(Reuters) - The Federal Reserve and Treasury Department once again led marathon weekend talks in an effort to resolve a crisis at a major financial institution, this time Wall Street investment bank Lehman Brothers, crippled by toxic real estate assets and a collapsing share price.
The federal government has a long history of involvement with financial institution rescues. Following is a chronology of key events over the last century.
PANIC OF 1907
In October 1907, a run on the Knickerbocker Trust Co after it failed in its effort to corner the market in shares of United Copper Co caused a panic on Wall Street. Banks called loans and stock prices plummeted, threatening several major banks with failure. The calming influence came not from the Fed, which did not exist, but from banker John Pierpont Morgan, who organized a consortium of bankers to provide funds to prop up banks and buy up stocks. They were joined by Treasury Secretary George Cortelyou, who brought in $35 million in federal funds. The episode led to creation of the Federal Reserve System in 1914 to add stability to the banking system.
GREAT DEPRESSION, 1930s
Some 9,000 U.S. banks failed during the Great Depression after a stock market collapse triggered a severe restriction of credit, massive loan failures and “runs” by depositors to withdraw their funds. President Franklin Delano Roosevelt’s first act after his 1933 inauguration was to declare a three-day bank holiday to cool things off. He later signed into law the Glass-Steagall Act, creating the Federal Deposit Insurance Corp, to restore depositors’ confidence in banks. The act also separated the operations of commercial banks and investment banks to reduce chances for another stock market bubble. Roosevelt also created the Federal Housing Administration and Fannie Mae to stabilize the housing sector and provide liquidity to the mortgage market.
COMMONWEALTH BANK OF DETROIT, 1972
Commonwealth Bank of Detroit was the first bank with more than $1 billion in assets to be bailed out. The bank was considered essential to Detroit’s inner city, so the Federal Deposit Insurance Corp provided $35.5 million in loans. It was never paid back.
FIRST PENNSYLVANIA, 1980
Established in 1782 as one of the first U.S. 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 the first large-scale bailout by the FDIC, which provided a $325 million five-year subordinated note that allowed First Penn to sell off government securities and reduce its interest drain. The FDIC made its money back, without interest.
CONTINENTAL ILLINOIS, 1984
Once the seventh-largest U.S. bank, Chicago-based Continental Illinois National Bank and Trust Co. 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 largely to bad oil and gas exploration loans purchased from the failed Penn Square Bank of Oklahoma, some of which led to criminal fraud charges against lending officers.
The FDIC injected $4.5 billion to rescue the bank and buy bad loans. The federal government held an 80 percent stake in the bank until 1994, when it was sold to Bank of America.
SAVINGS AND LOAN CRISIS, 1980s-90s
From 1986 to 1989, the Federal Savings and Loan Insurance Corp closed or assisted 296 institutions hit by unsound real estate and commercial loans. More than 740 institutions were later closed or consolidated by the Resolution Trust Corp, a federal agency created to take over and liquidate their assets, often for pennies on the dollar.
The largest of these was the American Savings and Loan Association of Stockton, California, which had about $30 billion in assets and received a $250 million injection from the Federal Home Loan Bank Board in 1988.
The FDIC estimates that resolution of the S&L crisis cost a total of $153 billion, with taxpayers footing $124 billion of the bill. Other estimates of the cost, including those from lawmakers, have been as high as $300 billion.
LONG-TERM CAPITAL MANAGEMENT, 1998
Massive losses by U.S.-based hedge fund Long-Term Capital Management due to Russian government bond defaults in 1998 panicked markets around the world. U.S. Treasury Secretary Robert Rubin and the Federal Reserve organized a $3.625 billion bailout with funds provided by major creditors. Bear Stearns was among the creditors that declined to participate.
BEAR STEARNS, March 16, 2008
Hard-hit by its heavy exposure to the faltering U.S. mortgage market, Bear Stearns teetered close to collapse after an acute cash shortage caused its trading partners to lose confidence in the firm. But the Federal Reserve 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. The first brokerage rescue since the Great Depression was done to avert a feared market meltdown and was accompanied by a new Fed lending facility for so-called primary dealers.
INDYMAC, JULY 11, 2008
Federal regulators seized control of Pasadena, California-based IndyMac Bank, the ninth-largest U.S. mortgage lender, after a massive run on deposits and mounting loan defaults. The bank, which had $32 billion in assets and once specialized in “Alt-A” home loans that often did not require borrowers to fully document income or assets, also faced losses on mortgages it could not sell into tight capital markets. The IndyMac failure, the largest this year and the third largest commercial bank failure ever, was expected to cost the FDIC about $8.9 billion from its $52.8 billion insurance fund.
FANNIE MAE, FREDDIE MAC, SEPT. 7, 2008
The government seized control of mortgage finance institutions Fannie Mae and Freddie Mac to stabilize them after massive falls in their share price made it impossible for them to raise needed capital to sustain mounting mortgage losses. The Treasury’s move to put the government-sponsored enterprises into conservatorship and inject up to $100 billion into each gave their debt and mortgage-backed securities a full U.S. government guarantee. It was aimed at restoring investor confidence in the firms and keeping funds flowing into the mortgage market to help stem the collapse of the U.S. housing market.
Reporting by David Lawder; Editing by Andrea Ricci
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