A History of U.S. Government Bailouts

This article is overdue. Probably by at least two years. I should have written it during the height of the 2008 bank bailouts, when a common thought running through most of our minds was, "This isn't supposed to happen. We never do this. This is America. We don't bail out troubled companies."

Truth is, we've been doing it for decades. While the 2008 bailouts were the largest, they were by no means the first time Uncle Sam has come to the rescue of failing businesses. Here's a brief history of intervention.

1970: Penn Central Railroad
Penn Central was on the verge of collapse in early 1970. It appealed for government aid, claiming it was vital to national defense interests. President Nixon agreed. Congress balked. Bankruptcy it was. Penn Central's collapse left banks holding a huge pile of suddenly worthless commercial paper. The Federal Reserve pumped them with liquidity, easing the burden. Congress then provided loan guarantees and billions in direct spending to create Amtrak, and merged the remnants of Penn Central with other flailing railroads to form Conrail, later privatized in 1986.

1971: Lockheed
Congress passed the Emergency Loan Guarantee Act in 1971 to support major businesses facing a crisis. Lockheed (NYSE: LMT  ) was the first up, scoring a $250 million loan guarantee. Said President Nixon:

This action will save tens of thousands of jobs that would otherwise have been eliminated. It will have a major impact on the economy of California, and will contribute greatly to the economic strength of the country as a whole. It will help ensure that the Nation's largest defense contractor, and its largest airframe manufacturer, will continue serving the Nation's needs.

1974: Franklin National Bank
Franklin began bleeding cash in the first few months of 1974 amid foreign currency trades going awry. Depositors started getting nervous. Before long it was an old-fashioned bank run. The Fed swooped in, granting Franklin a $1.75 billion loan to prevent "an international financial panic." Then-Fed Chairman Arthur Burns told Congress the bailout was necessary because, according to a 1974 media report, "if the bank had just failed without government intervention, other banks might have folded also." Franklin was eventually taken over by a European bank consortium.

1980: Chrysler
Detroit began hemorrhaging money in the late '70s as fuel-efficient imports from Toyota (NYSE: TM  ) and Honda devoured market share. Chrysler claimed 200,000 jobs could be at risk if it went bankrupt -- probably the first declaration of being "too big to fail." Congress bit, providing $1.5 billion in loan guarantees. In an ironic taste of things to come, then-GM (NYSE: GM  ) Chairman Thomas Murphy complained that the deal was "a basic challenge to the philosophy of America." GM took a different view of that philosophy 28 years later, when former CEO Rick Wagoner called GM's own bailout "a pivotal issue for the U.S."

1984: Continental Illinois National Bank
Continental got into trouble in the early '80s participating in what the FDIC called "extremely speculative oil and gas exploration loans" with Penn Square Bank. After Penn Square failed, Continental faced a bank run. The panic came to a head in 1984 when traders in Tokyo stopped rolling over Continental's short-term loans -- the same problem Lehman Brothers faced 24 years later. The FDIC stepped in, guaranteeing all deposit holders regardless of preset limits, infusing capital, and purchasing $4.5 billion in bad assets, effectively nationalizing the bank. Its remnants were eventually sold to Bank of America (NYSE: BAC  ) .

1989: Savings and loan industry
The S&L industry went absolutely hog wild in the '80s after the Garn-St. Germain Depository Institutions Act of 1982 allowed thrifts to engage in new business lines they had no experience in. More than 2,000 banks collapsed from 1985 to 1992, and more than 1,000 people were eventually indicted for fraud. President George. H.W. Bush stepped in with the Financial Institutions Reform Recovery and Enforcement Act, which gave birth to the Resolution Trust Corporation, a massive industry bailout that ultimately cost taxpayers $124 billion -- considerably more than the TARP program of 2008.

2001: Airline industry
The airline industry was already in trouble before 9/11. The terrorist attacks delivered what could have been a fatal blow. Two weeks after the attacks, President George W. Bush and Congress stepped in with the Air Transportation Safety and Stabilization Act, providing $5 billion in payments and $10 billion in loan guarantees for lost business after a mandatory grounding of all air travel in the days after Sept. 11; $20 million ended up going to airlines that were already bankrupt.

2008-2009: The mother of the mother of all bailouts: First it was Bear Stearns. Then Freddie Mac and Fannie Mae. Then the banks -- Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) , and anyone else that called itself a bank, wanted to be a bank, thought of itself as a bank, or could spell the word "bank." Then insurance companies. Then automakers. Then auto lenders. Then homeowners. Then homebuilders. You become numb to it after a while.

Who's next?

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns B of A preferred. General Motors is a Motley Fool Inside Value recommendation. The Fool owns shares of Bank of America, JPMorgan Chase &, Lockheed Martin, and Wells Fargo &. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2011, at 3:27 PM, Anowrasteh wrote:

    Didn't the government also bailout railroads in the 19th century?

  • Report this Comment On April 05, 2011, at 3:28 PM, MasonBartleson wrote:

    Reading this, Lehman Bros. has to feel slighted. If only Dick Fuld had been a nicer guy (or if Lehman had been GS) things would have been different.

  • Report this Comment On April 05, 2011, at 3:43 PM, PhulishMortal wrote:

    Who's next? Me! I'm pretty sure I'm too big to fail, although I have lost a few pounds lately.

  • Report this Comment On April 05, 2011, at 5:47 PM, xetn wrote:

    What about Amtrak?

  • Report this Comment On April 05, 2011, at 5:50 PM, dgmennie wrote:

    Like the old quiip says, when you owe someone $1000 (or, given inflation, $100,000), you have a problem....

    But when you owe someone $100 Million to $1 Billion or more, you have a partner....!!!

  • Report this Comment On April 05, 2011, at 9:06 PM, ynotc wrote:

    Morgan,

    Do you think that the government should be bailing business out? It seems that we have become an enabler for business to take unnecessary risks because they know they have a backstop.

    What say you?

  • Report this Comment On April 05, 2011, at 9:20 PM, IIcx wrote:

    Fannie and Freddie also come to mind.

  • Report this Comment On April 06, 2011, at 10:00 AM, Duke5343 wrote:

    And most important who caused this meltdown? Barney Frank & 1999 Fair Housing act, which the Media and Dems have been covering up. Barney was determined to help the poor live in Birth Right homes & he wife Herb Moss at Fannie was determined to make BIG bonuses, barney destroyed the banking regs put in place in 1980's and the greed ran amock BUT the real cause was US Citizens greed "IF the Deal sounds too good to be TRUE it usually is" Flip this house became a battle cry and millions of homes were repoed due to it.

    IT is believed in history that FDR's LACK of assistance caused the great deprression to last an extra 5 years, so yes the USG did right to not let the country crash with banks and everyone that WALKED from their obligations to pay morgages

  • Report this Comment On April 06, 2011, at 7:12 PM, drborst wrote:

    No commentary? Just a list of bailouts? I think the S&L crisis was still on a lot of minds in 2008. I think everyone expected Fannie and Fredie to get bailed out if they ever ran into trouble. Who said "this is America, we don't do this" ???

    Since Morgan won't give us something to talk about, I'll try:

    This list is shows us something about our government's industrial policy. It's more like welfare than education. Education is forward looking, welfare is there to help out those who really need it. (The difference is welfare has rules, bailouts don't)

  • Report this Comment On April 06, 2011, at 7:21 PM, whereaminow wrote:

    Morgan,

    One bailout that served as a precedent for the most recent one was Long-Term Capital Management

    http://en.wikipedia.org/wiki/Long-Term_Capital_Management

    David in Qatar

  • Report this Comment On April 06, 2011, at 7:30 PM, TMFHousel wrote:

    David,

    As I understand it, the NY Fed organized other banks to bail out LTCM, but no money from the Treasury or the Fed ever went in. And none of this was forced: Bear Stearns declined to help, and didn't put up a dime.

    Morgan

  • Report this Comment On April 07, 2011, at 10:32 AM, actuary99 wrote:

    Duke5343,

    Your RANDOM capitalization of WORDS is completely necessary. In NO way does it HURT your credibility or ANNOY people. The RANDOM capitalization of words coupled with CLAIMS of MEDIA cover-ups in NO WAY make you sound like a paranoid schizophrenic.

  • Report this Comment On April 09, 2011, at 8:50 AM, jbmaine wrote:

    I think this article would have been more meaningful if it included data on what the gov got back, net profit and or net loss

  • Report this Comment On April 09, 2011, at 3:35 PM, Joree wrote:

    I have to agree with ibmaine. It would be helpful to know what the return was on those bailed out. I know JPMChase and WFB paid back the money they had to take as fast as they could!

  • Report this Comment On April 09, 2011, at 11:57 PM, rfaramir wrote:

    Thanks, Morgan, for the list. Sometimes it's nice to just get the facts. Very cool.

    I'll do some editorializing myself, though. :-)

    Every one of them was the wrong thing to do! That's why the kind of power our central government has has to be taken back from them. Since they can, they sometimes will, even though they shouldn't. So we have to take away the "they can" part.

    The only one remotely justifiable was W's repayment for forcing the airlines to shut down after 9/11. Even so, it would have been best NOT to force them to do anything and then not to have to pay them back. But given the immoral forced shutdown, it was just. (I'm sure a bunch of pork and unnecessary payments went with it; I'm just talking about the morality of the basic idea.)

  • Report this Comment On April 10, 2011, at 4:56 PM, knighttof3 wrote:

    What a coincidence that the most and the biggest of the bailouts were those of financial companies. The so-called efficient capital allocators who somehow can't manage their own capital. The ones who contribute the most to political campaigns and who fill the halls of Treasury department.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1470349, ~/Articles/ArticleHandler.aspx, 10/23/2014 5:07:27 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement