Buffett Says Only Treasury Had Power To Save AIG

American International Group's financial troubles were too deep for private capital to be raised in a short period of time and only the U.S. Treasury was in a position to finance the bailout of the insurer, said financier Warren E. Buffett.

The billionaire owner of the insurance holding company Berkshire Hathaway Inc., Omaha, Neb., made the observation last night on the “Charlie Rose Show” on PBS during a wide-ranging interview on the economy.

Mr. Buffett said that we are going through a “very, very tough period,” and that he never thought he would see the day that “AIG's checks wouldn't clear.”

He said the initial reluctance on the part of the government to come to the rescue of the New York-based insurer was because federal officials waited for the private sector to step in.

“They hoped the private sector would come in, and the private sector tried to come in until they saw the size of the problem,” said Mr. Buffett. “There were people on that weekend who thought they had a solution, then the hole kept getting bigger and bigger.”

The size of the problem exceeded anything the private sector could deal with, necessitating Treasury's stepping in because the failure of AIG would have affected everyone, he said.

Mr. Buffett said that he would have come in to help finance AIG, but even he did not have the money to do it.

“If I thought $5- or $10 billion could have brought me a good deal, I would have done it,” he said. “It got beyond anyone's ability to take care of.”

AIG would be doing fine today if the company avoided financial derivatives, he suggested, calling them “financial weapons of mass destruction.”

He revealed that when he purchased Gen Re in 1998 the company had a similar but smaller book of derivatives business, 23,000 contracts. Mr. Buffett said he could not understand the book of business and got out of it as quickly as he could, adding it cost him more than $400 million “in a benign situation.”

He noted that AIG was not in a similar position and if they tried to unwind their book “it would have hit every institution in the world.”

He praised the Treasury Department for the deal, saying they struck “tough” terms and stand to make money for the government. He also said Treasury Secretary Henry Paulson is the right man for the job.

On questions about the bailout package being considered by Congress, Mr. Buffett said “it would be crazy not do this.”

“In my adult lifetime, I don't think I have seen people as fearful economically as they are now,” he said. “They are not wrong to be worried.”

He later added, “This is an economic Pearl Harbor,” underscoring the need to take action now–inaction could lead to another Great Depression.

Passage of the package will not be a panacea for the economic ills the country is facing, he observed, but it will help unglue the credit markets.

“The recession is going to get worse,” he said “it would be a big mistake to mislead people.”

He said the best case scenario would be the country coming out of this within six months, but it could take as long as two years before the economy is revived. Without the bailout package, he continued, it could take five years, maybe longer, before the economy would begin to turn around.

Unemployment will rise, he warned, but passage of the bailout plan will keep a lid on increasing unemployment and the overall economy from going into a tailspin.

“It will not create dramatic results in the economy,” said Mr. Buffett. “Unemployment will go up. You will see lousy earnings in many businesses…but the system will work over time and we do have a wonderful system.”