Wells Fargo

| Shares | Company | Cost | Market | | :--- | :--- | :---: | :---: | | 3,000,000 | Capital Cities/ABC, Inc. | $517,500 | $1,377,375 | | 46,700,000 | The Coca-Cola Co. | 1,023,920 | 2,171,550 | | 2,400,000 | Federal Home Loan Mortgage Corp. | 71,729 | 117,000 | | 6,850,000 | GEICO Corp. | 45,713 | 1,110,556 | | 1,727,765 | The Washington Post Company | 9,731 | 342,097 | | 5,000,000 | Wells Fargo & Company | 289,431 | 289,375 | Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings. The exception was Wells Fargo, a superbly-managed, high-return banking operation in which we increased our ownership to just under 10%, the most we can own without the approval of the Federal Reserve Board. About one-sixth of our position was bought in 1989, the rest in 1990.

The businesses in which we have partial interests are equally important to Berkshire’s success. A few statistics will illustrate their significance: In 1994, Coca-Cola sold about 280 billion 8-ounce servings and earned a little less than a penny on each. But pennies add up. Through Berkshire’s 7.8% ownership of Coke, we have an economic interest in 21 billion of its servings, which produce “soft-drink earnings” for us of nearly $200 million. Similarly, by way of its Gillette stock, Berkshire has a 7% share of the world’s razor and blade market (measured by revenues, not by units), a proportion according us about $250 million of sales in 1994. And, at Wells Fargo, a $53 billion bank, our 13% ownership translates into a $7 billion “Berkshire Bank” that earned about $100 million during 1994. | Berkshire’s Major Investees | Berkshire’s Approximate Ownership at Yearend | Berkshire’s Share of Undistributed Operating Earnings (in millions) | | | | :--- | :---: | :---: | :---: | :---: | | | 1994 | 1993 | 1994 | 1993 | | | 5.5% | 2.4% | $ 25(2) | $ 16 | | Capital Cities/ABC Inc. | 13.0% | 13.0% | 85 | 83(2) | | The Coca-Cola Company | 7.8% | 7.2% | 116(2) | 94 | | Federal Home Loan Mortgage Corp. | 6.3% (1) | 6.8% (1) | 47(2) | 41(2) | | Gannett Co., Inc. | 4.9% | | | | | --- | 4(2) | | | | | --- | | | | | | GEICO Corp. | 50.2% | 48.4% | 63(2) | 76(3) | | The Gillette Company | 10.8% | 10.9% | 51 | 44 | | PNC Bank Corp. | 8.3% | | | | | --- | 10(2) | | | | | --- | | | | | | The Washington Post Company | 15.2% | 14.8% | 18 | 15 | | Wells Fargo & Company | 13.3% | 12.2% | 73 | 53(2) | | | Berkshire’s share of undistributed earnings of major investees | $492 | $422 | Hypothetical tax on these undistributed investee earnings(4) | | | (68) | (59) | Reported operating earnings of Berkshire | 606 | | | 478 | | | | | Total look-through earnings of Berkshire | $1,030 | $ 841 | | |

12/31/04 Shares Company Percentage of Company Owned Cost Market (in $ millions) 151,610,700 American Express Company 12.1 $1,470 $ 8,546 200,000,000 The Coca-Cola Company 8.3 1,299 8,328 96,000,000 The Gillette Company 9.7 600 4,299 14,350,600 H&R Block, Inc 8.7 223 703 6,708,760 M&T Bank Corporation 5.8 103 723 24,000,000 Moody’s Corporation 16.2 499 2,084 2,338,961,000 PetroChina “H” shares (or equivalents) 1.3 488 1,249 1,727,765 The Washington Post Company 18.1 11 1,698 56,448,380 Wells Fargo & Company 3.3 463 3,508 1,724,200 White Mountains Insurance 16.0 369 1,114 Others 3,531 5,465 Total Common Stocks $9,056 $37,717 Let’s look at how the businesses of our “Big Four” — American Express, Coca-Cola, Gillette and Wells Fargo — have fared since we bought into these companies. As the table shows, we invested $3.83 billion in the four, by way of multiple transactions between May 1988 and October 2003. On a composite basis, our dollar-weighted purchase date is July 1992. By yearend 2004, therefore, we had held these “business interests,” on a weighted basis, about 12½ years.

So I don’t think you should — I think you should know something about the culture of the management and the institution to make a firm buy decision on a bank, and that’s hard to do for 99 percent of the banks. We own stock, as you know — it’s in our report — Wells Fargo and U.S. Bank and M&T up in Buffalo. And in all three cases, I think I understand quite well the DNA of the institution, in terms of how it behaves. That doesn’t mean those places are immune from problems, because they’ll have problems. But it means — but it does mean — they’re immune, in my view, from what I would call institutional stupidity. And I would not say that all banks are immune from that. As a matter of fact, there was a very wise man named — I think it was Morris Cohen (Morris Schapiro) — that said, “There are more banks than bankers,” and if you think about that awhile, you’ll get my point. (Laughs) Charlie?

BECKY QUICK: This question comes from James Lewis (PH) from Logan, Ohio, who said it was OK to use his name and city. He says, “One of the substantial investments of Berkshire is Wells Fargo. The chairman of Wells Fargo supposedly indicated that he did not want to take TARP funds from the federal government. “He, furthermore, recently said that some of the programs of the federal government to reinvigorate the banks were asinine. “Mr. Munger, do you agree with the chairman of Wells Fargo? And please explain why you do or do not agree. And Mr. Buffett, do you agree with Mr. Munger?” (Laughter) CHARLIE MUNGER: When a government is reacting to the biggest financial crisis in 70 years, which threatens important values in the whole world, and the decisions are being made hurriedly and under pressure and with good faith, I think it’s unreasonable to expect perfect agreement with all of one’s own ideas. I think the government is entitled to be judged more leniently when it’s doing the best it can under trouble. Of course, there’s going to be some reactions that are foolish. And I happen to share one of the troubles of some of the Wells Fargo executives, in that I’m pretty blunt. I happen to think that the accounting principle that says your earnings go up as your credit is destroyed — because if you had any money left, you could buy your own debt back at a discount — I happen to think that’s insane accounting. And I think the people who voted it into effect ought to be removed from the accounting board. So a man who talks like that has to have some sympathy with the people at Wells Fargo.

Insurance has been good to us. * Finally, we made two major investments in marketable securities: (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and (2) 63.9 million shares of IBM that cost us $10.9 billion. Counting IBM, we now have large ownership interests in four exceptional companies: 13.0% of American Express, 8.8% of Coca-Cola, 5.5% of IBM and 7.6% of Wells Fargo. (We also, of course, have many smaller, but important, positions.) 12/31/11 Shares Company Percentage of Company Owned Cost Market (in $ millions) 151,610,700 American Express Company 13.0 $ 1,287 $ 7,151 200,000,000 The Coca-Cola Company 8.8 1,299 13,994 29,100,937 ConocoPhillips 2.3 2,027 2,121 63,905,931 International Business Machines Corp 5.5 10,856 11,751 31,416,127 Johnson & Johnson 1.2 1,880 2,060 79,034,713 Kraft Foods Inc 4.5 2,589 2,953 20,060,390 Munich Re 11.3 2,990 2,464 3,947,555 POSCO 5.1 768 1,301 72,391,036 The Procter & Gamble Company 2.6 464 4,829 25,848,838 Sanofi 1.9 2,055 1,900 291,577,428 Tesco plc 3.6 1,719 1,827 78,060,769 U.S. Bancorp 4.1 2,401 2,112 39,037,142 Wal-Mart Stores, Inc 1.1 1,893 2,333 400,015,828 Wells Fargo & Company 7.6 9,086 11,024 Others 6,895 9,171 Total Common Stocks Carried at Market $48,209 $76,991

It’s kind of a fuzzy accounting rule, but it says that if you own a security for a while, and you paid X for it, and it’s been selling at, say, 80 percent of X for quite a while, nobody knows exactly what quite a while means, and I’m sure they phrase it differently in the accounting textbooks, but anyway, if it sells there for quite a while, you’re supposed to mark it down to that new valuation and have that markdown go through your income account, through your profit and loss account. Now we mark it down in any event for the balance sheet, and the balance sheet is what gives you the number for book value and is our reference point. But only when it meets this other than temporary thing does the mark down actually get run through the profit and loss account. Now, on March 31, as is shown, I believe, on the next slide, we owned some Wells Fargo stock, which had a cost of about 8 billion and the market value was 11.3 billion. But some of the Wells Fargo stock we bought had been bought at higher prices than the March 31 figure, whereas, as you can see, a lot of the stock, which had a gain in it of 3.7 billion, had been bought at lower prices. Well, under the rules, we were required to mark down the stock we bought at a higher price by 337 million, whereas we ignored, in the income account, the 3.7 billion of gain. Now, interestingly enough, there’s two ways you can account for securities, as I understand it, both fully meeting GAAP accounting requirements. And if we had — if we had used the average cost method, we would not have had to mark down. But we use what they call the specific identification method. Now the specific identification method is actually useful to us from a tax standpoint, because it means whenever we sell a security we can pick out the highest priced security and attribute the sale to that. So it actually saves us money, or the time use of money, to get into specific identification.

ANDREW ROSS SORKIN: Hi Warren. This question comes from Paul Spieker (PH) of Chicago, Illinois. I believe he may be here today. He writes, “One of your more famous and perhaps most insightful quotes goes as follows: ″‘Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.’ “In light of the unauthorized accounting scandal at Wells Fargo, of its admission that it charged customers for duplicate auto insurance, of its admissions that it wrongly fined mortgage holders in relation to missing deadlines caused by delays that were its own fault, of its admission that it charged some customers improper fees to lock in mortgage interest rates, of the sanction placed upon it by the Federal Reserve prohibiting it from growing its balance sheet, and of the more than recent $1 billion penalty leveled by federal regulators for the aforementioned misbehavior, if Wells Fargo company is a chronically leaking boat, at what magnitude of leakage would Berkshire consider changing vessels?” WARREN BUFFETT: Yeah, well, Wells Fargo (Applause) Wells Fargo is a company that proved the efficacy of incentives, and it’s just that they had the wrong incentives. And that was bad. But then they committed a much greater error - and I don’t know exactly how or who did it or when, but - ignoring the fact that they had a faulty incentive system which was incenting people to do things that were kind of crazy, like opening nonexistent accounts, et cetera. And, you know, that is a cardinal sin at Berkshire. We know people are doing something wrong, right as we sit here, at Berkshire. You can’t have 377,000 employees and expect that everyone is behaving like Ben Franklin or something out there. They - we - I don’t know whether there are ten things being done wrong as we speak, or 20, or 50. The important thing is, we don’t want to incent any of that if we can avoid it, and if we find when we find it’s going on, we have to do something about it. And that is absolutely the key to it.

WARREN BUFFETT: OK, Becky? BECKY QUICK (CNBC): This is a question that comes from Mike Hebel. He says, “The Star Performers Investment Club has 30 partners, all of whom are active or retired San Francisco police officers. Several of our members have worked in the fraud detail, and have often commented after the years-long fraudulent behavior of Wells Fargo employees, should have warranted jail sentences for several dozen, yet Wells just pays civil penalties and changes management. “As proud shareholders of Berkshire, we cannot understand Mr. Buffett’s relative silence compared to his vigorous public pronouncement many years ago on Salomon’s misbehavior. Why so quiet?” WARREN BUFFETT: Yeah, I would say this. The — (applause) — problem, well, as I see it — although, you know, I have read no reports internally or anything like that — but it looks like to me like Wells made some big mistakes in what they incentivized. And as Charlie says, there’s nothing like incentives, but they can incentivize the wrong behavior. And I’ve seen that a lot of places. And that clearly existed at Wells. The interesting thing is, to the extent that they set up fake accounts, a couple million of them, that had no balance in them, that could not possibly have been profitable to Wells. So, you can incentivize some crazy things. The problem is — I’m sure is that — and I don’t really have any inside information on it at all — but when you find a problem, you have to do something about it. And I think that’s where they probably made a mistake at Wells Fargo. They made it at Salomon. I mean, John Gutfreund would never have played around with the government. He was the CEO of Salomon in 1991.