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How Buffett’s Late-Night Call To Paulson Saved The Economy

Buffett's idea to inject capital into banks instead of buying assets proved to be a success in the 2008 financial crisis.

In the midst of the financial crisis in October 2008, Berkshire Hathaway Inc. CEO Warren Buffett made a significant late-night phone call to the then-Treasury Secretary Henry “Hank” Paulson. Buffett aimed to share an idea that could potentially revive the struggling economy.

Paulson, exhausted from a long night of collaborating with his team on policy ideas to restore confidence in Wall Street, recalls his weariness during that period. 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. Bush, providing insights from both the government and private-sector perspectives.

During this time, Congress had recently passed the Emergency Economic Stabilization Act, also known as the “bailout bill,” along with the establishment of the $700 billion Troubled Assets Relief Program (TARP) to acquire assets from failing banks. Despite these measures, investor concerns remained unabated.

“While we were getting this legislation in Congress, the situation worsened,” Paulson said. “We had the two biggest bank failures in U.S. history with Wachovia and Washington Mutual. We needed something that was going to work much quicker and be more powerful.”

Buffett’s Proposal

Amidst the frantic search for an effective solution, Buffett reached out to Paulson with his proposal.

Initially caught off guard by the unexpected call and not recognizing the voice on the other end, “My mom has a handyman named Warren. I’m saying, ‘Why is he calling me?’,” Paulson humorously recalls his confusion, remarking.

Henry “Hank” Merritt Paulson, talks about his book “Dealing with China” at Chinese University of Hong Kong. Amidst the frantic search for an effective solution in 2008, Buffett reached out to Paulson with his proposal. K.Y. CHENG/SOUTH CHINA MORNING POST VIA GETTY IMAGES 

As Paulson gathered his bearings, he listened to Buffett’s suggestion, acknowledging that it held the essence of what would eventually be implemented.

“It might make more sense to put more capital in the banks than it would to try and buy these assets,” Buffett recalls saying.

Following Buffett’s suggestion, a meeting was convened on Oct. 13, bringing together prominent bank CEOs such as John Mack of Morgan Stanley, Jamie Dimon of J.P. Morgan Chase & Co., Lloyd Blankfein of Goldman Sachs, John Thain of Merrill Lynch, and Vikram Pandit of Citigroup. The objective was to discuss the proposal at the Treasury.

While not all banks required immediate assistance, some CEOs expressed reluctance to accept cash injections, fearing it would indicate financial struggles and potentially lead to investor withdrawals. Nevertheless, Paulson stressed the crucial nature of the bailout to restore economic faith, eventually garnering unanimous agreement.

“Look, if I get lucky, my board will fire me, and I’ll get out of all this craziness,” Mack recalls thinking.

The outcome of the meeting resulted in the Treasury injecting $250 billion into the banking system using funds from TARP.

Public Perception

The bailout’s reception varied. Protesters took to the streets, expressing disapproval that taxpayer money was used to rescue wealthy Wall Street investors who, in the eyes of many, caused the crisis through their poor judgment.

“CASH for TRASH?” Another read, “Bail Out Working People, Not the Rich!” One sign read.

“I think there are still many 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 our interest in defending the U.S. economy,” Ben Bernanke, former Federal Reserve Chair said.

Paulson, Bernanke and New York Fed President Timothy Geithner emphasize that their actions were intended to aid Main Street by rescuing Wall Street. While admitting to imperfections in their crisis management, such as the inability to save Lehman Brothers from collapse, they stand by their decision to infuse funds into the economy through the banking sector.

Paulson highlights the steady recovery of the market and indexes like the S&P 500 since 2009, dubbing the bailout “the most successful program that is broadly hated in the history of mankind.”

Echoing this sentiment, Bush believes it to be “probably the greatest financial bailout ever,” even though he acknowledges the inability to provide irrefutable evidence, firmly believing that the intervention likely averted a severe depression.

A decade later in 2018, Buffett stated that another financial crisis is inevitable because of the same fundamental human traits — jealousy and greed — that contributed to the previous one 10 years ago. “That’s a permanent part of the system,” he said. 

In March, a series of small to mid-size U.S. bank failures sent shock waves through the global banking sector, resulting in a rapid decline in bank stock prices. Swift action by regulators aimed to prevent potential worldwide contagion. Buffett commended the government’s intervention, emphasizing its role in averting a more significant crisis.

Buffett expressed little surprise at the banks’ failures, attributing them to the growing complexity of the U.S. banking system. He revealed that he had been gradually divesting his holdings in bank stocks, beginning at the onset of the pandemic and continuing over the past six months. He cited increasing mismanagement within banks and their responses to flawed incentives as factors driving his decision.

“The American public doesn’t understand their banking system — and some people in Congress don’t understand it any more than I understand it,” Buffett said, highlighting the widespread lack of comprehension surrounding the intricacies of the banking industry.

Zenger News does not provide investment advice. 

Produced in association with Benzinga

Edited by Rachmad Imam Tarecha and Joseph Hammond

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