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U.S. Government Bailouts Have A Mixed Record

The final cost of the U.S. government’s still-evolving rescue plan for the nation’s financial institutions may be impossible to tally. Beyond parceling out the $700 billion of the Troubled Asset Relief Program (TARP), the U.S. Treasury Department and the Federal Reserve are providing wide-ranging financing, loan guarantees, and foreclosure relief for homeowners. But whatever the price tag, and however much or little of its investment the government eventually recoups, the plan will ultimately be judged on whether it accomplished what it set out to do—avoid massive bank failures, thaw frozen credit markets, stabilize home prices, and just generally pull the nation out of its economic tailspin.

Those are ambitious goals, but this is hardly the first time the government has attempted to save threatened industries or companies. ProPublica, a public interest news organization, recently compiled a list of 15 U.S. bailouts that begins with the 1970 rescue of the Penn Central Railroad and continues through today’s multiple efforts. Though some initiatives managed to stabilize important American institutions, the overall record has been decidedly mixed.

Typically, the government steps in only after its hand has been forced. In the case of Penn Central, for example, the railroad was nearly bankrupt when it asked for help from the Federal Reserve, arguing that support was vital because the railroad transported goods essential for national defense. But Congress balked and Penn Central, which had placed large bets on real estate and other non-railroad investments, declared bankruptcy to avoid repaying debts owed to numerous commercial banks. Fearing a chain reaction of bank failures, the Fed in 1971 provided almost $700 million in loan guarantees. In 1976, the U.S. merged Penn Central with five other rail carriers into Conrail, a national freight railroad company, and later sold the company to private investors. All told, the government spent almost $20 billion to keep Conrail running, then recouped about $4 billion on the sale.

Other transportation industries have needed their own bailouts. Defense contractor Lockheed, which made military aircraft, wanted to produce commercial jets as well, but problems with its first passenger plane left the company in dire financial straits. In August 1971, Congress passed the Emergency Loan Guarantee Act, and to save 60,000 jobs in California and avoid a threat to national defense, the government guaranteed $250 million in financing (more than $1.3 billion in 2008 dollars). Lockheed repaid the loans by 1976, according to ProPublica, and the U.S. actually made money on the deal, receiving $112 million in loan fees.

New York City and Chrysler Corp., in 1975 and 1980, respectively, also asked for and received federal bailouts. President Gerald Ford at first refused to help the insolvent city, but once New York had made efforts to save itself, he signed legislation that provided billions of dollars in loans and loan guarantees, all of which was eventually repaid. In 1979, Chrysler lost $1.1 billion and was on the verge of bankruptcy. Once again, Congress acted, and $1.5 billion in government loans, matched by commercial lending, saved the company. According to ProPublica, the U.S. netted more than $600 million on its bailout investments.

Several past bailouts involved financial institutions, including Franklin National Bank in 1974 and Continental Illinois National Bank and Trust Company in 1984. But by far the biggest previous rescue involved the savings and loan industry in 1989. In what was then the greatest collapse of financial companies since the Great Depression, more than 1,000 S&Ls failed. The Resolution Trust Corporation, formed as part of legislation passed in 1989, took over failed institutions and sold assets at an ultimate cost to taxpayers of $293 billion, according to ProPublica.

Current government efforts dwarf anything it has done before. Already, hundreds of billions of dollars have been spent to arrange for the sale of Bear Stearns, guarantee the solvency of Fannie Mae and Freddie Mac, rescue American International Group, Citigroup, and automakers General Motors and Chrysler, and inject capital into banks through TARP. It may take years to judge the success or failure—and add up the total cost—of this latest, greatest government bailout.

 


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



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