WSJ: The History of Bailouts

Submitted By Trader Mark
Readers, if you find any happy or at least neutral economic stories please email me and I'll be happy to post one. While I take satisfaction intellectually that just about all my predictions are playing out one by one, I'd like to post something happy every so often about the economy - I've been searching high and low and aside from the boom in the yacht owners it is hard to find one. ;)

Anyhow, on to The History of Bailouts per the Wall Street Journal - some good reading as the government assures us we won't be on the docket and all costs to tax payers will be "contained" / "limited" (ahem) Remember the party line "We are not Japan". We did not have a real estate bubble (like Japan), we do not have a decade+ long morbid stock market (like Japan) [Mar 26 - WSJ: Stocks Tarnished by Lost Decade], we do not have the government / regulators looking the other way to prop up the financial system (like Japan), we did not act to save banks because they are "too big to fail" (like Japan). Nope, nothing like Japan here - we after all were mighty critical of them for all there actions. It would be mighty hypocritical for us to follow in their footsteps - we are so much mightier and better than that.

A long history of bank bailouts around the world provides some models for what could unfold in the U.S. as the government becomes more directly involved in fixing a damaged financial system. This history shows it is almost always a painful process, typically costly to taxpayers and best done quickly.
Since the 1990s, countries like Japan, Sweden, South Korea and Thailand have all experienced banking crises. The U.S. had its own financial upheaval during the savings-and-loan debacle in the 1980s.
Each of these predicaments required dramatic moves, including bank closures and nationalizations, efforts to buy bad assets, plus injections of capital by governments that the market wouldn't provide. Often, depositors and creditors of ailing financial institutions get protection and shareholders get the worst deal of all.
The U.S. government has tiptoed toward some of these measures with its handling of the FNM');return true" onmouseout="window.status=('');return true">Fannie Mae and FRE');return true" onmouseout="window.status=('');return true">Freddie Mac crisis. On Sunday, the Treasury Department said it would seek to expand credit lines to the two companies and ask for temporary authority to provide them with capital, if necessary.
The process dragged on for more than a decade in Japan. "What both common sense and research show is that deferred adjustment doesn't work, it just ends up being worse," says Kenneth Rogoff, a professor of economics at Harvard University.
After allowing troubled banks to limp along and accumulate more bad loans for several years, Japan got serious in the late '90s and early part of this decade. A couple of banks failed or were sold to foreigners. (note to readers - the United States of Subprime was VERY critical of Japan - telling them to let the free markets work and let the pain happen as it should. Once again, those in glass houses....)
Meanwhile (in Japan), the government pumped billions into surviving banks by purchasing preferred shares from them and encouraging them to merge with others. (sound vaguely familiar?)
Sweden's experience in the early '90s is often cited as an example of a decisive approach. After a real-estate bubble popped and bankruptcies soared, the government said it would protect all depositors and creditors in its floundering banking system. It did this by creating government-organized 'bad' banks specifically to manage troubled assets, and set tough conditions in order for banks to get new capital from the government for the surviving banks.
In the end, the government handed over $11 billion to the banks, and the crisis wrung 4% out of Sweden's gross domestic product, according to the World Bank.
In Korea and Thailand, banks had to come up with their own recapitalization plans, which were matched in some cases by contributions from the government -- with strings attached.
Korea took a case-by-case approach, in which the government was ready to assist banks by having an asset-management company buy their bad loans or by injecting new capital in the form of subordinated debt into viable banks. By mid-1999, the cost to the government reached $46 billion, or 13% of gross domestic product, according to the International Monetary Fund.