In the midst of the financial crisis in October 2008, Berkshire Hathaway Inc. CEO Warren Buffett made an important late-night phone call to then-Treasury Secretary Henry “Hank” Paulson. Buffett aimed to share an idea that could potentially revive the struggling economy.
Don’t miss: Why Silicon Valley elites are betting on this startup’s vision to bring American families together
Paulson, exhausted from a long night of collaborating with his team on policy ideas to restore confidence on Wall Street, recalls his weariness during this time. He shares his experience in the documentary “Panic: The Untold Story of the 2008 Financial Crisis”. The documentary features interviews with notable figures, including former presidents barack obama And George W. Bushproviding information from both government and private sector perspectives.
Meanwhile, Congress had recently passed the Emergency Economic Stabilization Act, also known as the “Bailout Bill”, as well as the establishment of the Troubled Assets Relief Program (TARP) of $700 billion to acquire failing bank assets. Despite these measures, investor concerns remained unchanged.
“As we got this legislation through Congress, it got worse,” Paulson said. “We had the two biggest bank failures in US history with Wachovia and Washington Mutual. We needed something that was going to work a lot faster and be more powerful.”
Buffett’s proposal
Amid the frantic search for an effective solution, Buffett contacted Paulson with his proposal.
Initially taken aback by the unexpected call and not recognizing the voice on the other end of the line, Paulson humorously recalled his confusion, remarking, “My mom has a handyman named Warren. I say, ‘Why is he calling me?'”
As Paulson gathered his bearings, he listened to Buffett’s suggestion, acknowledging that it held the essence of what would ultimately be implemented.
Buffett remembers saying, “It might make more sense to put more capital into banks than to try to buy those assets.”
Following Buffett’s suggestion, a meeting was called for October 13, bringing together prominent bank CEOs such as John Mack of Morgan StanleyJamie Dimon from JP Morgan Chase & Co.Lloyd Blankfein of Goldman SachsJohn Thain of Merrill Lynchand Vikram Pandit from Citigroup. The objective was to discuss the proposal to the Treasury.
To stay up to date with the best startup news and investments, Sign up for the Benzinga Startup Investing & Equity Crowdfunding newsletter
While not all banks needed immediate help, some CEOs have expressed reluctance to accept cash injections, fearing it could indicate financial hardship and potentially lead to investor withdrawals. Nonetheless, Paulson underscored the crucial nature of the bailout to restore economic confidence, eventually garnering unanimous agreement.
Mack remembers thinking, “Look, if I’m lucky, my board will fire me and I’ll get out of all this madness.”
Following the meeting, the Treasury injected $250 billion into the banking system using TARP funds.
Public perception
Reception of the bailout varied. Protesters took to the streets, expressing their disapproval that taxpayers’ money had been used to rescue wealthy Wall Street investors who many believe caused the crisis through their poor judgment.
A sign said “CASH for TRASH?” Another read, “Save the workers, not the rich!”
“I think there are still a lot of people who believe that we bailed out companies and helped Wall Street because we were trying to help our friends in the financial industry and not out of self-interest in defending the American economy,” he said. Ben Bernanke, former chairman of the Federal Reserve. said.
Paulson, Bernanke and New York Fed President Timothy Geithner emphasize that their actions were aimed at helping Main Street by saving Wall Street. While admitting flaws in their handling of the crisis, such as the inability to save Lehman Brothers from collapse, they maintain their decision to inject funds into the economy via the banking sector.
See next: This startup invented programmable, drinkable plastic that dissolves in water in 60 hours
Paulson points to the steady recovery of the market and indices like the S&P500 since 2009, calling the bailout “the most widely hated successful program in human history.”
Echoing that sentiment, Bush believes it is “probably the greatest financial bailout of all time”, although he acknowledges his inability to provide hard evidence, firmly believing the intervention likely has avoided severe depression.
A decade later, in 2018, Buffett said another financial crisis is inevitable because of the same fundamental human traits – jealousy and greed – that contributed to the previous one 10 years ago. “It’s a permanent part of the system,” he said.
In March, a series of bankruptcies by small and medium-sized US banks sent shock waves through the global banking sector, causing bank stock prices to fall rapidly. Rapid action by regulators to prevent possible global contagion. Buffett praised the government’s intervention, pointing to its role in preventing a bigger crisis.
Buffett said he was unsurprised by bank failures, attributing them to the growing complexity of the US banking system. He revealed that he had gradually sold off his holdings of bank stocks, since the start of the pandemic and over the past six months. He cited growing mismanagement within banks and their responses to misguided incentives as factors motivating his decision.
“The American public doesn’t understand its banking system — and some people in Congress don’t understand it any more than I do,” Buffett said, pointing to the widespread lack of understanding surrounding the intricacies of banking.
Get away from the stock market
The stock market is not lacking in volatility. From inflation to bank meltdowns, the day-to-day concerns of the modern investor keep growing. It can be hard to resist volatility, which is why hundreds of thousands of investors have started diversifying into startups with platforms like StartEngine and Wefunder. StartEngine allows anyone to invest in startups, including investing in StartEngine itself. This allows investors to diversify into a new asset class and shift their investment thesis towards a longer-term approach bypassing much of the volatility associated with the open market. For example, Gameflip is currently a startup that consistently raises millions from retail investors and venture capitalists.
See more on start-up investment of Benzinga.
Don’t miss real-time alerts on your actions – join Benzinga Pro for free! Try the tool that will help you invest smarter, faster and better.
This article Warren Buffett’s Late Phone Call in 2008 Sparked Perhaps the Most Successful But Hated Scheme in ‘Human History’ – and Saved the Economy originally appeared on Benzinga .com
.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.