UIL: Background Paper

Background on the Spring 2009 UIL Topic

Resolved: Government bailouts of major corporations are just.

"If you would like an empirical law of government behavior, it is that in a panic or threatened financial collapse, governments intervene-every government, every party, every country, every time." 

--Alex J. Pollock of the American Enterprise Institute

Throughout our nation's history, the United States has bailed out major corporations on numerous occasions.[1] 

• The nation's first bailout occurred in 1892 during the United States' first financial crisis. The U.S. Treasury provided hundreds of thousands of dollars in securities for the troubled banks.
• Another bailout occurred during the Great Depression when about 1,000 American homeowners a day were losing their houses. The federal government created the Home Owners' Loan Corp, designed to prevent home foreclosures. The agency bought defaulted mortgages from banks, and then refinanced them at lower rates for fixed, 15 year terms.[2]
• In 1971, the federal government passed the Emergency Loan Guarantee to provide funds to any major business enterprise in crisis. The first recipient was Lockheed in 1971 when Congress passed a bill to give $250 million to the company. The federal government funded Lockheed because its failure would have meant significant job loss in California and, because Lockheed was a major defense contractor and the United States was involved in the Vietnam War, its failure could have negatively impacted our national defense.
• Most recently in 2001, the federal government signed into law the Air Transportation Safety and Stabilization Act, which compensated airlines for the mandatory grounding of aircraft after the attacks. The act released $5 billion in compensation and an additional $10 billion in loan guarantees or other federal credit instruments.[3]

The effort in Congress to save corporations such as Bear Sterns, Fannie Mae, Freddie Mac and the automobile industry is only the latest in a series of financial maneuvers by the government.  The current financial crisis was the result of mortgages issued to subprime borrowers-those with a lesser ability to repay the loans.  When the housing market began to decline in 2006 and 2007, mortgage delinquencies soared and securities backed with subprime mortgages lost value.  This triggered a large decline in capital and a tightening credit market, adversely affecting financial institutions and other major corporations. 

In response to the financial crisis, Treasury Secretary Henry Paulson presented the Troubled Asset Relief Program (TARP) in September 2008.  TARP is designed to further economic stability by taking bad mortgages off the books of financial institutions in America through government purchase to further economic stability.  Under the program the Treasury can purchase up to $700 billion of troubled assets from financial institutions.  The hope is that once trading of these assets resumes, prices stabilize and ultimately increase, it will result in a gain for the Treasury.   

Some such as the United Auto Workers have suggested that the Treasury use TARP funds for a bailout of the U.S. auto industry.  Currently the Treasury lacks statutory authority to direct TARP funds to automakers.  Under the statue passed by congress, TARP is clearly limited to financial institutions. 

Clearly, this is a very timely topic on which you will be able to find a great deal of literature.  Check out our research links on the topic here.  Also, check out our upcoming "Card of the Week" feature where we will post useful arguments on both sides of this debate. 

[1] Nelson Schwartz, "History of Public Aid During Crises," New York Times, September 7, 2008.

[2] Michael Phillips, "Government Bailouts: A U.S. Tradition Dating to Hamilton," The Wall Street Journal, September 20, 2008.

[3] "History of U.S. Government Bailouts," ProPublica, December 22, 2008.