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How Warren Buffett rescued US biggest banks from financial crisis

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Warren Buffet, the CEO of Berkshire Hathway, is reportedly in talks with the Biden administration after the collapse of Silicon Valley Bank, Signature Bank, and Silvergate Capital Corp this month.

Buffett’s contribution to support US banks during the financial instability has a long history. The Oracle of Omaha’s frugal decision has helped two big banks overcome the crisis during their worst period.

Investment of $5 billion to Goldman Sachs

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In 2008, at the peak point of the global financial crisis, the legendary investor invested $5 billion in Goldman Sachs to strengthen the firm’s capitalisation and liquidy in turbulent times.

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The then decision of Buffett has generated a return of roughly $3.1 billion for him. Buffett had placed his bets on Goldman Sachs soon after the collapse of the Lehman Brothers. In 2020, Berkshire Hathaway Inc sold 84% of its Goldman Sachs.

Buffett’s one magical call may have helped save the US economy:

In October 2008, Buffett made a late-night call to the then Treasury Henry “Hank” Paulson with an idea of how the US government might be able to turn the economy around.

According to the documentary “Panic: The untold Story of the 2008 Financial Crisis”, Buffett shared his idea when the biggest banks failed –Wachovia and Washington Mutual.

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

At thet time, CEOs of major banks–including John Mack of Morgan Stanley, Jamie Dimon of J.P. Morgan, Lloyd Blankfein of Goldman Sachs, etc convened at the Treasury to discuss the proposal.

Not all these banks needed assistance and some were apprehensive to accept cash out of fear that it might signal to the public that they were struggling and prompt investors to pull out.

The meeting ultimately led the Treasury to inject $250 billion into the banking system, drawing funds from TARP. The plan was not universally well-received. But former US President George W Bush said “The intervention, I think, probably saved a depression”.

Paulson said, “bailouts was the most successful program that is broadly hated in the history of mankind”.

Warren Buffett rescued Bank of America:

In 2011, Buffett’s Berkshire Hathaway invested $5 billion in Bank of America through preferred stock, helping the then-ailing mega lender raise capital to bolster its balance sheet.

At the time, Bank of America shares were reeling due to unending legal woes stemming from the crisis and its catastrophic acquisition of Countrywide Financial. Other issues, such as a cascading sovereign debt crisis in Europe and fears over a debt default in the US were largely out of the firm’s control.

Now, the Bank of America has settled the bulk of its crisis-era litigation and beefed up its capital position.

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