ungrateful if we took this one disadvantage that has come to us and obsessed on it.

WARREN BUFFETT: I get those kind of lectures all the time. (Laughter)