This is a transcript of Warren Buffett's Sun Valley live interview on CNBC's Squawk Box, July 12, 2012, from

7:30am to 8:00am ET. In his conversation with Becky Quick, Buffett says he now sees U.S. economic growth slowing, but residential housing is picking up slightly. He also says Europe has "been slipping pretty fast" over the past six weeks. BECKY QUICK: Mr. Buffett, thank you for joining us this morning. WARREN BUFFETT: It's good to be here. BECKY: It's great to see you. And we couldn't think of a better time to have you on because there are so many questions about what's been going on with the economy, what's been going on with the jobs picture. Why don't you tell us what you're seeing right now in your businesses? BUFFETT: Well, I've got a little different story this time. (Laughs.) For a couple years I've been telling you everything except residential housing was improving at a moderate rate not crawling, but not galloping either but that residential housing was flatlining. And the last two months it's been just sort of the opposite. The general economy in the United States has been more or less flat, and so the growth has tempered down. But the residential housing, we're seeing a pickup. It's noticeable. It's from a very low base. It doesn't amount to a whole lot yet, but it's getting better. So you've got a kind of flipflop on that. BECKY: What happened? When we talked in the past you had said that when housing turned that would be when the U.S. economy would turn. What happened? BUFFETT: Well, it hasn't changed all that much yet. But it is picking up. But at the same time the rest of the economy is slowing down. It's not heading downward but it's not growing at the rate that it was CNBC SQUAWK BOX TRANSCRIPT: July 12, 2012 PAGE 1 OF 11

earlier. And then, it's kind of interesting in Europe. For a year or so, in most places, forget about Greece for the moment, but generally in Europe you didn't have a big slowdown. You had a lot of worry and all that. But in the last couple months in Europe, particularly in the past month, it's pretty much across Europe, things have really started to slip pretty fast. BECKY: We've heard this from a lot of CEOs who joined us in the last several weeks. But what business lines in particular do you look at and you see these things popping up? BUFFETT: All of the businesses that we have, and then I talk to people in other businesses. It's pretty clear that's what's going on right now. There are certain figures I can't tell you where I get them. Europe is really it's headed downward in the last, I don't know, six weeks or so. And it wasn't going that way before. It wasn't doing that well, but it wasn't and then it hit the skids. BECKY: Is that because of consumers or because of businesses, confidence really slowing down and spending slowing down? BUFFETT: Yeah, well, spending is slowing down and when spending slows down business reacts. They're not seeing the same kind of spending so they pull in their horns some. BECKY: What, of the things you can talk about, the numbers that you do see, concern you the most? BUFFETT: Well, it's pretty general, Becky. Like I say, it has not turned down yet in the United States. Our freight car loadings are up weekby-week. I normally get them today but I'm not home, so but last week they're up the eastern railroads were down moderately, but a lot of that's coal. But nevertheless, just across the board, when you're looking at our retail sales, jewelry or furniture or you name it yards of carpet are down, our carpet business is better. But on the other hand, if you look at we're the largest home builder in the country, Clayton Homes, and that's up, brick is picking up, but these are from low levels. But you are seeing in our real estate brokerage firm, CNBC SQUAWK BOX TRANSCRIPT: July 12, 2012 PAGE 2 OF 11

which is the second largest in the country, pending sales are up by a reasonable amount but from a very low base. BECKY: Well with everything else not a reversal, a slowdown in the growth, what happened? What happened six weeks ago to spook people, to spook businesses? BUFFETT: I don't know the answer to that. I know the result. You could argue in Europe, why it was delayed so long? Because Europe has really been you could see this coming for two it was two years ago we saw a lot of our Spanish and Italian and even French bonds. We were overly cautious probably. But that was two years ago. Europe, with all that's going on, it probably kept it from having any kind of gains but it didn't really seem to sink in. But I would say the last, well I know the last couple months, with some acceleration, it's been hitting over there. BECKY: We've watched the jobs picture and the last employment numbers at 8.2 percent from that government report last Friday. Is that a chicken and egg cycle? Are people watching the jobs number and getting spooked by it, or is the jobs number kind of BUFFETT: Well, you're right. There is some circularity in it. I don't know the answer to exactly why it's happening. And I don't know what it will be three months from now or six months from now because three months ago I didn't know what it would be today. The U.S. economy is doing better than virtually any big economy around the world. This economy has come back a long way, with the exception of housing, from where it was a few years ago. And you can see it in corporate profits. I thought it would take housing I still think it would take housing coming back to move us generally, significantly, upward and I still think that's true. But so far the little pickup in housing has not been near enough to offset whatever is going on in the world generally. BECKY: The Fed came out with their minutes yesterday. Obviously they're concerned about the economy. They say that they could step in

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to do something else. But I guess the question becomes what would it take for them to step in and what do they do at that point? BUFFETT: Yeah, I I have my own doubts. I'm sure Chairman Bernanke would disagree with me. And he knows a lot more about it than I do. But I I do I you know, when you get when you have interest rates down to to zero, not only here but in the main in the major com countries in Europe and and you have the you have a 15-year treasury inflation protected, so called TIPS, security selling at a negative yield. Fifteen years, people are willing to put their money out at a minus rate in real terms. That that that that that's about as far as you can go. I I I now I I'm you know, you can talk about more easing or that sort of thing. But you know, the banks are sitting with enormous amounts of money at the Fed. They don't want to be sitting with that money at the Fed. I mean, it it's it's bringing 'em a quarter of a percent or something. You lose money on that money at the Fed, just from the bank standpoint. So they're not happy having that money at the Fed. They just aren't seeing that much demand for for loans. BECKY: So BUFFETT: Although they're picking up a little. I mean but it's nothing like people would like to see. I I don't see I don't see what the Fed does that's that is dramatic. BECKY: Is does that mean we're in a "wait and see" pattern? And BUFFETT: To some extent. And then it it it also means that that that (LAUGH) that they shouldn't be bicycling like crazy at the Fed while while well they they may maybe they should be bicycling like crazy, but it but while Congress sits there on the sidelines and and, you know and basically squabbles. BECKY: What should Congress be doing, at this point? I mean, we're gonna talk more with Simpson and Bowles a little later this morning.

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But you think that there's something that Congress should be doing right now? BUFFETT: Well, I think I think people have a feeling that that that Congress is is inept. And and and and sort of paralyzed by by the desire of each side to make the other side look bad. So I I I think that has gotta be a factor in in in general confidence. You know, if you see your government not functioning, (LAUGH) it's not it's not really the most it's not the biggest spur to activity that you can imagine. BECKY: Yeah, maybe not a confidence booster, so to speak. BUFFETT: Yeah, so so I I think I think it's hard for the Fed to offset the Congress, in terms of changing public opinion. BECKY: Okay we're gonna have more with Warren Buffett in just a moment. Europe's Future and the Libor Scandal BECKY QUICK: We are live in Sun Valley. And we are joined by Warren Buffett. And Mr. Buffett well, let's get back to what we were talking about with Europe before. The spreads blew back out again. And all of the fixes we thought we'd seen from the ECB at this point, they seem to be lasting for less and less time. Back above 7 percent for some of these bonds. What's this mean? Where where are we headed? WARREN BUFFETT: Well, it means that that a fundamentally flawed system was designed some years back. And we've been trying to or they have been trying to patch it during the last couple of years. And and it's hard to change a very fundamental, important system with patches, particularly when 17 people have a say in where the patches should go and what kind of patches you should use. So it's it's it's it's not an easily solved problem. BECKY: Well, at this point, as you mentioned, it's really hurting the economy there, as well, starting to drag down in in a major way. CNBC SQUAWK BOX TRANSCRIPT: July 12, 2012 PAGE 5 OF 11

BUFFETT: Particularly in the last few months, yeah. BECKY: So what's the end result over the next six months or so? BUFFETT: Well, ten years from now, Europe will be working fine. But they they but the and they will be consuming more there. They'll they'll get it worked out. But but there's no obvious answer. And and and that becomes more and more apparent as they go along. And and like I say, they're they're they're trying to put patches on something that's got a lot of leaks. BECKY: But patches on something that has a lot of leaks, you could have a lot of different solutions to the end of that. Is the euro still gonna exist ten years from now? Europe will, but will the euro? BUFFETT: I don't know. I don't know. And I don't think they know. I mean, it it it certainly can't exist as originally designed. We've found out that that trying to have a common monetary unit, when you don't have somewhat common fiscal policies and cultures and work rules and all kinds of things just doesnt work. And and how they'll how they'll resolve that is anybody's guess. BECKY: Obviously, it it depends on who's in charge, who the leaders are. And the leaders there seem to get voted out every time a new election comes along. So if there's a constant changing set of players at the table, how how is there a good solution? BUFFETT: Yeah, well, I I I I I I would not know the solution myself. I mean Henry Kissinger said a long time ago, you know, "If I want to call Europe, what number do I dial?" And and, you know, essentially, that's the problem. I mean, they the when we had our crisis in 2008, everybody knew the responsibility was on Bernanke and and Paulson and and with the president behind 'em. And as long as as long as they knew where they were going, they had the will and the and and and the ability to do things that were needed to do. But exactly who has the ability when when you dont have a printing press, you it's it's a different animal.

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BECKY: You know, we we've been watching the headlines over the last several weeks. And the manipulation of Libor is just the latest in a series of scandals that has to break down the public's trust in what happens with financial institutions, what happens on Wall Street. What what do you think about what's happened with Libor and how big of a deal is this? BUFFETT: Well, it it it's a big deal. It's a big deal. I mean, it you know, you've got the base rate for the whole world including including some loans we have in the past. And so the the idea that a bunch of traders can can start emailing each other or phone each other and and play and play around with that rate is is an important thing. And you know, it it is not good for the system. BECKY: Does it shake your confidence in the system? BUFFETT: Well, I I've got a lot of confidence in the system over time. No, the our system works. I you know, we are sitting here in Sun Valley in pretty good circumstances, compared to a couple hundred years ago. So we're we're not working any harder than they worked 200 years ago. We're not any smarter. But we we live far differently. So our our system works over time. But but it sure shakes (Laughs) it shakes your faith in certain institutions, I'll put it that way. Not the but not the whole system. BECKY: I know Andrew's got a question for you, as well. JOE KERNEN: I just before Andrew's gonna talk about JPMorgan, I just, Warren, wanted to quickly ask. But Bob Diamond, very good executive I know that in the past you know, we Goldman had some P.R. and some you know, some ethics issues. You said I mean, you wouldn't want you I don't think you want Blankfein to lose his job. I don't know what you wanted to happen with the the officers at Wal-Mart. And I'm wondering whether you thought that this is an overshoot that that Diamond is just unceremoniously dumped. And you know, he was an American in in London. And I

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mean, would you don't wouldn't you rather have him stay, if you were a Barclay's shareholder? BUFFETT: Well, I'm not a Barclay's shareholder. But I I don't think he had any choice but to go. When with something as big as Libor you know, if it happ it and he wasn't in charge of all of Barclay's, at that time. But but there are a lot of things that went on in that trading room that who knows who was aware of what? And I don't know anything specific about it. But that was not that it was not a rogue trader. Let's put it that way. JOE: You don't have different opinions based on whether you own shares in the stock, though, right? BUFFETT: Well, I no, not on this. But I I may know less about it. JOE: Sometimes sometimes maybe, yeah. BUFFETT: I haven't foll I haven't followed Barclay's. JOE: All right. ANDREW ROSS SORKIN: Hey Warren BUFFETT: You know, at Salomon we had you know, some problems in and they had to go. ANDREW: Warren, talking about trust and a company that you do own a stock in, JPMorgan we're gonna hear from Jamie Dimon tomorrow what their earnings are. And we're gonna try to hear some more about what happened to that soured trade. Your views on on the trade itself? Your confidence in the company? Your confidence in Mr. Dimon? BUFFETT: Yeah, I I think Jamie Dimon is one of the best bankers in the world. And if I had a bank I I like John Stumpf a lot too incidentally, at Wells Fargo. But if if if I owned a bank in Omaha and I could get Ja Jamie to to run it for me, I would feel very happy. And no, Jamie Jamie understands banking. He understands CNBC SQUAWK BOX TRANSCRIPT: July 12, 2012 PAGE 8 OF 11

risk. And and you know, it was it's a significant loss. But you l you he J.P. Morgan lost billions and billions and billions of dollars on loans. I mean, if you if you've got a couple trillion dollar balance sheet, you're gonna have some losses some places. ANDREW: Do do you have any different views as a result of this, about the Volcker rule or some of the regulations that are part of Dodd-Frank? BUFFETT: Well, I my partner, Charlie Munger is more Old Testament than I am on this. But I I do think that I think there are good reasons to restrict the activities that banks can be in. ANDREW: So the activities that led to these losses, you would preclude JPMorgan from participating in, in the future? BUFFETT: Well, it it's it's hard to say what they those acti I mean, if they're truly hedging risks you know, I I there's there's certainly a lot to be said if if you're running a bank and you you you want to hedge interest rate risk, hedge foreign exchange risk, I mean, that that that's perfectly proper. We do it in our in our energy companies. We we have we have transactions all the time to hedge risks. So if somebody goes off the reservation and and starts turning hedging positions into speculative positions, you know, you may have a problem. But that that was not policy at JPMorgan. That you know, that was one fellow's near as I can ascertain that that that went very, very big in a position that was originally designed as a hedge position. And and then he put a hedge on a hedge and and pretty soon he had what they call a Texas hedge. BECKY: Hey, Warren, can we go back to Libor for a moment, too? BUFFETT: Sure. BECKY: You mentioned that you have some contracts and some some things that are based off of Libor that have been there I I'm guessing derivatives and some other things that have been in that? CNBC SQUAWK BOX TRANSCRIPT: July 12, 2012 PAGE 9 OF 11

BUFFETT: Well yeah, we we own some auction rate municipals, for example, that are priced off Libor a couple billion. BECKY: So what happens? If if Libor was manipulated, do you have a case to go back and have a complaint, to have a lawsuit, to have anything that comes up with any of this? BUFFETT: Well, I I think there certainly will be a bunch of lawyers that will think that. And and it if you can pin down the person that did something to you. And they had and there may well be some kind of a case. I mean, we we bought these securities in the market auction rate. Municipals that have they're tied to Libor. I have a feeling that in for any one entity, the amount might be very, very small, but but it BECKY: It's over $3 trillion of things BUFFETT: but it's a huge mark oh, it's a huge market. BECKY: that are priced against this. BUFFETT: I mean it it's the the numbers would stagger you. BECKY: So how big of a problem could this turn out to be down the road? BUFFETT: It could turn out to be a big problem. But we don't know what banks did what, at this point. But but well, go back to our Salomon experience. You had one fellow with one bo a couple of bond issues, and it that caused a lot of trouble. And and you get Libor, then you're talking about the whole world. BECKY: Right. And everybody associated with it. BUFFETT: Everything is everything's tied in. And of course, you're in this terrible position, if you if you have millions of contracts based on Libor and one side profits from a given price being out of line, and the other side loses you're not gonna collect from the fellow that got the benefit. If you're in the middle of the trade, you're just gonna CNBC SQUAWK BOX TRANSCRIPT: July 12, 2012 PAGE 10 OF 11

have the people on the losing side of each trade come after you. So it it it's very asymmetrical for the person that's got a bunch of trades on it. BECKY: Okay, so it could be a potentially huge can of worms. BUFFETT: It's it it is a can of worms. BECKY: It is a can of worms. (LAUGH) BUFFETT: I will guarantee. It's it is a can of worms. BECKY: Okay. Warren, we're gonna have much more in just a moment. We want to thank you for your time.

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