In the middle of the financial crisis in October 2008 Berkshire Hathaway Inc. CEO Warren Buffett had a momentous phone call with then-Treasury Secretary Henry “Hank” Paulson late that night. Buffett wanted to spread an idea that could potentially revive the ailing economy.
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Paulson, exhausted from a long night working with his team on policy ideas to restore confidence in Wall Street, recalls his fatigue during that time. He shares his experiences in the documentary Panic: The Untold Story of the 2008 Financial Crisis. The documentary contains interviews with well-known personalities, including former presidents Barack Obama And George W Bushand provides insights from both government and private sector perspectives.
During that time, Congress had recently passed the Emergency Economic Stabilization Act, also known as the “Bailout Act,” while creating the $700 billion Troubled Assets Relief Program (TARP) to buy assets from failing banks. Despite these measures, investors' concerns remained unabated.
“While we were getting this legislation in Congress, the situation was getting worse,” Paulson said. “We had the two biggest bank failures in US history with Wachovia and Washington Mutual. We needed something that worked much faster and was more powerful.”
In the midst of a frantic search for an effective solution, Buffett turned to Paulson with his proposal.
Paulson was initially surprised by the unexpected call and did not recognize the voice on the other end. He humorously recalls his confusion, noting, “My mother has a handyman named Warren. I'm like, ‘Why is he calling me?'”
As Paulson oriented himself, he listened to Buffett's proposal and realized that it contained the essence of what would eventually be implemented.
Buffett recalls saying, “It might make more sense to put more capital in the banks than to try and buy these assets.”
At Buffett's suggestion, a meeting was called on Oct. 13, bringing together prominent bank CEOs like John Mack MorganStanleyJamie Dimon from JP Morgan Chase & Co.Lloyd Blankfein of Goldman SachsJohn Thain of Merrill Lynchand Vikram Pandit from Citigroup. The aim was to discuss the proposal in the Ministry of Finance.
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While not all banks needed immediate help, some CEOs expressed reluctance to accept cash injections, fearing it would indicate financial troubles and potentially lead to investor pullouts. Nonetheless, Paulson emphasized the critical nature of the bailout to restore economic confidence and eventually received unanimous approval.
Mack recalls thinking, “If I'm lucky, my board will fire me and I'll get out of all this insanity.”
The outcome of the meeting led to the Treasury Department pumping $250 billion into the banking system using TARP funds.
The response to the rescue operation varied. Protesters took to the streets expressing their disapproval of taxpayers' money being used to bail out wealthy Wall Street investors who many believe their poor judgment caused the crisis.
One sign read, “CASH for GARBAGE?” Another read, “Save the working people, 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, not out of our interest in defending the US economy said former Federal Reserve Chairman Ben Bernanke.
Paulson, Bernanke and New York Fed President Timothy Geithner emphasize that their actions were aimed at helping Main Street by bailing out Wall Street. They admit imperfections in their crisis management, such as the inability to save Lehman Brothers from collapse, but stand by their decision to pump money into the economy through the banking sector.
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Paulson emphasizes the steady recovery of the market and indices like that S&P 500 Since 2009, he has called the bailout “the most successful and universally hated program in human history.”
In that sense, Bush believes it is “probably the largest financial bailout of all time,” even as he concedes an inability to present irrefutable evidence and is adamant the intervention likely averted a major depression.
A decade later, in 2018, Buffett declared that another financial crisis was inevitable because of the same basic human traits — jealousy and greed — that contributed to the previous crisis a decade earlier. “It's an integral part of the system,” he said.
In March, a spate of smaller and mid-sized US banks rocked the global banking sector, triggering a sharp fall in bank share prices. Regulatory authorities took swift action to prevent possible global contagion. Buffett praised the government's intervention and stressed its role in averting a major crisis.
Buffett was unsurprised by the banks' failure, attributing it to the increasing complexity of the US banking system. He announced that he had phased out his holdings of bank stocks, beginning with the outbreak of the pandemic and continuing into the past six months. He cited the increasing mismanagement within the banks and their reactions to faulty incentives as reasons for his decision.
“The American public doesn't understand their banking system — and some people in Congress don't understand it any more than I do,” Buffett said, citing a widespread lack of understanding of the intricacies of the banking industry.
Away from the stock market
There is no shortage of volatility in the stock market. From inflation to bank failures, the modern investor's daily concerns continue to mount. It can be difficult to withstand the volatility, which is why hundreds of thousands of investors have started to diversify into startups using platforms like StartEngine and Wefund. StartEngine allows anyone to invest in startups, including StartEngine itself. This allows investors to diversify into a new asset class and shift their investment thesis to a longer-term approach, bypassing much of the volatility associated with the open market. Gameflip, for example, is currently a startup that is continuously raising millions from private investors and venture capital.
For more information, see startup investments by Benzinga.
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This article: Warren Buffett's late-night phone call in 2008 sparked possibly the most successful yet most hated program in “human history” — and saved the economy. He originally appeared on Benzinga.com
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