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A brief history of bail-outs

Created:
25 September 2008
Updated:
24 September 2008
Written by:
Jonathan Eley

Maybe by the time you read this, Congressman and Senators will have heeded Hank's call and agreed to push through the proposed $700bn-plus bail-out of America's creaking banking system. It will certainly be the biggest taxpayer-funded rescue operation ever. But it certainly won't be the first. Here's a few others, with a nod to Wikipedia and the New York Times and thanks to several of my more learned colleagues!

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The first US banking collapse: The Wall Street Crash of 1929 was triggered by a bank run, but things didn't turn really nasty in the banking system until the start of 1933, when a run on banks affiliated to Henry Ford began to gather momentum. In response, the incoming Roosevelt administration created Fannie Mae, set up the Federal Deposit Insurance Corporation, and passed the first of two Glass-Steagall Acts, to curb speculation. The repeal of some of these measures in subsequent decades was, many claim, partly to blame for the current crisis and the savings and loans disaster (see below).

The UK secondary banking crisis: This was small beans compared to today's crisis - after all, the Bank of England is estimated to have 'only' lost £100m bailing out around thirty smaller lenders (according to Margaret Reid's book on the subject) as a result of the 1973-75 banking crisis. But the parallels are uncanny - excessive and lax lending against property, followed by an oil price shock and a general drying-up of capital.

The savings and loan crisis: Real estate lending again, along with poor regulation. Savings and loans were the US equivalent of UK building societies, but gradual liberalisation under the Carter administration effectively allowed them to take on more and more risk, and reduced the amount of federal supervision they were subject to. With predictable consequences.; over 700 'thrifts' had failed by the late 1980s with many of their liabilities assumed by the Resolution Trust Corporation in 1989. The RTC could well serve as the model for the proposed Paulson bail-out.

Sweden: The $11.8bn or so that Swedish taxpayers coughed up to rescue their banking system from the abyss in 1992 doesn't sound like much - but proportionate to the country's population, and adjusted for inflation, it's not far short of what the Bush administration is proposing. A key difference is that while Swedish banks got their cash, the government got equity in the banks, as well as rotten loans. In social-democratic Scandinavia, with its long tradition of public ownership, this was not a difficult concept to sell. Banks also had to absorb huge write-offs before the state recapitalised them. The banks were returned to private ownership as markets recovered.

Hong Kong: In the run-up to its handover to China, Hong Kong enjoyed a huge speculative boom in property and shares, particularly shares in companies connected to China. It all went wrong, of course, and by the middle of 1998 the Hang Seng had more than halved from its previous high. It was at this point that the government of a territory repeatedly voted the freest economy in the world, decided it had had enough. Blaming 'speculators' and 'short sellers', it used some $15bn of its vast foreign exchange reserves to take big stakes in leading quoted companies. There was international outrage as this perceived moving of the goalposts - but the government had the last laugh, as it unwound the stakes at a profit when the market recovered. Strictly speaking, this wasn't a bail-out at all, but an intervention. Whether it removed the need for a subsequent bail out is open to debate.

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