Posts Tagged by bank bailouts

SAVING BAD BUSINESSES BY STEALING YOUR MONEY

Penn Central was the nations’ leading railroad prior to 1970. And it was a pretty egregious example of how far bankers were willing to go to bilk money out of a cash cow.

Penn starting getting deeply into debt. Its loans were rolled over, and more money was forwarded to keep operations going, which included servicing interest on their current debt. But as things got worse, the huge banks who were in on the play, which included Continental Illinois, Chase Manhattan, Chemical Bank, Manufacturer’s Hanover and First National City, agreed to continue the loans only if the banks’ officers were put on the railroad’s operating board.

So essentially, the bankers lent themselves money and were in cahoots with the whole game. Also, they were privy to information about the railroad and its stock far ahead of the public. They used this information for their own private profit as the railroad bit the dust. Public records showed that the top executives saved themselves more than $1 million dollars by the sale of stock ahead of the public. A million saved is a million earned.

After all the banks who were called in to support the railroad with cash funds were given complete assurance that the Fed would guarantee the loans, the bailout was a done deal. Immediately all the unionized employees of the failing enterprise were given 13.5% raises. In the end, the Fed authorized loan guarantees of $125 million.

This was never really intended to solve the problem, and a year later the railroad was nationalized and its passenger service became Amtrak. It is a government-run enterprise to this day and continues to operate at a massive loss… only staying open with further governmental subsidies.

The freight side of Penn Central became Conrail, with the government owning 85% of its stock. Fortunately it was sold in a public offering in 1987, staged an impressive comeback and operates at a profit.

At the same time, defense giant Lockheed was also on the edge of bankruptcy. It was $400 million in debt, and Bank of America, along with several other smaller banks, were anxious to keep the milk flowing. Eventually, they marshaled an army of interested parties and went to Washington. They claimed that tens of thousands of jobs would be lost, along with suppliers and subcontractors who would be forced into bankruptcy if Lockheed were allowed to fail. So the government gave them an additional $250 billion in guarantees. That increased their total indebtedness 60%.

Of course, the government had a not-so-secret desire to see Lockheed pay off these debts, and the only way it could do that would be to earn more money. So the company became the chief winner of no-bid contracts and recipients of other governmental work. In the meantime, other defense contractors suffered, since they were essentially pushed out of the whole process in the rush to save Lockheed.

In the mid-’70s, New York City was pursuing the same path. Waste and overspending abounded in this gigantic welfare experiment. By 1975, NYC had sold so many bonds, the market was flooded with them, and there were no more lenders. Well, almost no more. Chase Manhattan and Citicorp were the banks that were benefiting the most from interest paid on these debt, but when the day finally came that interest payments were halted, both bankers and city leaders put together a caravan to Washington, D.C.

Same game plan: Threats of halting essential services… no firemen… no police… no garbage pickup. Rioting and anarchy in the streets. Spreading disease. In New York City? This could have international repercussions.

Out came the federal checkbook and draft was made for $2.3 billion, double what the city already owed. Even though there were a number of conditions placed upon the loan to balance the NYC budget and get a surplus to pay off these debts, none of them were ever honored. The city remains in debt to this day.

Then there was Chrysler for $1.5 billion.

Unity Bank, which eventually cost taxpayers just under $4.5 million.

Commonwealth Bank of Detroit, which enjoyed a $1.5 billion fed bailout – then was eventually sold to First Arabian Corporation, a firm funded by Saudi princes.

First Pennsylvania Bank was carrying $328 million in questionable loans, $16 million more than the entire stock float of the company. They received a $325 million loan from the FDIC.

Continental Illinois was the nations’ seventh-largest bank. It had assets of $42 billion, thousands of employees around the globe and an annual income of $254 million by 1981. Unfortunately, its stellar growth was based on shaky loans to risky businesses and foreign governments who could not obtain financing anywhere else.

Its stock was doing wonderfully, and it was named one of the five best-managed banks in the country. But as they began to reap the risk they had sown, the worlds’ first electronic bank run began. Customers were blissfully unaware, but the biggest depositors began withdrawing their funds, and the business was rumored to be in trouble. Creditors raised their interest rates to the banks and began withdrawing funds. In just four days, Continental’s withdrawals were so heavy, they were forced to go to the Fed for a $3.6 billion loan to cover them. Several banks extended a 30-day line of credit, but it was of no use. Within a week, the bank’s outflow ballooned to over $6 billion.

In the end, Continental’s liabilities (including those off-book) totaled $69 billion. Only about $3 billion of that was FDIC insured. The final bailout was more complicated than I can go into here. But just know that the bank was bailed out, and the taxpayers were stuck with the bill.

Then comes the subprime fiasco of 2008. Notice the fact beyond debate, that the Fed did not come to the rescue of the subprime borrowers. Nope — it rescued the banks. It was for this purpose that it was designed, and it continues in its mission today.

All in the name of preventing catastrophe, protecting the public and providing “liquidity” to the markets.

The multibillion-dollar bailout engineered last year is only chump change to what it will eventually cost the taxpayer. Protect the banks — fleece the public.

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