{"id":50135,"date":"2015-06-25T06:00:24","date_gmt":"2015-06-25T12:00:24","guid":{"rendered":"http:\/\/www.businesspundit.com\/?p=50135"},"modified":"2015-06-25T20:08:33","modified_gmt":"2015-06-26T02:08:33","slug":"the-10-biggest-government-bailouts-in-u-s-history","status":"publish","type":"post","link":"https:\/\/www.businesspundit.com\/the-10-biggest-government-bailouts-in-u-s-history\/","title":{"rendered":"The 10 Biggest Government Bailouts In U.S. History"},"content":{"rendered":"

\"AIG<\/a><\/p>\n

The word \u201cbailout\u201d became ubitious during the Great Recession. From banks \u201ctoo big to fail\u201d to the faltering auto industry in Detroit, Washington has been the go-to lender of last resort for many American companies.<\/p>\n

And the rise of the tea party on the right and Elizabeth Warren (and Bernie Sanders) on the left have been, in large part, due to the widespread dissatisfaction with those bailouts.<\/p>\n

But the thing is\u2026they aren\u2019t unique. The bailouts of the Great Recession are just the latest examples of a long history of the U.S. government stepping in to ensure the economy keeps on ticking – at home and abroad. Except in one case, where a private benefactor had to step in to keep the U.S. government running. Sort of.<\/p>\n

The Panic of 1792<\/h1>\n

\"1792<\/a><\/p>\n

The United States was just a few years old when it faced a full-fledged financial crisis in 1792. The Bank of the United States was chartered in 1791 on the encouragement of Treasury Secretary Alexander Hamilton, a proponent of strong government involvement in the economy.<\/p>\n

The young country\u2019s finances had been \u201cchaotic\u201d<\/a> following the Revolutionary War and Hamilton would call for the establishment of a national bank in 1790. After Congress approved his plan, the demand for subscription rights (or \u201cscrips\u201d) to shares in the new Bank of the United States was so strong it created a bubble that soon threatened the nascent American economy.<\/p>\n

Hamilton would squelch that crisis by using Treasury funds to buy securities on the open market and stabilize the economy. But the trouble wasn\u2019t over. Early the next year, after the Bank had officially opened, speculator William Duer would overextend himself trying to corner the securities market. His default would help spark a panic and Hamilton would use the kind of \u201clender of last resort\u201d measures we\u2019re familiar with today.<\/p>\n

Economists David Cohen, Richard Sylla, and Robert Wright dubbed the Duer-led bubble-burst \u201cWall Street\u2019s first crash<\/a>.\u201d The event helped create the New York Stock Exchange and essentially created \u201cBagehot\u2019s rule<\/a>\u201d for dealing with financial crises eight decades before Walter Bagehot did.<\/p>\n

The Bank of the United States had been highly controversial prior to its realization, and would continue to be for decades until its charter expired in 1811. The Second Bank of the United States would succeed it, but, equally controversial, find stiff political opposition from Andrew Jackson in the 1830s to be insurmountable and eventually die an unceremonious death itself.<\/p>\n

The Panic of 1893<\/h1>\n

\"Panic<\/a><\/p>\n

This one’s a bit different. Following the Civil War, speculation in the railroad industry ran rampant. That, combined with an economy roiled by the post-war years, spurred a crisis in 1873. Twenty years later, those same factors led to another panic that crippled the government’s finances. The collapse of a railroad construction boom caused a run on banks’ gold reserves (which then backed the currency) and sharply diminished the country’s gold supply. J.P. Morgan<\/a> would eventually step in to effectively bail out the government by “sell[ing] $65 million in gold bonds for the U.S. Treasury.”<\/p>\n

Just over a century later, the tables would be turned. But we’ll get to that in a bit.<\/p>\n

\"The<\/a><\/h1>\n

The Great Depression & The New Deal<\/h1>\n

No economic calamity before or since has matched the stock market crash of 1929 and the ensuing Great Depression. It would bedevil the world economy for well over a decade, only being fully vanquished along with the Nazis after World War II.<\/p>\n

President Franklin D. Roosevelt would take a stridently activist approach to dealing with the Depression\u2019s effects (including a near-25% unemployment rate when FDR took office). The New Deal<\/a> touched everything from the home loan industry to construction projects like the Hoover Dam, job programs for writers and artists, and support for farmers. World War II, which began ten years after the stock market crash, would finally help spark a sustained recovery.<\/p>\n

Several programs and agencies established by the New Deal still exist today, including the Federal Deposit Insurance Corporation (FDIC), Federal Housing Administration (FHA), Social Security, and the Securities and Exchange Commission (SEC).<\/p>\n

Two particular policies of this period will resonate in later bailouts. Fannie Mae, which was established in 1938 to help Depression-era Americans purchase homes, will show up later on this list when, ironically, it needed its own bailout. \u00a0And the Glass-Steagall Act of 1933 included provisions restricting banks from associating with securities firms. Those restrictions were lifted in the late 1990s and have been cited by some as a cause of the financial crisis of the late 2000s and the Great Recession.<\/p>\n

The Marshall Plan<\/h1>\n

\"The<\/a><\/p>\n

This one’s also a bit different in that it wasn’t a bailout of a private company or financial market, but instead a bailout of Western Europe.\u00a0The continent had been devastated by World War II and amid fears that the rebuilding countries could fall prey to instability or Communist takeover, U.S. Secretary of State George Marshall<\/a> proposed a program that would end up putting $12 billion (about $120 billion of today\u2019s dollars) toward a massive reconstruction of Europe\u2019s industrial base and overall economy.<\/p>\n

Spooked by the communist coup in Czechoslovakia, Congress ended months of debate and passed the Economic Cooperation Act of 1948<\/a>, launching the Marshall Plan and serving as a template for future foreign aid by the United States. The program would sharpen the divide between East and West, leading the Soviet Union to tighten its control on the Eastern European countries it occupied at the end of the war as Western Europe rebuilt with American assistance. By the way, the Economic Cooperation Administration that oversaw the Marshall Plan would lay the groundwork<\/a> for today’s European Union (which is dealing with its own bailout woes<\/a>).<\/p>\n

The Savings & Loan Scandal, 1989<\/h1>\n

\"Savings<\/a><\/p>\n

In the 1980s and early 1990s, about one-third of the more than 3,000 savings and loan associations in the U.S. failed, creating a financial crisis in the process since so much of their business was related to mortgages. In fact, 4,000 S&Ls held about half of the outstanding home mortgages in 1980 (around $480 billion; total assets held by the S&Ls was $600 billion), according to Kenneth J. Robinson\u2019s essay on the crisis at the Federal Reserve History<\/a> website.<\/p>\n

Thanks to stress on the wider financial markets due to rising inflation and interest rates, S&Ls faced steep losses. The federal government\u00a0and many states responded at first with deregulation, but this only served to spark growth in the S&L industry. According to Robinson,<\/p>\n

From 1982 to 1985, thrift industry assets grew 56 percent, more than twice the 24 percent rate observed at banks. This growth was fueled by an influx of deposits as zombie thrifts began paying higher and higher rates to attract funds. These zombies were engaging in a \u201cgo for broke\u201d strategy of investing in riskier and riskier projects, hoping they would pay off in higher returns. If these returns didn\u2019t materialize, then it was taxpayers who would ultimately foot the bill, since the zombies were already insolvent and the FSLIC\u2019s resources were insufficient to cover losses.<\/p><\/blockquote>\n

Congress eventually stepped in, passing the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The crisis is estimated to have cost taxpayers about $132 billion<\/a>, although ProPublica<\/a> says that cost is closer to $180 million.<\/p>\n

Iraq<\/h1>\n

\"Iraq<\/a><\/p>\n

In another, but far more recent, large-scale foreign bailout, the United States has spent over $60 billion to rebuild Iraq following the 2003 invasion and subsequent toppling of Saddam Hussein from power. The government\u2019s inspector general for the reconstruction, Stuart Bowen<\/a>, effort told the Associated Press in 2013 that it \u201cgrew to a size much larger than was ever anticipated\u201d and \u201cnot enough was accomplished for the size of the funds expended.\u201d<\/p>\n

With the rise of the Islamic State, the U.S. has returned its attention to Iraq<\/a>. Whether that will eventually lead to another massive rebuilding effort remains to be seen, but the Obama administration has so far resisted returning to the scale of the past decade.<\/p>\n

TARP<\/h1>\n

\"TARP<\/a><\/p>\n

In the fall of 2008, the American financial system was on the brink of collapse. The House of Representatives first rejected a bill to bail out the struggling financial institutions; the idea of spending taxpayer dollars to help out reckless bankers proved, unsurprisingly, to be politically toxic. But despite that widespread disgust, the debate was eventually won by those warning that the big banks were just \u201ctoo big to fail\u201d and letting them do so would spark a market collapse and depression. After several days of debate, a revised version of the Emergency Economic Stabilization Act of 2008 did become law and spawned the Troubled Asset Relief Program, better known as TARP.<\/p>\n

TARP earmarked $700 billion to buy the banks\u2019 \u201ctroubled assets,\u201d essentially securities backed by under water mortgages, but as of September 2012 the nonpartisan Congressional Budget Office<\/a> reported that only $431 billion of that would actually end up being disbursed.<\/p>\n

The Maiden Lane Transactions (Bear Stearns & AIG)<\/h1>\n

\"Bear<\/a><\/p>\n

In addition to TARP, the Federal Reserve Bank of New York created three limited liability corporations to bail out Bear Stearns and American International Group (AIG). The companies – Maiden Lane, Maiden Lane II, and Maiden Lane III<\/a> – were all named after the street adjacent to the New York Fed.<\/p>\n

The first Maiden Lane was focused on helping JP Morgan Chase & Co. merge with Bear Stearns by assuming the latter\u2019s troubled mortgage-related assets, which totaled about $30 billion. By summer of 2012, the LLC had repaid its original loan amount with interest.<\/p>\n

The other two LLCs, ML II and ML III, were related to AIG\u2019s severe liquidity crisis that had resulted from selling credit default swaps. According to ProPublica<\/a>, AIG received about $180 billion in aid from the Treasury Department and Federal Reserve.<\/p>\n

The interesting thing about the AIG bailout is that it wasn\u2019t very kind to the company. Here\u2019s how New York Times<\/em> business writer Andrew Ross Sorkin described it recently<\/a>:<\/p>\n

When the Federal Reserve propped up A.I.G. in September 2008, unlike its approach with most of the big banks, it threw out the company\u2019s chief executive and took control of 79.9 percent of the company, nearly wiping out many of its shareholders. Taxpayers got all of their money back, and then some, receiving a profit of more than $20 billion.<\/p><\/blockquote>\n

Sorkin was commenting on a federal judge’s ruling last week that the government\u2019s actions were illegal and \u201cdraconian.\u201d In Sorkin\u2019s words, Judge Thomas Wheeler \u201csuggested taxpayers should have offered AIG a more generous deal.\u201d<\/p>\n

But Wheeler also ruled that former AIG CEO Maurice Greenberg is not due any damages because \u201cif the government had done nothing, the shareholders would have been left with 100 percent of nothing.\u201d Which establishes an interesting precedent that\u00a0could affect how the federal government responds to future crises like AIG\u2019s, although just how\u00a0that might play out remains to be seen.<\/p>\n

Fannie Mae & Freddie Mac<\/h1>\n

\"Fannie<\/a><\/p>\n

The subprime mortgage crisis of the mid-2000s put much stress on federally-backed mortgage financiers Fannie Mae and Freddie Mac. The two entities had been created decades ago (Fannie Mae during the Great Depression and Freddie Mac in 1970) to expand the market by selling mortgage-backed securities. That, of course, was a dicy proposition in\u00a02007 and 2008 during the height of the subprime mortgage crisis.<\/p>\n

Fannie and Freddie were effectively nationalized<\/a> through the Housing and Economic Recovery Act of 2008, being placed into conservatorship by the Treasury Department. The Federal Housing Finance Agency still controls the two companies, although Fannie and Freddie paid off the original loan<\/a> and have been fairly profitable since.<\/p>\n

The U.S. Auto Industry<\/h1>\n

\"US<\/a><\/p>\n

Thanks in part to the financial crisis of 2008, General Motors and Chrysler found themselves in dire straits. After the Treasury Department lent the two companies around $80 billion total over four years, they managed to turn things around. Auto sales last year marked their highest point since 2006<\/a>, while the industry has seen about 500,000 new jobs created<\/a> since 2009, according to Treasury. The bailout officially ended last December when Treasury sold its last piece of Ally Financial, formerly GMAC. When all is said and done, the auto industry bailout cost taxpayers about $9.3 billion.<\/p>\n

Chrysler, by the way, is no longer Chrysler. It merged with Italian automaker Fiat to become Fiat Chrysler Automobiles (FCA) and is headquartered in London.<\/p>\n","protected":false},"excerpt":{"rendered":"

The word \u201cbailout\u201d became ubitious during the Great Recession. From banks \u201ctoo big to fail\u201d to the faltering auto industry in Detroit, Washington has been the go-to lender of last resort for many American companies. And the rise of the tea party on the right and Elizabeth Warren (and Bernie Sanders) on the left have […]<\/p>\n","protected":false},"author":24,"featured_media":50173,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7845],"tags":[7843,7844],"class_list":{"0":"post-50135","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-politics","8":"tag-government-bailouts","9":"tag-government-spending"},"acf":[],"wps_subtitle":"","_links":{"self":[{"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/posts\/50135","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/users\/24"}],"replies":[{"embeddable":true,"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/comments?post=50135"}],"version-history":[{"count":0,"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/posts\/50135\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/media\/50173"}],"wp:attachment":[{"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/media?parent=50135"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/categories?post=50135"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.businesspundit.com\/wp-json\/wp\/v2\/tags?post=50135"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}