As this graphic illustrates, the United States government has a history of stepping in to help ensure companies it deems too big to fail remain solvent. Since 1970, the government has provided assistance to specific companies and industries to prevent a ripple effect throughout the economy. It is a costly practice, but one that has been more successful than not. However, it remains to be seen how its heightened activity in 2008 will fare.
U.S. Government Corporate Bailouts
1970 – 2008
In 2008, the United States government got heavily involved in the corporate world as it bailed out several corporations. Government leaders felt drastic measures were necessary in order to avoid another and more severe Great Depression. There were companies that it felt would cause catastrophic harm to the U.S. and global economy if they were allowed to fail. As this graphic illustrates, this was not the first time government leaders have felt inclined to get involved in corporate dealings, but it was an unusually active period.
In 1970, Penn Central Railroad approached the government looking for money to avoid bankruptcy. Within a year, the government came up with a plan to assist the railroad along with five others by combining them and loaning them $676 million. The transaction proved successful for all parties when, in 1987, the government sold the combined companies for $3.1 billion, collecting $579 million in dividends.
In 1971, Lockheed was the first recipient of funds through the Emergency Loan Guarantee Act. The company received loans totaling $1.4 billion. The bailout saved thousands of jobs for Californians and stabilized the defense contractor’s financial state. In addition to steadying the aerospace company, the government was repaid in full in 1977 and received $112 million in fees.
Franklin National Bank
After suffering through drastic losses in the first half of 1974, the government interceded, offering a loan of $1.75 billion. Unfortunately, the government should have investigated the bank before committing funds. It later discovered the bank was corrupt and had ties to the mafia. As a result, the government took ownership of the bank. Over the next five years, it sold off all bank assets for the sum of $5.1 billion.
Back in 1980, Chrysler appeared on the government bailout list for the first time. The government established the Chrysler Corporation Loan Guarantee Act to rescue the automaker from bankruptcy. Through the Act, the government backed the borrowing of $1.5 billion in loans to the trouble automaker. By 1983, the company had paid back all loans and purchased the warrants for 14.4 million shares of stock back from Uncle Sam for $311 million. While many observers considered the action a success, the fact that Chrysler would appear on the list two more times leaves the matter open for debate.
Continental Illinois National Bank & Trust Company
The government’s second foray into the banking industry occurred in 1984. Much like we’ve heard recently in the news, Continental Illinois was considered too big to be allowed to fail. In this case, the FDIC stepped in to rescue the bank, injecting $4.5 billion into the business and taking over 80% of the shares.
Majority ownership in the bank was returned to the public sector in 1991 at a loss of $1.8 billion to the U.S., making the government zero for two in the banking sector. The bank was sold to BankAmerica in 1994.
Savings & Loan
In the largest government intervention to date, $50 billion in taxpayer money was issued to the savings & loan industry through the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. A plethora of savings & loan institutions had become insolvent and the money was necessary to prevent further collapse in the industry. Many institutions were closed and liquidated and increased restrictions were instituted across the industry to prevent further indiscretions.
After the attacks on September 11, the entire airline industry was crippled with several airlines in danger of going bankrupt. Congress passed the Air Transportation Safety and System Stabilization Act, which gave the airlines $15 billion for mandatory grounding of planes, and defense against lawsuits resulting from the attacks.
Although one airline still went bankrupt at a cost of $23 million to the government, the Act was deemed a success. The purchase of airline stock at below-market value provided a profit to taxpayers as a result of the bailout.
The year 2008 was by far the government’s most active and expensive year for corporate assistance. Fearing the greater depression, the government loaned out hundreds of billions of dollars to several corporations. It’s too early to tell whether it will prove to be a wise investment, though avoidance of a meltdown in the global economy seems to demonstrate it was at least partially successful.
In March, the Fed issued a $29 billion loan to assume the risk for the less liquid assets of Bear Stearns and insure the sale of the nearly 100-year-old company to JP Morgan for $236 million.
Next, the government prevented the collapse of the mortgage funding industry by promising finance giants Fannie Mae and Freddie Mac up to $100 billion each. Next up for rescue was American International Group, which had been the largest insurance group. Over three separate installments, the government distributed $150 billion in funds to the battered insurer. Additionally, the government took an 80% stake in the company with its final purchase of $40 billion in preferred shares.
To encourage the production of fuel-efficient vehicles and to boost sales, the Big 3 automakers, Chrysler, Ford, and General Motors, received $25 billion in bailouts in September.
In its biggest bailout in history, the government committed $351 billion to Citigroup. The government issued a $25 billion bailout, followed by the backing of $306 billion in loans and securities, topped with another $20 billion injection.
Chrysler has the dubious distinction of appearing on this list for a third time. Accompanied by General Motors, the automakers were granted an additional $13.4 billion, with another $4 billion available if necessary. Each company was given a strict three-month deadline to reduce costs and produce profits to repay the debt.
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