The Modern History of Bank Bailouts
We Need to Remember Bank Bailout History
The history of bank bailouts is a sad one because it vividly illustrates the common wisdom by George Santayana that "Those who cannot remember the past are condemned to repeat it." Whenever looking for a striking example of failure to learn from mistakes, it seems like bank bailout history is a leading candidate because of three recurring events:
(1) Banks keep on making similar mistakes that necessitate a bailout.
(2) The U.S. Government, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) continue to bailout the guilty banks.
(3) Despite multiple perspectives that often indicate criminal activity might have taken place, legal prosecution is extremely rare.
Below you will find a concise overview of modern bank bailout history in the United States — since 1970. As you will see, one of the most timely and relevant books about this topic is aptly titled "The Best Way to Rob a Bank Is to Own One."
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.— Henry Ford
Modern U.S. History of Bank Bailouts - 1970 Was an Important Year
The modern history of bank bailouts started with the bankruptcy of Penn Central Railroad in 1970. The highlights of the period from 1970 to the present are summarized below.
Banks that issued commercial paper to Penn Central Railroad were bailed out by the Federal Reserve Board when Penn Central declared bankruptcy in 1970.
Corruption and poor business practices forced the FDIC to take over Franklin National Bank. Some of the bank executives were eventually convicted.
Continental Illinois National Bank (eighth largest bank in the United States at the time) incurred excessive losses due to energy loans purchased from Penn Square Bank in Oklahoma. The Federal Reserve and FDIC combined efforts to rescue the bank. BankAmerica eventually purchased the bank.
There were numerous failed savings and loans (S&Ls). This was a taxpayer bailout of about $200 billion via the Financial Institutions Reform Recovery and Enforcement Act. In general, the S&Ls failed in large numbers because they took excessive risks and took advantage of changes in laws covering financial institutions. This should sound familiar to those recently exposed to banks incurring excessive risks and taking advantage of reduced banking restrictions. The 2008 financial crisis had its origins in 1989 and earlier. The most visible S&L executive was Charles Keating of Lincoln Savings and Loan. He eventually served less than five years in prison.
This was the year of the perfect financial storm that brought down Bear Stearns, Fannie Mae, Freddie Mac and Citigroup. In January 2009, Bank of America was given additional assistance. The Emergency Economic Stabilization Act was passed by Congress in October 2008 (Troubled Asset Relief Program or TARP).
Except for banks and bankers, bailouts are usually not good for society.
How can banks be bailed out by governments?
Explanation of a Bank Bailout
What are bank bailouts? Here is a great explanation.
A Poll - For or Against?
How do you feel about bank bailouts?
Videos Featuring William Black - Author of "The Best Way to Rob a Bank Is to Own One"
William Black's superb book originally published in 2005, "The Best Way to Rob a Bank Is to Own One," is featured below. Here are several videos in which he describes key aspects of problems related to bank bailouts.
This superb book was published in 2005 and focuses on the collapse and subsequent bailout of the savings and loans (circa 1989). Charles Keating was one of the few bankers criminally prosecuted, and William Black connects the dots between Keating's actions and corporate financial fraud during the period after 2000.
One More Thing - Are Today's Banks the New Robber Barons?
Do you know what a "Robber Baron" is (was)? The term "robber baron" has been around for parts of at least two centuries. I haven't seen it used much recently but couldn't help thinking immediately of modern-day banks when I came across this definition of "Robber Baron": "It combines the sense of criminal ('robber') and illegitimate aristocracy ('baron'). The term was typically applied to businessmen who were viewed as having used questionable practices to amass their wealth. Allegedly, their 'questionable practices' usually included selling the product at extremely low prices (and paying their workers very poorly in order to do so), buying out the competitors that couldn't keep up, and once there was no competition, they would hike prices far above the original level." This perspective is consistent with the viewpoints in "The Best Way to Rob a Bank Is to Own One" and the other recommended book about the 2008 banking crisis and subsequent bailouts.
Mark Twain Spoke Frequently about Business and Bankers
One example — "A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain." Another example — "There are two times in a man's life when he should not speculate: when he can't afford it, and when he can." An updated version of the second quote might read like this:
There are two times when a bank should not speculate: when the bank can't afford it, and when it can.
Neil Barofsky about Ongoing Bank Bailouts - Taxpayers Paid for This?
The book written by Neil Barofsky about the most recent bailout is shown below.
Thomas Jefferson - Third President of the U.S.
"Banking establishments are more dangerous than standing armies."
It is prudent to not rely on just one explanation about the recent banking bailouts. Here is one of the books that you should include when attempting to learn what you need to know about the most recent bank crisis.
This is the definitive book about the recent bank bailout period that began in 2008. Neil Barofsky was there, so this is truly an eyewitness account — easily one of the best books about the recent financial crisis that began during the period 2006-2008. An excellent guide to help you understand what has happened.
Are we learning from history? What did the banks learn?
Another way to answer these questions is to look at what would happen differently if the recent banking crisis flares up again. In our last episode, the biggest banks got much bigger so "Too Big to Fail" certainly appears to still be a substantial and real risk. Bankers have continued their losing ways since the bailout by continuing risky investment practices. Why is that?
A big part of the problem is that there is a huge divergence between what the public (voters and citizens) wants and needs and what politicians have actually done. To many in Congress, the only "public" that counts is the one sending them big checks, and the banking establishment keeps on writing their checks. So the banks have obviously learned to keep those cards and checks coming.
What should you do? We can all do less business with the banks that caused the massive problems. Reduce business debt instead of increasing it. Fire your Zombie Bank. Avoid the bad banks and find the good banks. Develop a Plan B.
A bank is a place that will lend you money if you can prove that you don't need it.— Bob Hope
© 2012 Stephen Bush