Media Clips
International Herald Tribune (France)
September 8, 2008
In A Crisis, U.S. Businesses Get Help
Government Has A Long History of Bailing Out Corporations
By Nelson D. Schwartz
Despite decades of free-market rhetoric from Republican and Democratic lawmakers, Washington has a long history of providing financial help to the private sector when the economic or political risk of a corporate collapse appears too high.
The effort to save Fannie Mae and Freddie Mac is only the latest in a series of bailouts that stretch back to the rescue of the military contractor Lockheed and the Penn Central Railroad under President Richard Nixon, a Republican, and the rescue of Chrysler in President Jimmy Carter's Democratic administration, through the more recent salvage of the savings-and-loan banking system in the late 1980s.
Now, with the U.S. government preparing to save Fannie and Freddie only six months after the Federal Reserve orchestrated the rescue of the Bear Stearns investment bank, it appears that the mortgage crisis has forced the government once again to shove ideology aside and get back into the bailout business.
''If anybody thought we had a pure free market financial system, they should think again,'' said Robert Bruner, dean of the Darden School of Business at the University of Virginia. ''The government and private financial institutions are cheek by jowl in their engagement with the flows of money in the economy, so regulators have a keen interest in the survival of financial institutions.''
He added that such rescues typically came when the economy was weakening or was already in a recession, as was the case in the 1970s. Referring to the economist Joseph Schumpeter's description of a recession as a cold shower for economic excesses, Bruner said, ''We're witnessing a correction for all the mistakes of the recent boom.''
The closest historical analogy to the Fannie-Freddie crisis is the rescue of the farm credit and savings and loan systems in the late 1980s, said Bert Ely, a banking consultant who has been a longtime critic of the mortgage finance companies as well as a frequent participant in discussions at the American Enterprise Institute, a conservative policy organization in Washington.
The savings and loan bailout followed years of high interest rates and risky lending practices, and ultimately cost taxpayers $124 billion, with the banking industry kicking in $30 billion more, Ely said.
Still, Ely makes a distinction between the rescue of Fannie and Freddie and the savings and loans versus the earlier aid packages for Chrysler and other industrial companies.
''They didn't have a federal nexus; they weren't creatures of the federal government,'' he said. ''The way Chrysler and others were handled was inappropriate and could have been dealt with under the bankruptcy code.''
In the Chrysler case, Carter and lawmakers in car-building states helped push through a package of $1.5 billion in loan guarantees in 1979 for the troubled carmaker, while also demanding concessions from labor unions and lenders. Similarly, Lockheed was saved by loan guarantees in 1971, rather than the kind of direct infusion of billions of dollars, as saving the mortgage finance companies would likely require.
The mortgage finance effort is also different because of the potential fallout for the broader economy and especially the beleaguered housing sector if it were to not succeed.
Unlike a particular automotive company or even a major bank like Continental Illinois National Bank and Trust, which was bailed out in 1984, ''we depend on Fannie and Freddie for funding almost half of our mortgage market,'' said Thomas Stanton, an expert on the two companies, who also teaches at Johns Hopkins University. He added, ''The government has many less degrees of freedom in dealing with these companies than in the earlier bailouts.''
Even in an era when both Democrats and Republicans agree on broad free-market principles, ''nobody ever wants to play Russian roulette,'' said Jonathan Koppell, director of the Millstein Center for Corporate Governance and Performance at Yale University.
''It creates a massive moral hazard for the future,'' he added, ''but nobody wants to be the one at the helm when the market entered Armageddon.''