By Raman Jokhakar, Tarunkumar Singhal, Chartered Accountants
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18. Failed Superhero : Ineffective rescue acts of US in 100 years
The 1907 panic :
In October that year, a run on the knickerbocker Trust after
it failed to corner the market in United Copper shares caused panic on Wall
Street. Stocks plummeted, threatening major banks with failure. The calming
influence came not from the Fed — which did not exist — but from banker John
Pierpont Morgan, who organised a consortium of bankers to provide funds to prop
up banks and buy up stocks.
Great Depression, 1930s :
Some 9,000 banks failed after a stock market collapse
triggered severe restriction of credit, massive loan failures and ‘runs’ by
depositors to withdraw funds. President F. D. Roosevelt’s first act after his
1933 inauguration was to declare a 3-day bank holiday to cool things off. He
later signed into law the Glass-Steagall Act, creating Federal Deposit Insurance
Corp (FDIC), to restore depositors’ confidence in banks.
Commonwealth Bank, 1972 :
This was the first bank with over $ 1 billion in assets to be
bailed out. Being essential to Detroit’s inner city, so FDIC provided $ 36
million in loans — never to be repaid.
First Pennsylvania, 1980 :
Established in 1782 as one of the first US private banks,
First Penn was among many banks in the 1970s made insolvent by high deposit
interest rates that outstripped earnings from lower-yielding assets. It was
FDIC’s first large-scale bailout.
Continental Illinois, 1984 :
Once the seventh-largest US bank, Chicago-based Continental
Illinois National Bank and Trust was deemed ‘too big to fail’ and remains the
largest commercial bank taken over by the Fed and FDIC. The $ 40 billion-asset
bank became insolvent due to bad oil and gas exploration loans.
Bear Stearns, 2008 :
US Fed and treasury brokered a weekend deal for JPMorgan
Chase & Co to buy Bear Stearns at a rock-bottom price, with the Fed agreeing to
guarantee $ 29 billion in Bear Stearns assets taken on by JPMorgan.
Fannie Mae, Freddie Mac, 2008 :
The government seized control of mortgage finance firms
Fannie Mae and Freddie Mac to stabilise them after massive falls in their share
price made it impossible for them to raise needed capital to sustain mounting
mortgage losses.
AIG, 2008 :
Fed stepped in to rescue AIG, one of the world’s largest
insurers, with an $ 85 billion injection of taxpayer money. Under the deal, the
government will get a 79.9% stake in AIG.
(Source : The Times of India, 18-9-2008)
