Buffett expects government action on Fannie and Freddie

Fri Aug 22, 2008

By Jonathan Stempel

NEW YORK (Reuters) - Warren Buffett said the U.S. economy is unlikely to improve before 2009, and that he expects the government to take action to support troubled mortgage financiers Fannie Mae and Freddie Mac.

Speaking Friday on CNBC television, Buffett said retail businesses within his Berkshire Hathaway Inc, insurance and investment conglomerate have been struggling and that the economy is now suffering from past excesses in the availability of credit.

"You always find out who's been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach," said Buffett, the world's richest person, according to Forbes magazine.

"What we're seeing in business, in our retail businesses, or anything having to do with housing, is even a further slowing down in June and July, both in terms of credit experience where people first got in trouble with house payments, and now credit card payments," he said.

Referring to the economy, Buffett said: "In my judgment it won't be any better five months from now."

Buffett built Omaha, Nebraska-based Berkshire into a $180 billion conglomerate with some 76 businesses that sell such things as insurance, bricks, carpeting and manufactured housing, as well as ice cream, knives and underwear. It also invests in many blue-chip companies, including American Express Co and Wells Fargo & Co.

Fannie and Freddie shares have plummeted as speculation grows about a government bailout of the companies, which own or guarantee almost half of U.S. mortgages. Shares of both have fallen more than 90 percent in the last year.

"They're too big to fail," Buffett said. "That doesn't mean that the equity can't get wiped out, and it almost has. In a practical sense, as institutions, they don't have any net worth.... People who own their insured mortgages or own their debt, nothing is going to happen to them. The equity and preferred stock is another question."

He forecast that "you'll see some action fairly soon" to support the companies, but that he has not been formally approached to help out in any bailout.

In Thursday trading on the New York Stock Exchange, Berkshire Class A shares closed at $115,000, and Class B shares closed at $3,835.

(Additional reporting by Euan Rocha; Editing by Steve Orlofsky)