Warren Buffett phoned Treasury Secretary Hank Paulson with a stimulus idea when the 2008 financial crisis hit. It may have saved the US economy

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© REUTERS / Jim Young
US Treasury Secretary Henry Paulson (left) shares a laugh with financier Warren Buffett, CEO of Berkshire Hathaway, at the US Financial Markets Competitiveness Conference in Washington on March 13, 2007. REUTERS / Jim Young

  • Warren Buffett phoned Treasury Secretary Hank Paulson at the height of the 2008 financial crisis with a suggestion that likely saved the US economy from an even deeper recession.
  • Renowned Berkshire investor and CEO Hathaway suggested that the government invest capital directly in banks instead of buying only their distressed assets.
  • Paulson quickly rounded up the bosses of the country’s biggest banks and convinced them to accept billions of dollars in investments.
  • The Treasury demanded high-dividend-paying preferred shares, as well as stock warrants in return, mimicking Buffett’s rescue of Goldman Sachs in September 2008.
  • Former President George W. Bush called it “possibly the greatest financial bailout of all time” and said it “was probably saving a depression.”
  • Visit the Business Insider homepage for more stories.

Warren Buffett made a late night call on Saturday October 11, 2008 that likely spared the United States from an even more devastating financial crisis.

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Billionaire investor and CEO of Berkshire Hathaway called then-Treasury Secretary Hank Paulson, the couple said in “Panic: The Untold Story of the 2008 Financial Crisis,” a documentary released in 2018.

“Hank, this is Warren,” said Buffett. The first thought of a tired and dizzy Paulson was, “My mother has a handyman named Warren, why is he calling me?” ”

Buffett called about the Distressed Assets Relief Program (TARP), which allowed the Treasury to spend $ 700 billion to buy distressed assets from banks. Lawmakers passed it in a desperate effort to shore up the financial system after the collapse of Wachovia and Washington Mutual – two of the biggest bank failures in American history.

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Once Paulson realized that Buffett was at stake, the Berkshire boss suggested the government invest directly in the banks instead of just buying their assets because he “would do very well” using this approach.

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FOLLOWING

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“He pitched the idea that was the seed of what we did,” Paulson said in the documentary.

Paulson brought together the heads of the nation’s largest banks the following Monday. He persuaded them to accept billions in cash from the government, threatening to withhold future aid if they refused to take it.

The Treasury eventually invested funds in more than 700 financial institutions as part of the capital purchase program. In exchange, he received healthy dividend-paying preferred shares or debt securities.

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He also obtained warrants allowing him to buy the shares of the companies at a fixed price in the future, thus enjoying some of the increased recovery in exchange for risk to taxpayer dollars.

The deals were at least in part modeled on Buffett’s Goldman Sachs bailout a few weeks earlier. The investor handed the bank $ 5 billion in exchange for preferred stock paying a 10% annual dividend as well as stock warrants.

Former President George W. Bush hailed the banking program as “possibly the greatest financial bailout ever” in the documentary, adding that it “probably saved a depression.”

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