Bailouts: The Emergency Button That Keeps Getting Reinstalled

This week’s Weekender takes a brisk, slightly irreverent lap around real, historical financial rescues, from J.P. Morgan’s locked-door diplomacy to depositors getting saved while shareholders didn’t.

With Washington now signaling it will do what is needed to support Argentina’s economy, including talks over a large swap line alongside an International Monetary Fund program, it’s a good time to revisit what bailouts fix, what they break, and the weird ways they sometimes even make money.

1. Before the Fed, there was the library.

In 1907, J.P. Morgan literally corralled New York trust company presidents in his Madison Avenue library and locked the doors until they agreed to pony up a rescue package. It was an all-nighter that helped inspire the creation of the Federal Reserve in 1913. (Federal Reserve History)

2. Mexico’s ’95 crisis ended up in the black for the United States.

After the Tequila Crisis, the U.S. used the Exchange Stabilization Fund to backstop Mexico. Mexico repaid early, and the Treasury earned roughly $580 million in profit, thanks to interest premia. Not every bailout bleeds red ink. (PIIE)

3. “Ford to City: Drop Dead” headline ran before loans were approved.

President Gerald Ford initially spurned New York City’s plea in 1975 (cue the immortal tabloid headline), but by December, he signed the Seasonal Financing Act, authorizing up to $2.3 billion in short-term federal loans at above-Treasury rates. It was tough love with a check attached. (Sky HISTORY TV channel)

4. A Fed-brokered bailout used zero taxpayer dollars.

When hedge fund LTCM teetered in 1998, the Federal Reserve Bank of New York convened Wall Street rivals, and 14 banks injected $3.6 billion to stabilize the fund. The Fed facilitated; it didn’t fund. The line between referee and player has defined crisis playbooks ever since. (Federal Reserve History)

5. TARP’s headline number wasn’t the bill.

Under the Troubled Asset Relief Program, Congress authorized $700 billion in 2008 (later capped at $475 billion), but the lifetime cost ended up around $31 billion, largely due to housing and auto programs. Many bank investments generated profits. A messy win is still a win. (U.S. Department of the Treasury)

6. Greece’s bailout trilogy totaled more than a quarter-trillion euros.

Across three programs (2010, 2012, 2015), Greece received 288.7 billion euros (about $337.8 billion). The 2012 package also engineered the largest sovereign debt restructuring on record (private bondholder “haircuts”). A marathon, not a sprint. (European Stability Mechanism)

7. Cyprus pioneered the modern “bail-in.”

In 2013, Cyprus recapitalized Bank of Cyprus by converting 47.5% of uninsured deposits (over 100,000 euros) into equity, while insured deposits were protected. It was shocking at the time, but it made creditor bail-ins part of the European toolkit. (European Stability Mechanism)

8. In 2023, the U.S. backstopped depositors, not banks.

After Silicon Valley Bank and Signature Bank failed, regulators invoked the systemic risk exception, so all depositors were made whole; shareholders and certain creditors weren’t. Simultaneously, the Fed launched the Bank Term Funding Program to funnel liquidity against Treasuries at par. (FDIC)

9. Switzerland flipped the capital stack at Credit Suisse.

The 2023 rescue saw UBS acquire Credit Suisse while Switzerland provided massive liquidity support. AT1 bondholders were wiped out (CHF 16B) even as shareholders received UBS stock, an inversion that sparked global AT1 soul-searching. (finma.ch)

10. India once airlifted its gold.

Facing a balance-of-payments crisis in 1991, the Reserve Bank of India airlifted approximately 47 tons of gold to the Bank of England to secure emergency foreign exchange, an unforgettable image of what a true last-resort bailout can look like. (The Economic Times)

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