Fairholme: Amex Bad Debt a Pig in the Python

Michael Breen: Most of the changes happened last fall, but a more recent one, it looked like American Express was added to the firm and to the portfolios. Maybe you can explain that. That's got a ton of headline risk, but obviously that's when you get good bargains.

Bruce Berkowitz: I think last year we worried about financials. You didn't know what they owned, what they owed, and a few months ago I didn't even know who owned them. But it got to the point, especially with an American Express, where you could understand the basic businesses and there wasn't a lot of off-balance sheet risk. And I wasn't worried about derivatives and counter-party risks. And American Express has a significant cash flow from their merchant business, from their loan business.

And when you take at look at that cash flow in the relationship to the amount of potential bad debt that they had, you could see it was what I would call a "pig in the python" situation. Where the pig is the bad debt and they just had to digest that bad debt.

So in my mind it wasn't a question of American Express going out of business or failing, because they clearly had the balance sheet and the cash generation. It was just a question of how many quarters is it going to take for American Express to digest the bad debt created when they maybe got a little bit too exuberant on lending to a few that they probably should not have lent to.

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