2014: Should Berkshire increase leverage?

AUDIENCE MEMBER: Hello Warren, Charlie. My name is Stefano Grasso (PH) and I come from Genova, Italy, all the way from there. It’s a pleasure to be here today with you.

I have a question about increasing leverage for Berkshire in this day. This question is really to trigger a discussion and to hear your thoughts on that.

And also, this question was triggered by the fact that following the acquisition of BNSF, few years ago, which was partially financed by Berkshire stock, shortly after, there was plenty of cash around.

There could be different advantages for Berkshire to wisely increase leverage these days. Some generally true for all the companies. Some Berkshire specific.

And the Berkshire specific, most important one for me as a shareholder, is that the investment decision made to invest the funds would be made by the present team, you and the other managers.

Question is then, why not go out and ask for several billions in bonds with a long maturity, and maybe even with some earlier endorsement or callable options embedded at Berkshire discretion, and good — and make a good use of it? Thank you.

WARREN BUFFETT: Well, what you say makes great sense.

And it’s the kind of thing Charlie and I used — I think if you’d asked Charlie and me 40 years ago, that if we were looking at the present set of interest rates and we had some wonderful businesses that were making a lot of money, whether we would have gone out and borrowed a whole lot of money for the long term. We would’ve said yes, right, Charlie?

CHARLIE MUNGER: Wouldn’t have been a hard decision.

WARREN BUFFETT: But, we’ve got several reasons. We — A, we do have a good way of generating funds other than through equity: through float. And we’ve done that to the tune of 77 billion.

And we don’t like the idea of operating a very conservatively-leveraged company, and then changing courses so that the people who bought bonds that were rated double-A, sort of find themselves with much lower rated bonds of the sort.

We don’t have any problem leveraging up the utility or the railroad. They deserve to have even a lot more debt than they do, but we keep it sort of in line with what the rating agencies think should be conventional ratios.

But they’re — if you look — if you analytically look at them — both of them could withstand a fair amount more debt.

At the parent level, we — you know, looking back on the BNSF deal, we borrowed some money that time and we used some equity.

I think using equity helped us make the deal. But it was, you know, it was not a smart thing to do, basically.

I should — and I could’ve always gone to the market and repurchased a bunch of stocks subsequently, and that’s probably what I should’ve done on that.

So I understand your point. I completely — you know, another 30 or 40 billion of debt at Berkshire would be nothing and it would cost very little.

We don’t actually have great places to put it now, as evidenced by the fact that we’ve got 25 billion or so of excess cash.

We’d be — we are reluctant to leverage it up a lot at the parent now, since we have these other sources of money that are really pretty attractive.

We are selling what we call structured settlements, for example, that have a very long duration. And they actually have an interest cost to us of less than if we were to sell bonds.

So we are doing certain things that are along the lines you urge, but not nearly as aggressively as you urge.

And you probably are right. And you’re certainly right if we saw a $50 billion deal and we passed on it for some reason because we were unwilling to take on some debt.

If we see a really good $50 billion deal, we’ll figure out a way to do it.

Charlie?

CHARLIE MUNGER: I think we’d welcome it. We’re — even though what you suggest is intelligent, we’re probably not going to do it in advance.

WARREN BUFFETT: You caught the last two words there.