Buffett says Fed avoided chaos in Bear bailout

OMAHA, Nebraska (Reuters) - Warren Buffett said on Saturday said the U.S. Federal Reserve avoided financial market "chaos" in coordinating the March bailout of Bear Stearns Cos BSC.N, which faced imminent bankruptcy before agreeing to be acquired by JPMorgan Chase & Co (JPM.N).

The central bank, led by Chairman Ben Bernanke, helped broker the buyout, after liquidity evaporated at Bear, which had been Wall Street's fifth-largest investment bank.

JPMorgan, the third-largest U.S. bank by assets, agreed to pay $10 per share for Bear, and the Fed agreed to guarantee $29 billion of Bear's assets.

"I think the Fed did the right thing in stepping in on Bear Stearns," Buffett said at the annual meeting of his Berkshire Hathaway Inc (BRKa.N) (BRKb.N) insurance and investment company. "Just imagine the thousands of counterparties around the world having to undo contracts."

Buffett said a record 31,000 shareholders attended the meeting in Omaha's Qwest Center, including an overflow crowd in halls outside the main arena.

He and Berkshire Vice Chairman Charlie Munger fielded questions for five hours, often humorously, on investing, the economy, politics and life.

Attendance has soared since Berkshire in 1996 created Class B shares worth 1/30th of a Class A share. These made it easier for ordinary investors to invest with Buffett, the world's richest person.

RISK AT ISSUE

Buffett said the Bear debacle illustrates how some investment banks and commercial banks may have grown too large to effectively manage risk.

"The big investment banks, a number of them, and big commercial banks, I think they're almost too big to manage effectively from a risk standpoint in the way they've elected to conduct their business," he said. "You need someone at the top whose DNA is very, very much programmed against risk."

Berkshire is, he said. "We want to run Berkshire where if the world isn't working tomorrow the way it is working today, or in a way that wasn't expected, we wouldn't have a problem," Buffett said. "If we can earn a decent return on capital, what's an extra percentage point?"

One area of concern is the estimated $60 trillion market for credit default swaps, an insurance contract that covers losses to banks and bondholders when companies don't pay their debts, and lets investors bet on credit markets.

Yet Buffett doesn't foresee a collapse. "I don't think it's going to happen, and I think the chances of it happening were reduced significantly by the fact the Fed stepped in at Bear Stearns," he said.

Berkshire, however, has benefited from market disruptions, including many triggered by the nation's housing crisis.

Buffett said his four-month-old bond insurer, Berkshire Hathaway Assurance Corp, wrote $400 million in business in the first quarter, more perhaps than other rivals combined.

Much, he said, came from customers who already had insurance from other "triple-A" rated insurers, some of which got caught with exposure to subprime mortgages.

"It tells you something about the meaning of 'triple-A' in the bond insurance field in the first quarter," Buffett said.

Buffett said Berkshire also bought $4 billion in "auction-rate" municipal debt whose yields soared, often into double digits, despite many issuers' high credit quality.

SUCCESSION ON TRACK; BUFFETT EYES EUROPE

Buffett, 77, said Berkshire still has three internal candidates to eventually succeed him as chief executive, and four candidates to become chief investment officer. Berkshire ended March with about $147 billion in stocks, bonds and cash.

But noting that the average age between he and Munger is 80, and assuming they'll live to be 100, Buffett joked: "We're only aging at 1-1/4 percent a year. Some companies' (CEOs) are aging at 2 percent. Think about how risky that is."

Buffett plans this month to visit four European countries to seek out family-owned businesses he might want to buy when the time comes for a sale. He said Berkshire isn't on the "radar screen" of many potential sellers in Europe.

Berkshire does have a process in place to make its 95 percent-owned German reinsurance unit, Cologne Re, a fully owned subsidiary "before too long," Buffett said.

Buffett occasionally addressed more controversial issues.

Asked whether he should push Coca-Cola Co (KO.N) to pull back from its role as a big corporate supporter of the Summer Olympics in Beijing, Buffett said it would be a "terrible mistake" not to back the Olympic movement. Berkshire ended 2007 with an 8.6 percent stake in Coca-Cola.

And Buffett turned back efforts by American Indian tribes and salmon fishermen to have Berkshire's PacifiCorp unit remove four dams on the Klamath River in California and Oregon, which they say kill fish. Three people asked Buffett questions about it and protesters occasionally shouted opposition to the dams.

(Editing by Todd Eastham)