The History of Too Big To Fail

Updated: February 14, 2011

It's the silent concession underlying almost every government bailout of a private company: the idea that, should the company fail, society as a whole would suffer. We heard this most recently in 2008, when AIG was rescued by the Treasury to ward off "systemic risk" to the economy. But this was hardly the only bailout to be justified in this manner. The "too big to fail" mantra has been used bail out several private companies from their own destruction.

Today, Focus offers a short history of these businesses - both what drove them to despair, and how they were bailed out.

F.A. Heinze Trusts

One of the earliest known "too big to fail" bailouts involved trusts owned by copper speculator and bank president F.A. Heinze. After an unsuccessful maneuver by Heinze to corner the U.S. copper market, bank depositors scurried to take their money out of Heinze's trusts. As the trusts were more or less unregulated, they did not fall under the voluntary "clearinghouse system" of that time: a loose alliance of banks that lent money to each other during depositor runs. But as BusinessWeek explains:

"John Pierpont Morgan, along with other bankers he organized, provided $30 million to stabilize the trusts; the U.S. Treasury pitched in another $25 million. Morgan even asked New York clergy to implore their congregations to stay calm. The crisis prompted the creation of the Federal Reserve System six years later."

Lockheed Aircraft

One of the better known government bailout beneficiaries was Lockheed Aircraft in 1971. A Time Magazine article from that year explained that Lockheed, facing bankruptcy after serious cost-overruns, rallied public support for the cause. Citing the roughly 60,000 American jobs that would be destroyed, Lockheed mobilized machinists and scientists to buy newspaper ads. Displaced aerospace workers "launched letter-writing campaigns, made speeches to P.T.A.'s and even organized a boycott of Wisconsin cheese and beer" to show Wisconsin Senator William Proxmire (a staunch opponent of the Lockheed bailout) that they meant business.

All told, it worked. The House of Representatives ultimately approved (by a narrow 192-189 vote) a federal guarantee of some $250 million in loans to the troubled aircraft company.

Chrysler

Just nine years later, another iconic American brand - Chrysler - came looking, hat in hand, for federal assistance. But as we'll soon see, the 1980 bailout is tiny compared with the GM/Chrysler bailouts of 2008. In 1980, US News explains, bankruptcy seemed inevitable as Chrysler executives stared down a crushing $1 billion loss. Yet Congress would have none of it. In order to save auto industry jobs (and, some would argue, save face with auto unions), Congress acted to gaurantee $1.5 billion in loans to the suffering automaker.

Fortunately, supporters of the bailout like to remind us, Chrysler repaid these loans in full by 1983 and returned - temporarily - to profitability. The Chrysler bailout was also noteworthy for including many restrictions and requirements on Chrysler, such as defining exactly what the government's money could and could not be spent on.

The Savings & Loan Crisis

Anyone who has read the Michael Lewis classic Liar's Poker is familiar with the savings and loan debacle of the 1980's. Once the industry was deregulated, hundred of S&L's failed, one after the other, during the late 1980's. In response, the federal government closed down the now-bankrupt Federal Savings & Loan Insurance Corp (which was intended to insure the S&L's assets) in 1989. In one fell swoop, this manuever placed the S&L's squarely in the hands of the FDIC. According to BusinessWeek, this led to the formation of "a temporary Resolution Trust Corp. to merge or close failing thrifts."

When all the smoke cleared, the FDIC estimated that taxpayers spent "nearly $124 billion from 1986 to 1995" to clean up the savings and loan mess. The problem, as some have pointed out, was not deregulation per se, but the fact that taxpayer money was at stake and therefore should have been regulated.

AIG

As noted earlier, AIG is arguably the poster child for the modern "bailout era." In 2008, it was decided that the beleaguered insurance giant (which owned gigantic amounts of the credit-default swaps at the heart of the housing bust) simply could not be allowed to fail. To let AIG go bankrupt, regulators and businesspeople told us, would risk nothing short of a global economic collapse. A 2010 MarketWatch article revealed that Treasury Secretary Tim Geithner (and his predecessor, Hank Paulson) defended the mammoth $182 billion bailout.

Geithner in particular said that without the bailout, "thousands of more factories would have closed their doors; the value of American savings would have fallen even more. It would have brought about utter collapse." Paulson, meanwhile, contends that the unemployment rate could have soared to 25% and beyond.

General Motors

Another prominent symbol of today's bailout era is General Motors. In June 2009, the Washington Post outlined what brought the once-proud car company to its knees and how the government had to rush in to help. Following decades of heavy unionization, declining marketshare and lackluster leadership, GM finally sunk into bankruptcy. In order to rescue its corporate carcass (and many thousands of auto jobs) the U.S. Treasury literally bought a 60% stake in GM (controlling interest) in exchange for the $50 billion invested.

While GM is no longer technically bankrupt, the Post reminds us that "the company's stock value would have to rise to unprecedented levels for the U.S. to break even on its investment."

Citibank

Taxpayers are never happy about bailing out large companies, but going on three years later, it's hard to use Citibank as an example of why. Last March, the New York Magazine followed up on the 2008 Citibank bailout:

"A few weeks ago, Citigroup CEO Vikram Pandit thanked the government for the $45 billion it gave his bank, which he said "built a bridge over the crisis to a sound footing on the other side." Well, now it's the government's turn to thank Citigroup, because the Obama administration is about to sell its stake in the bank and make an $8 billion profit. Yay!"

Virtually no one predicted such a favorable outcome at the time of the bailout. Citi had just agreed to pay the New York Mets $20 million per year for the naming rights on their new stadium, and citizens and politicians alike protested feverishly. Some even demanding that Citi cancel the deal or give their bailout money back. Today, though, it can only be regarded as one of the most profitable bailouts in corporate history.

Fannie Mae & Freddie Mac

Unfortunately, there are no rosy outcomes to celebrate in the cases of Fannie Mae and Freddie Mac. The two federally sponsored mortgage institutions (which played a key role in worsening the 2008 housing bust) continue to drain even more taxpayer dollars than was originally expected. An October 2010 Washington Post article warned that the continued rescue of these organizations "is likely to cost taxpayers an additional $19 billion" and could total $124 billion more "if the economy starts shrinking again", according to government projections.

This is on top of the $135 billion already spent to bail out Freddie and Fannie. Worst yet, the Post says, it seems likely that these two bailouts in particular "will be the most expensive part of the government's response to the financial crisis" - and the odds of loan repayment are "slim" according to regulators.

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