Iterview with Warren Buffett by FOX Business Network's Liz Claman

This is the transcript of the interview with Warren Buffett by FOX Business Network's Liz Claman. You can also watch the video below.

LIZ CLAMAN, FOX BUSINESS NETWORK ANCHOR: Let's get to the story of the day. Berkshire Hathaway making this huge bet on the railroads. One in particular, acquiring Burlington Northern Santa Fe in a deal worth about $44 billion. Let's talk to the man behind the deal. It was all his idea. On the phone, Warren Buffett, chairman and CEO of Berkshire Hathaway. Hello, Warren, how are you?

WARREN BUFFETT, CHAIRMAN/ CEO, BERKSHIRE HATHAWAY: Hi, Liz.

CLAMAN: What did you do? Did you wake up one day and say, " I think I'll spend another $26 billion in cash and stock for a railroad."? How did this come about?

BUFFETT: It came about because our board had a meeting (ph) scheduled for a year down in Fort Worth. The reason we have three different businesses we own in Fort Worth. And my Debbie Ballsonnick (ph), my assistant said, "Let's do the next one in Fort Worth and check out those companies." So, we went down there a week ago last Thursday. And I went down a couple of hours earlier -- early because there were two people I wanted to see. One, my friend John Roach and then the other one was Matt Rose over at BNSF. And while I was over there, we had about ten minutes alone after some vice presidents made a presentation. And I said, "Matt, if you're ever looking for a home for the railroad, Berkshire would make a good one." And he didn't throw me out of the office, so the next day I made him an offer, and he said he would take it to the directors and the rest is history.

CLAMAN: So, it's a ten-minute meeting and then a week. That's awfully fast, but this is how you operate. You had already owned, of course, about 24 percent of Burlington Northern. What was it that crystalized your belief in that 10 minutes or the vice president's presentation that you ought to buy the whole thing?

BUFFETT: It wasn't -- it wasn't -- you know, I felt good about it from the time we bought our first stock in 2006. But if we hadn't scheduled the meeting down there, probably wouldn't have happened. At least it wouldn't have happened now. But I -- you know, I like the business very much. I think the management is the best there is, and, like I say, when I didn't get thrown out of the office, I made it specific, and it was a good offer from their standpoint. And they decided to accept it. And now we're going to own a railroad. And we never fool around on things, Liz. I mean, I tell the lawyers, get this thing done, you know.

CLAMAN: I think Debbie Ballsonnick, your assistant who thought it best to put the meeting down there should get the big high five. No doubt at all.

BUFFETT: Well, yes, you'll see we didn't have an investment banker on the deal, but maybe we should have put her down.

CLAMAN: She's smart enough to do it. What is it, Warren, you see in the railroad transport area versus trucking or air cargo?

BUFFETT: Well, the rails move a freight at a much more environmentally friendly way than the truckers do. And they also only use about a third of the fuel. So, it's helping -- it helps our trade balance in the long run. It helps in terms of the atmosphere. It is a very, very efficient, effective, environmentally friendly way of moving freight. And, you know, our rail system is a huge asset to the country.

CLAMAN: BNI, of course, hauls about 10 percent of the nation's electricity-generating coal. Is this, Warren, a bet somehow on coal?

BUFFETT: Well, they haul a lot of coal and coal from the Powder River Basin in the West -- is more competitive, it's lower-sulfur coal than in the East. So, it will be around a long time. But coal, over the long run, coal will diminish in relative importance.

CLAMAN: There's a growing anti-rail lobby in Washington right now. I know you know because you do your homework on this stuff with a push by the shippers to re-regulate the rails -- the Railroad Antitrust Enforcement Act, if you will. Do you have any friends in Washington who assured you that railroads would not be re-regulated? Because I would imagine if the Obama administration went along with the shippers to regulate the rails, that might hurt your investment.

BUFFETT: Well, I would say since the Staggers Act back in 1980, which diminished the regulation substantially, you've had enormous progress with the rail system. You've decreased prices on inflation-adjusted terms significantly. So, I would say that the deregulation that took place starting in starting in 1980 is actually benefited the shippers enormously. And we're moving far, far more freight with using far less fuel, very efficiently. My guess is that people will see the rail for what they are, really an outstanding way of moving freight around the country.

CLAMAN: Cheapest, best way. But then there's cap-and-trade, Warren. Some analysts are very skittish about coal and a possible backlash if cap-and-trade goes through. You mentioned now -- you said, we're going to see a diminishing of coal use. But what do you think cap-and-trade would do to the business if that went through?

BUFFETT: It won't change the composition of what utilities are doing tomorrow or next week or next year. The utilities over time are going to use less coal and probably more nuclear. Our own utility, for example, uses wind very substantially in Iowa. So, over time, coal is going to diminish somewhat. Now, I think that will hit Eastern coal more than Western coal, but that's a fact of life over a considerable period of time. And that's true whether there's cap-and-trade or not, yes.

CLAMAN: The way you structured this deal, you're using some Berkshire stock for this and then $16 billion, I believe, in cash to pull it off. The Berkshire board approved a what? -- 50-to-1 split for the Class B(ph) shares. Why not all cash, Warren? Are you trying to preserve your cash at this point?

BUFFETT: I like to have a very comfortable level of cash. This is also the minimum amount of stock we can give and still have people be able to elect a tax-free deal that own BNSF stock currently. If we were going to use -- I don't like using stock, I can tell you that. I don't like issuing Berkshire shares.

CLAMAN: Is this the first time you've used stock?

BUFFETT: No. No, we've used it before. In fact, if you go back to (INAUDIBLE) deal, that was an all-stock deal. But generally speaking, I'm not enthused about using stock. But using 40 percent and considering the fact we already own some, which we also bought for cash, we're mostly using cash in this transaction.

CLAMAN: You just mentioned the tax-free aspect. Can you clarify a little bit on that?

BUFFETT: Well, 40 percent of the deal will be stock, and everybody will be able to opt whether they want stock or cash. And if less than 40 percent opt for stock, they get an all-stock allocation. And if more than 40 percent, still, people who opt for stock will get mostly a stock allocation. And to the extent they get stock, it will be a tax-free exchange.

CLAMAN: To acquire a company of this size when transportation demand is down, of course, as you said, is really a bet on the U.S. economy. In fact, in the release you called it an all-out wager on the economic future of the United States. When do you see the total recovery taking hold?

BUFFETT: I don't know. But it doesn't really make any difference in terms of this acquisition. If we're going to hold something for a hundred years, the next week or month or year doesn't really make any difference. If we hold it a hundred years, I guarantee you there will be some recessionary years in that period. And it really doesn't make any difference whether it's the first year or the fifth year or the eighteenth year. We're in for keeps.

CLAMAN: It's funny you did this with the rails because just two weeks ago we had Bob Oldstein of the Oldstein Funds on saying the rails are overstating their earnings and underdepreciating their equipment. Do you see it that way? Did you look into that?

BUFFETT: It's true. I didn't have to listen to that, but it's true any company that has long-life assets is replacing assets that they bought many years ago with things that cost more money now. That's true of our utility business, that's true of any business. It's true -- if you build a plant that 30 years ago had a 30-year life. When you go to replace that same plant, it's going to cost you more money. That's a fact of life in an inflationary economy.

CLAMAN: One year ago in September, we were all so nervous, and that's when President Bush and Hank Paulson pushed through T.A.R.P. Since then, we've had the stimulus. You have said when you treat a patient with such a huge amount of medicine, the likes of which we've never done before, somewhere down the line, we're going to see the ramifications. What do you think those ramifications will be, and aren't you worried to make such a huge purchase knowing that that may come to pass

BUFFETT: I'd be more worried holding cash. I think that if you look at the side effects of the incredible dosage that we've had to give -- and I think that dosage has been 100 percent appropriate; I'm not knocking that. But when you apply the kind of medicine we've applied, you may have sort of unprecedented aftereffects, too. But the one thing about those unprecedented aftereffects is they're going to be very bad for cash. I would much rather own working assets than have cash in a period that well could become inflationary down the road.

CLAMAN: But that's with the headwinds, though. You told me back in May and repeat in June the commercial real estate would, quote, "hit the skids big-time," and now we see that it is. What makes you think the businesses would ship more goods by a railroad when that kind of headwind is blowing in dark clouds? Or is this such a long-term bet at this point that you're not looking the next two years out?

BUFFETT: OK. Thank you, Liz.

BUFFETT: I don't know what will ship next year, but I would bet a lot of money -- in fact, we have bet a lot of money -- ten years from now there will be more people in the United States and they will be consuming more things than they consume now. And that will be more so 20 years from now and 30 years from now. So, there's going to be goods moving around for more and more people who are going to be consuming more and more of them, and certainly, rails should not only get a share but probably should probably get a little more than their share. It's a bet on the American economy essentially continuing to prosper over time just as it's prospered every since 1776.

CLAMAN: A lot of employers you're taking on here. Universal healthcare is at the forefront of a lot of people's minds. Do you think as you look what the government is attempting to do and Congress, now is the time to tackle such an expensive problem?

BUFFETT: Well, I think it's long past the time we tackle health care. But one of the real problems is the incentives in the system, and they’re very tough to get to. But we do spend 16 percent or so GDP on health care in the United States. And we have to figure out some way to slow down that particular engine.

CLAMAN: Do you think the wealthy should be taxed to pay for healthcare for all?

BUFFETT: I think the wealthy overall should be taxed more relative to the poor and the middle class.

CLAMAN: Here's a worry, though. The House bill calls for that 5 percent surtax on the wealthy, but it’s not indexed for inflation. Could that end up mimicking the alternative minimum tax which originally was supposed to tax only the rich, and now, as you know, police officers and teachers have to pay it?

BUFFETT: Well, I haven't read the 1,900 some pages in their entirety. I do know they have the 5 percent tax -- I think it's on incomes of over $500,000 or something. You're right, the way I read it, it's not index. But as a practical matter, I think that the wealthy have had their share of overall taxes, counting payroll taxes diminish significantly in the last 20 years. So I think that if you're looking for more revenue from the citizenry, I think the rich are the place to look.

CLAMAN: And that's you.

BUFFETT: That's me, right!

CLAMAN: You're okay with it?

BUFFETT: Absolutely.

CLAMAN: I always take your temperature each time we speak when it comes to President Pbama. Back in June, the last time you spoke you were very happy with all he's done. Does that sentiment continue?

BUFFETT: I am very, very glad I worked for and voted for President Obama, and I think he's the right man to have in the job.

CLAMAN: You're not concerned about all the spending that's going on at the moment?

BUFFETT: I think it's been -- I think it's necessary. I think a lot of the things we've done in of the last year or 15 months will have aftereffects. But I think they've been very important. We came very close to going into the abyss a year ago. And, you know, they've had to do some very unusual things, and some will have later costs. But they still were the right things to do.

CLAMAN: You wrote in back in August in the "Times" "the dollar's destiny lies with Congress." And with the deficit for 2009 -- listen, the numbers keep changing but $1.4 trillion, 10 percent of GDP high since 1945. Are you buying foreign currencies now or at least playing that carry trade since the dollar's so weak and there are other currencies with better yield? And I know you don't like to talk about what you're doing but, you know, as you see the dollar.

BUFFETT: You're seeing us get rid of a lot of dollars today in exchange for a lot of assets. So, I would rather own physical assets than own dollars.

CLAMAN: OK. As we finish up here, I have to ask, is this Burlington Northern purchase really just a chance to beef up your Lionel Train collection you have in the attic?

(LAUGHTER)

BUFFETT: I've got -- I’ve got a pretty good railroad on the third floor, but it’s nothing compared to the Burlington Northern...

CLAMAN: Yes. Matt Rose of Burlington Northern just said he's getting thousands and thousands of railcars to add to that collection.

BUFFETT: Yes. Right! Right! (LAUGHTER)

CLAMAN: Thank you so much, Mr. Buffett.