This chapter discusses the concept of "bailouts" as applied to various cases, including Penn Central, Lockheed, New York City, Chrysler, and others.
The analogy of a sporting event used previously is abandoned for a more serious examination of the "real game" of bank bailouts by the Federal Reserve.
Penn Central
The largest U.S. railroad faced bankruptcy in 1970, deeply in debt to multiple large banks.
Banks had significant control over management decisions, contributing to financial mismanagement.
Insider trading allegations arose when banks sold shares before public announcements.
The need for a federal bailout became evident to prevent complete shutdown.
The Fed's intervention included opening the discount window to provide liquidity.
Eventually led to the nationalization of passenger and freight services through Amtrak and Conrail.
Lockheed
Largest defense contractor, faced bankruptcy in 1970.
A coalition of interests lobbied for a federal bailout to prevent military and economic fallout.
Treasury guaranteed $250 million in loans, essentially subsidizing defense contracts.
New York City
In 1975, NYC faced financial collapse due to excessive debt, employment, and welfare promises.
Banks held significant debt, necessitating federal intervention to prevent bankruptcy.
Federal loans enabled the continuation of city services under the specter of potential financial chaos.
Chrysler
In 1978, Chrysler faced massive debt due to outdated vehicle models and high interest rates.
A $1.5 billion federal loan guarantee was arranged to save the company.
Banks benefitted from taxpayer-backed loans, while Chrysler avoided collapse.
Federal Deposit Insurance Corporation (FDIC)
FDIC not true insurance, but more a tool for bailouts of large banks.
Several options for handling bank failures: payoff, sell-off, or bailout.
Bailouts protect banks regardless of size, but particularly favor large banks.
Unity Bank
An exception to bailout practices, saved due to social and political considerations.
Despite financial mismanagement, the bank was bailed out to avoid social unrest.
Commonwealth Bank of Detroit
Bailouts became standard for larger banks, with justifications ranging from essential services to minority issues.
First Pennsylvania Bank
1980 bailout emphasized importance of large banks in maintaining economic stability.
FDIC provided substantial support to prevent perceived domino effect.
Continental Illinois
1984 bailout of the nation's seventh-largest bank represented one of the largest interventions.
Triggered by a chain of bad loans and an electronic bank run.
FDIC and Federal Reserve provided extensive support to prevent collapse.
Highlighted the disparities in treatment between large and small banks.
Conclusion
The Federal Reserve and associated bailouts favor large banks at the expense of smaller ones and taxpayers.
This chapter provides a foundation for questioning the role of the Federal Reserve and its impact on the economy.