The History of US Government Financial Bailouts

01
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The Panic of 1907

J.P. Morgan
New York City Trusts. LOC

100 Years of Government Bailouts

The 2008 financial market meltdown is not a solo event, although its magnitude marks it for the history books. It's the latest in a series of financial crises where businesses (or government entities) turn to Uncle Sam to save the day.

  • 1907 : Run On Trusts - The last days of deregulation
  • 1929 : Stock Market Crash and Great Depression - Although the stock market crash did not, by itself, cause the Great Depression, it contributed.
  • 1971 : Lockheed Aircraft is pinched by Rolls Royce bankruptcy.
  • 1975 : President Ford says 'no' to NYC
  • 1979 : Chrysler - US government backs loans made by private banks, in order to save jobs
  • 1986 : Savings and Loans failed by the 100s after deregulation
  • 2008 : Fannie Mae and Freddie Mac enter downward spiral
  • 2008 : AIG turns to Uncle Sam in wake of secondary mortgage crisis
  • 2008 : President Bush calls on Congress to pass a $700 billion financial services bailout

The Panic of 1907 was the last and most severe of the bank panics of the "National Banking Era." Six years later, Congress created the Federal Reserve.

Sum: $73 million [approximately $1.6 billion in 2008 dollars] from the U.S. Treasury and millions from John Pierpont (J.P.) Morgan, J.D. Rockefeller, and other bankers

Background: During the "National Banking Era" (1863 to 1914), New York City was truly the center of the country's financial universe. The Panic of 1907 was caused by a lack of confidence, the hallmark of every financial panic. On 16 October 1907, F. Augustus Heinze tried to corner the stock of United Copper Company; when he failed, his depositors tried to pull their money from any "trust" associated with him. Morse directly controlled three national banks and was a director of four others; after his failed bid for United Copper, he was forced to step down as president of Mercantile National Bank.

Five days later, on 21 October 1907, "National Bank of Commerce announced that it would stop clearing checks for the Knickerbocker Trust Company, the third largest trust in New York City." That evening, J.P. Morgan organized a meeting of financiers to develop a plan to control the panic.

Two days later, the panic struck Trust Company of America, the second largest trust company in New York City. That evening, Secretary of the Treasury George Cortelyou met with financiers in New York. "Between October 21 and October 31, the Treasury deposited a total of $37.6 million in New York national banks and provided $36 million in small bills to meet runs."

In 1907, there were three kinds of "banks": national banks, state banks, and the less-regulated "trust." The trusts -- acting not unlike today's investment banks -- were experiencing a bubble: assets increased 244 percent from 1897 to 1907 ($396.7 million to $1.394 billion). National bank assets almost doubled during this period; state bank assets grew 82 percent.

The panic was precipitated by other factors: an economic slowdown, stock market decline, tight credit market in Europe.
 

02
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Stock Market Crash of 1929

Destitute pea pickers, LOC; Photographer: Dorothea Lange
LOC

The Great Depression is associated with Black Tuesday, the stock market crash of 29 October 1929, but the country entered a recession months before the crash.

A five-year bull market peaked on 3 September 1929. On Thursday 24 October, a record 12.9 million shares were traded, reflecting panic selling. On Monday 28 October, panicked investors continued to try to sell stocks; the Dow saw a record loss of 13%. On Tuesday 29 October 1929, 16.4 million shares were traded, shattering Thursday's record; the Dow lost another 12%.

Total losses for the four days: $30 billion [approximately $378B in 2008 dollars], 10 times federal budget and more than the U.S. had spent in World War I ($32B estimated). The crash wiped out 40 percent of the paper value of common stock. Although this was a cataclysmic blow, most scholars do not believe that the stock market crash, alone, was sufficient to have caused the Great Depression.

Learn about what caused the Great Depression

03
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The Lockheed Bailout

Lockheed F22 Raptor
Lockheed via Getty Images

Net Cost: none (loan guarantees)

Background: In the 1960s, Lockheed was trying to expand its operations from defense aircraft to commercial aircraft. The result was the L-1011, which proved to be a financial albatross. Lockheed had a double-whammy: the slowing economy and the failure of its principle partner, Rolls Royce. The airplane engine manufacturer went into receivership with the British government in January 1971.

The argument for bailout rested on jobs (60,000 in California) and competition in defense aircraft (Lockheed, Boeing and McDonald-Douglas).

In August 1971, Congress passed the Emergency Loan Guarantee Act, clearing the way for $250 million [approximately $1.33B in 2008 dollars] in loan guarantees (think of it as co-signing a note). Lockheed paid the U.S. Treasury $5.4 million in fees in fiscal 1972 and 1973. Total fees paid: $112 million.

Learn more about the Lockheed bailout

04
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New York City Bailout

Lower Manhatten, 15 August 2008
Getty Images

Sum: Line of Credit; Repaid + Interest

Background: In 1975, New York City had to borrow two-thirds of its operating budget, $8 billion. President Gerald Ford rejected an appeal for help. The intermediate savior was the city's Teachers' Union, which invested $150 million of its pension funds, plus a refinance of $3 billion in debt.

In December 1975, after city leaders begin addressing the crisis, Ford signed the New York City Seasonal Financing Act, extending the City a line of credit of up to $2.3 billion [approximately $12.82B in 2008 dollars]. The U.S. Treasury earned about $40 million in interest. Later, President Jimmy Carter would sign the New York City Loan Guarantee Act of 1978; again, U.S. Treasury earned interest. (See Too Big To Fail)

Read The Domino Scenario: The Day New York City Defaulted, 2 June 1975 New York magazine

05
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The Chrysler Bailout

Chrysler vehicle sits in showroom, 2008.
Getty Images

Net Cost: None (loan guarantees)

Background: The year was 1979. Jimmy Carter was in the White House. G. William Miller was Treasury Secretary. And Chrysler was in trouble. Would the federal government help save he nation's number three automaker?

In 1979, Chrysler was the nation's 17th largest manufacturing company in the country, with 134,000 employees, mostly in Detroit. It needed money to invest in tooling a fuel-efficient car that would compete with Japanese cars. On 7 January 1980, Carter signed the Chrysler Loan Guarantee Act (Public Law 86-185), a $1.5 billion loan package [approximately $4.5B in 2008 dollars]. The package provided for loan guarantees (like co-signing a loan) but the U.S. government also had warrants to buy 14.4 million shares of stock. In 1983, the U.S. government sold the warrants back to Chrysler for $311 million.

Read more about the Chrysler bailout.

06
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The Savings and Loan Bailout

Locked Out
Getty Images

The Savings and Loan (S&L) crisis of the 1980s and 1990s involved the failure of more than 1,000 savings and loan associations.

Total Authorized RTC funding, 1989-1995: $105 billion
Total Public Sector Cost (FDIC estimate), 1986–1995: $123.8 billion

According to the FDIC, the Savings and Loan (S&L) crisis of the 1980s and early 1990s produced the greatest collapse of U.S. financial institutions since the Great Depression.

Savings and Loans (S&L) or thrifts originally served as community-based banking institutions for savings and mortgages. Federally chartered S&Ls could make a limited range of loan types.

From 1986 to 1989, the Federal Savings and Loan Insurance Corporation (FSLIC), the insurer of the thrift industry, closed or otherwise resolved 296 institutions with total assets of $125 billion. An even more traumatic period followed the 1989 Financial Institutions Reform Recovery and Enforcement Act (FIRREA), which created the Resolution Trust Corporation (RTC) to "resolve" insolvent S&Ls. By mid-1995, RTC resolved an additional 747 thrifts with total assets of $394 billion.

The official Treasury and RTC projections of the cost of the RTC resolutions rose from $50 billion in August 1989 to a range of $100 billion to $160 billion at the height of the crisis peak in June 1991. As of December 31, 1999, the thrift crisis had cost taxpayers approximately $124 billion and the thrift industry another $29 billion, for an estimated total loss of approximately $153 billion.

Factors contributing to the crisis:

  • The phase-out and eventual elimination in the early 1980s of the Federal Reserve’s Regulation Q
  • In the 1980s, state and federal deregulation of depository institutions, which allowed S&Ls to enter new but riskier loan markets
  • Deregulation occurred without an accompanying increase in examination resources (for some years examiner resources actually declined)
  • Reduced regulatory capital requirements
  • The development during the 1980s of the brokered deposit market. A brokered deposit "is obtained from or through the mediation or assistance of a deposit broker." Brokered deposits have come under scrutiny in the 2008 Wall Street meltdown.

Learn more about the S&L crisis. See the FDIC Chronology.

FIRREA legislative history from THOMAS. House vote, 201 - 175; Senate agreed by Division Vote. In 1989, Congress was controlled by Democrats; recorded roll call votes appear to be partisan.