US investor Warren Buffett, chairman and chief executive officer (CEO) of Berkshire Hathaway Inc., says that the markets are unlikely to fall any further and only a 9/11 kind of situation could rock the US economy now.

No regrets: Chairman and chief executive officer of Berkshire Hathaway Warren Buffett. Andrew Harrer/Bloomberg

In an exclusive interview with CNBC’s Becky Quick— marking the one-year anniversary of the collapse of Lehman Brothers Holdings Inc.—Buffett described the phone calls he got over that weekend in September 2008 as Lehman and American International Group Inc. (AIG) battled for survival. He didn’t make any deals and says he has no regrets about what he did or didn’t do. Edited excerpts:

We are one year out from Lehman’s (collapse) and a lot of people are trying to figure out whether it was the right choice, whether it was the wrong choice (to let it collapse) ...What do you think?

...Lehman probably should have been—not saved, (it) isn’t the right word—but transferred in some kind of an orderly manner. I mean it was the chaos that came after the fact that it just happened and there was total disorder. And I think the trustee for Lehman has said between $50 billion (around Rs2.42 trillion today) and $75 billion at Lehman itself was lost unnecessarily because of the disorderly way that the liquidation took place.

Obviously, there were a lot of calls that were going on behind the scenes at that point. Were you a part of any of those calls?

Oh, I got a call. I was in Edmonton—at a social event—I was at the hotel (at) about 6 o’clock or so Edmonton time. And I did get a call from the head of Barclays—Bob Diamond—and Michael Klein, who was an investment banker. And they had just learnt apparently that the British authorities would not allow them to take over all of Lehman. This was not just the part that they took over later. But they were talking about coming in and taking over Lehman. And the British authorities had said if it involved more than £3 billion, as I remember, it needed the vote of shareholders and that couldn’t take place till sometime later, so they were asking if we would write an insurance contract that would protect everybody on the other side of trades until they got that shareholder approval. So they were looking for a solution, I can tell you, at about 8 o’clock on Saturday. And 8 o’clock in the evening. And they didn’t find one.

Were you surprised? I mean, what happened? Did you turn down this offer? What happened?

Well, what happened is they described the transaction to me, that I really couldn’t grasp, quickly. And so I asked them to send me a fax at the hotel. I was gonna go to the social affair that would break up around midnight. Send me a fax that explains the transaction in detail so I could understand it. Tell me how much of a limit they needed and—how much of a premium they would pay. And then I would get back to them promptly. I’d call them that night... Anyway when I got back to the hotel that night around midnight, there was no fax. Apparently, it blew up at some point in that period.

What did you hear afterwards? Did they explain to you why or what?

Well, no, I don’t know why they felt the transaction was unfeasible or I don’t know if (it was) for some other reason, that Barclay’s decided they couldn’t go ahead with Lehman at that point. And as you know, a few days later they actually made a transaction with the broker-dealer arrangement.

But the way I understood it on Saturday at 8 o’clock New York time or so was that one of the authorities in England had ruled essentially that if it involved more than, I think, £3 billion, they couldn’t do it without shareholder approval.

Did you get other phone calls that weekend?

I got a lot of phone calls. I had a phone call on Friday night—late Friday afternoon—on AIG. And they were going to need many, many billions of dollars by the following Wednesday, so I went down to the office on Friday night and looked hard at whether we might possibly buy a very large property casualty operation from them. And spent a few hours then. And then I called (AIG’s CEO) Bob Willumstad and I said, “Unfortunately, I can’t do this deal. And don’t waste your time with me, so go someplace else." Then on Sunday, after I got back from Edmonton, AIG was in the picture again and they were looking for an insurance policy in connection with an offer that was being made for AIG. I think it was by Chris Flowers (founder of private equity firm JC Flowers and Co.) and perhaps KKR (private equity firm), a few people.


A few people. And they said they were going to get going to a board meeting and decide whether they were going to accept this. But if they did accept it would we be good on a certain type of reinsurance transaction. I said I thought we would. But then that blew up on Sunday night, so it was a lot of action.

Is this different from any time you’d ever experienced before?

It was—except for the Solomon experience I had in 1991, when I was more directly involved. This was a very extraordinary weekend.

What did you see in the AIG deal, in the offer there that you that you thought, “Forget about it. This is not going to work?"

I just—we were talking about buying a property casualty operation that might have sold in the $25 billion range. And what I saw indicated to me I wouldn’t have wanted to pay that in the first place. And beyond that it would have required New York state insurance department approval and who knows what else. And I just—there was no way to hand a lot of money by Wednesday the next week.

And in hindsight do you have any regrets about any of the decisions you made that weekend?

No. I should have been probably doing other things too. No, I am glad we didn’t buy that particular insurance operation. I would have done the reinsurance transaction that was involved on Sunday night. The Lehman thing I still don’t understand, even to this day, exactly what the transaction was. No, it was—it was—it was a movie to see but not to participate in.

We are one year out. Last year, what was the worst possible thing you could imagine happening that didn’t happen?

Well, I think if the country and the Fed. I mean if (Federal Reserve chairman Ben) Bernanke and (former treasury secretary Henry) Paulson and whoever else was involved with the decision, if they hadn’t have stepped up to guarantee—in effect guarantee—commercial paper and guarantee the money market funds, the meltdown would have been immediate. I mean it’s hard to tell how far it would have gone. But it would have gone—it would have gone further than anybody would have wanted to see. And that—you can argue, if Bank of America hadn’t bought Merrill Lynch on Sunday, on Monday I think Merrill would have gone. And so if you had Lehman and Merrill go in the same day—who knows what would have happened.

Who do you think the biggest heroes are?

Well, I think... Bernanke. I think Paulson’s a hero. I think (current treasury secretary Timothy) Geithner’s a hero. You know, you can look back and say you could have done this a little differently or that a little differently, but at the time I called it an economic Pearl Harbor and in the end we got through Pearl Harbor. And and it could have turned out a lot differently.

There are some people, including (bank analyst) Meredith Whitney, who say we’ve just kicked things down the road. That the banks are still struggling. That we have a lot of problems that could still come up from credit cards, from other areas, from consumers getting pinched for—needing credit. Are we through the worst of it?

Oh, I think we’re certainly ...through the worst of it in residential real estate in all probability. And the reason is we’re building a lot fewer houses and we’re forming households, so that solves itself over time. Doesn’t do it in a day or a week, but it solves itself. So we’re further on that. We’re going to have unusual losses in credit cards and in commercial real estate, all of that. But we’re a lot better off than we were a year ago. I mean for one thing, some of the toxic assets have been flushed through. There’s been capital raised. There’s... We’re immeasurably better than we were a year ago.

But is there a risk of a second downturn? Will unemployment levels climb to a point where it becomes a leading indicator rather than a lagging indicator?

I think the odds are very much against getting significantly worse. It’s sort of plateaued at the bottom right now, but if you got some horrible exogenous event, some—some, you know, 9/11-type event or worse—you know, you could have something that would be really disruptive and start things all over again. But in terms of problems that we have identified and are working with, we’ve got more to come. But we’re past the critical point.