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A Taxonomy of Bailouts: Comparing the Coronavirus Rescues With Rescues Past A Taxonomy of Bailouts: Comparing the Coronavirus Rescues With Rescues Past
(3 days later)
A week ago, the big question in Washington was: Which industries will be bailed out of their losses because of coronavirus?A week ago, the big question in Washington was: Which industries will be bailed out of their losses because of coronavirus?
This week, the question is: Which industries won’t?This week, the question is: Which industries won’t?
With stunning speed, it has become clear that many mainstays of American industry are facing potentially existential risks from their looming financial losses, and that Congress and the Trump administration are determined to prevent widespread bankruptcies and corporate collapse.With stunning speed, it has become clear that many mainstays of American industry are facing potentially existential risks from their looming financial losses, and that Congress and the Trump administration are determined to prevent widespread bankruptcies and corporate collapse.
But not all bailouts are equal. There are distinctly different rationales for industry bailouts, each with different implications for how a rescue is (or ought to be) designed and carried out. And the surprisingly rich history of the U.S. government’s stepping in to backstop major companies and industries shows what forms they might take.But not all bailouts are equal. There are distinctly different rationales for industry bailouts, each with different implications for how a rescue is (or ought to be) designed and carried out. And the surprisingly rich history of the U.S. government’s stepping in to backstop major companies and industries shows what forms they might take.
In normal times and in most cases, the process for dealing with a company that runs out of money is straightforward. It goes to court and files for bankruptcy protection; shareholders generally get wiped out or close to it; and the business is either restructured (in Chapter 11) or liquidated (in Chapter 7), with whatever is left divided fairly among those the company owed money to.In normal times and in most cases, the process for dealing with a company that runs out of money is straightforward. It goes to court and files for bankruptcy protection; shareholders generally get wiped out or close to it; and the business is either restructured (in Chapter 11) or liquidated (in Chapter 7), with whatever is left divided fairly among those the company owed money to.
But for lots of different reasons, and in many different eras, government officials have decided that major companies, or entire industries, needed some form of special treatment.But for lots of different reasons, and in many different eras, government officials have decided that major companies, or entire industries, needed some form of special treatment.
To understand what form the coronavirus bailouts might take, it’s worth looking at these different rationales and programs, and the lessons they offer. Note that these categories aren’t mutually exclusive, and several past bailouts can fit into more than one.To understand what form the coronavirus bailouts might take, it’s worth looking at these different rationales and programs, and the lessons they offer. Note that these categories aren’t mutually exclusive, and several past bailouts can fit into more than one.
Companies in the financial industry are unlike other companies in important ways. They provide the funding that the rest of the economy relies on, meaning that if financing freezes up en masse, a recession can result. The companies that make up this industry are deeply intertwined through a web of debts and obligations.Companies in the financial industry are unlike other companies in important ways. They provide the funding that the rest of the economy relies on, meaning that if financing freezes up en masse, a recession can result. The companies that make up this industry are deeply intertwined through a web of debts and obligations.
As such, they tend to have “systemic risk,” the possibility that the failure of one firm or one key market could ripple through the economy and make everybody worse off. In that case, the usual arguments against bailouts — especially moral hazard, the idea that rewarding firms that made irresponsible bets encourages more irresponsible bets in the future — tend to get pushed aside.As such, they tend to have “systemic risk,” the possibility that the failure of one firm or one key market could ripple through the economy and make everybody worse off. In that case, the usual arguments against bailouts — especially moral hazard, the idea that rewarding firms that made irresponsible bets encourages more irresponsible bets in the future — tend to get pushed aside.
This systemic risk drove the Bush and Obama administrations and the Fed under Ben Bernanke to give emergency loans to A.I.G.; arrange the sale of the investment bank Bear Stearns; and invest money on favorable terms in hundreds of banks, starting with the handful of giant “too big to fail” institutions like Citigroup and Bank of America.This systemic risk drove the Bush and Obama administrations and the Fed under Ben Bernanke to give emergency loans to A.I.G.; arrange the sale of the investment bank Bear Stearns; and invest money on favorable terms in hundreds of banks, starting with the handful of giant “too big to fail” institutions like Citigroup and Bank of America.
These actions were deeply unpopular, but they succeeded in stabilizing the financial system and helping to end the financial crisis. And they turned out to be profitable for taxpayers, as the investments in question ended up making about $15 billion.These actions were deeply unpopular, but they succeeded in stabilizing the financial system and helping to end the financial crisis. And they turned out to be profitable for taxpayers, as the investments in question ended up making about $15 billion.
Many of the industries being discussed as possible recipients of coronavirus bailouts don’t have the same systemic issues. If a hotel chain or cruise line goes bankrupt, it will hurt employees, creditors and shareholders of that company, but probably not the broader economy.Many of the industries being discussed as possible recipients of coronavirus bailouts don’t have the same systemic issues. If a hotel chain or cruise line goes bankrupt, it will hurt employees, creditors and shareholders of that company, but probably not the broader economy.
The current efforts to shore up the financial system have more to do with systemic risk. With many lending markets freezing up as investors and companies hoard cash, the Fed has already announced a program to fund commercial paper — a form of short-term borrowing used by companies in a range of industries.The current efforts to shore up the financial system have more to do with systemic risk. With many lending markets freezing up as investors and companies hoard cash, the Fed has already announced a program to fund commercial paper — a form of short-term borrowing used by companies in a range of industries.
The way things are going, the Fed will most likely consider other efforts that would amount to subsidies of other forms of lending, such as to state and local governments and corporations large and small. It is a recognition that allowing those markets to falter can cause broad economic damage far beyond that experienced by any one company facing tough credit.The way things are going, the Fed will most likely consider other efforts that would amount to subsidies of other forms of lending, such as to state and local governments and corporations large and small. It is a recognition that allowing those markets to falter can cause broad economic damage far beyond that experienced by any one company facing tough credit.
When the terrorist attacks of Sept. 11, 2001, caused the air travel industry to shut down for a time, creating enormous losses, one option would have been to allow major airlines to go into bankruptcy and restructure.When the terrorist attacks of Sept. 11, 2001, caused the air travel industry to shut down for a time, creating enormous losses, one option would have been to allow major airlines to go into bankruptcy and restructure.
Instead, Congress and the George W. Bush administration decided to offer $7 billion in grants and loan guarantees to prevent bankruptcies. The logic behind the action was straightforward: The airlines were innocent victims of the terrorist attacks, and the government ought to stand behind them to prevent their unnecessary failure.Instead, Congress and the George W. Bush administration decided to offer $7 billion in grants and loan guarantees to prevent bankruptcies. The logic behind the action was straightforward: The airlines were innocent victims of the terrorist attacks, and the government ought to stand behind them to prevent their unnecessary failure.
It’s the corporate equivalent of disaster relief. When a hurricane decimates a state, the federal government sends billions in aid to help the area get on its feet.It’s the corporate equivalent of disaster relief. When a hurricane decimates a state, the federal government sends billions in aid to help the area get on its feet.
This rationale could end up applying to numerous industries in the current situation, including the airlines (again), cruise lines, hotels, restaurants and others being shut down by forces far beyond their control.This rationale could end up applying to numerous industries in the current situation, including the airlines (again), cruise lines, hotels, restaurants and others being shut down by forces far beyond their control.
With the economy in free fall in late 2008 and 2009, the automobile industry was on the brink. The Big Three American automakers had built too much manufacturing capacity and had unsustainable contracts with their labor unions and auto dealers, just as demand for cars collapsed.With the economy in free fall in late 2008 and 2009, the automobile industry was on the brink. The Big Three American automakers had built too much manufacturing capacity and had unsustainable contracts with their labor unions and auto dealers, just as demand for cars collapsed.
In theory, auto companies could go bankrupt and come out the other side as leaner, more efficient versions of themselves. But the Obama administration worried that because of the freeze-up in global credit markets, automakers would be unable to obtain the financing that normally allows companies to keep operating during a restructuring.In theory, auto companies could go bankrupt and come out the other side as leaner, more efficient versions of themselves. But the Obama administration worried that because of the freeze-up in global credit markets, automakers would be unable to obtain the financing that normally allows companies to keep operating during a restructuring.
The fear was that General Motors, Chrysler and Ford would instead collapse, bringing down thousands of suppliers and millions of jobs with them — during what was already a severe recession.The fear was that General Motors, Chrysler and Ford would instead collapse, bringing down thousands of suppliers and millions of jobs with them — during what was already a severe recession.
So they directed funds from the bank bailout toward loans to help G.M. and Chrysler through a restructuring. It was hardly a free lunch for the automakers. Both went through a Chapter 11 bankruptcy, autoworkers unions agreed to restructured contracts, and the companies were allowed to end onerous contracts with dealers. But the industry stayed open for business.So they directed funds from the bank bailout toward loans to help G.M. and Chrysler through a restructuring. It was hardly a free lunch for the automakers. Both went through a Chapter 11 bankruptcy, autoworkers unions agreed to restructured contracts, and the companies were allowed to end onerous contracts with dealers. But the industry stayed open for business.
This kind of bailout can apply even to companies that have some culpability in their difficulties — like the auto companies that made plenty of mistakes, and were helped out anyway because the cost of not doing so would have been so great.This kind of bailout can apply even to companies that have some culpability in their difficulties — like the auto companies that made plenty of mistakes, and were helped out anyway because the cost of not doing so would have been so great.
Updated June 5, 2020 Updated June 12, 2020
Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.
So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement.So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement.
A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study.A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study.
The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April.The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April.
Mass protests against police brutality that have brought thousands of people onto the streets in cities across America are raising the specter of new coronavirus outbreaks, prompting political leaders, physicians and public health experts to warn that the crowds could cause a surge in cases. While many political leaders affirmed the right of protesters to express themselves, they urged the demonstrators to wear face masks and maintain social distancing, both to protect themselves and to prevent further community spread of the virus. Some infectious disease experts were reassured by the fact that the protests were held outdoors, saying the open air settings could mitigate the risk of transmission.Mass protests against police brutality that have brought thousands of people onto the streets in cities across America are raising the specter of new coronavirus outbreaks, prompting political leaders, physicians and public health experts to warn that the crowds could cause a surge in cases. While many political leaders affirmed the right of protesters to express themselves, they urged the demonstrators to wear face masks and maintain social distancing, both to protect themselves and to prevent further community spread of the virus. Some infectious disease experts were reassured by the fact that the protests were held outdoors, saying the open air settings could mitigate the risk of transmission.
Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home.Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home.
States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people.States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people.
Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.
Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.
If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)
Taking one’s temperature to look for signs of fever is not as easy as it sounds, as “normal” temperature numbers can vary, but generally, keep an eye out for a temperature of 100.5 degrees Fahrenheit or higher. If you don’t have a thermometer (they can be pricey these days), there are other ways to figure out if you have a fever, or are at risk of Covid-19 complications.Taking one’s temperature to look for signs of fever is not as easy as it sounds, as “normal” temperature numbers can vary, but generally, keep an eye out for a temperature of 100.5 degrees Fahrenheit or higher. If you don’t have a thermometer (they can be pricey these days), there are other ways to figure out if you have a fever, or are at risk of Covid-19 complications.
The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing.The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing.
If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.
If you’re sick and you think you’ve been exposed to the new coronavirus, the C.D.C. recommends that you call your healthcare provider and explain your symptoms and fears. They will decide if you need to be tested. Keep in mind that there’s a chance — because of a lack of testing kits or because you’re asymptomatic, for instance — you won’t be able to get tested.If you’re sick and you think you’ve been exposed to the new coronavirus, the C.D.C. recommends that you call your healthcare provider and explain your symptoms and fears. They will decide if you need to be tested. Keep in mind that there’s a chance — because of a lack of testing kits or because you’re asymptomatic, for instance — you won’t be able to get tested.
Expect to see this rationale used extensively in coming debates, with companies of all types seeking federal assistance by arguing that otherwise they will have to cut more jobs or shut down entirely.Expect to see this rationale used extensively in coming debates, with companies of all types seeking federal assistance by arguing that otherwise they will have to cut more jobs or shut down entirely.
In 1971, Lockheed had made a series of ill-advised decisions, making overpriced planes for which there was little demand. Facing bankruptcy, its leaders sought a rescue from Congress.In 1971, Lockheed had made a series of ill-advised decisions, making overpriced planes for which there was little demand. Facing bankruptcy, its leaders sought a rescue from Congress.
A key part of their argument: The demise of the nation’s largest defense contractor and maker of airframes would threaten national security, eliminating supplies the Pentagon needed during the Vietnam War.A key part of their argument: The demise of the nation’s largest defense contractor and maker of airframes would threaten national security, eliminating supplies the Pentagon needed during the Vietnam War.
That argument was enough to secure a $250 million loan guarantee, despite the strategic errors by the company that led to that predicament.That argument was enough to secure a $250 million loan guarantee, despite the strategic errors by the company that led to that predicament.
It sounds remarkably similar to the situation facing now Boeing, the nation’s premier aerospace company. It was already facing a crisis from its crash-prone 737 MAX plane. And now its main customers, airlines, are canceling orders and mothballing existing planes, threatening to cause its revenue to plummet in the coming months.It sounds remarkably similar to the situation facing now Boeing, the nation’s premier aerospace company. It was already facing a crisis from its crash-prone 737 MAX plane. And now its main customers, airlines, are canceling orders and mothballing existing planes, threatening to cause its revenue to plummet in the coming months.
If Boeing finds itself in a financial hole, expect to hear a national security argument for saving it, given that it is the United States’ second-biggest defense contractor. No. 1? That would be Lockheed Martin, the descendant of the firm President Nixon bailed out five decades ago.If Boeing finds itself in a financial hole, expect to hear a national security argument for saving it, given that it is the United States’ second-biggest defense contractor. No. 1? That would be Lockheed Martin, the descendant of the firm President Nixon bailed out five decades ago.
Sometimes the government has less leeway than it might seem.Sometimes the government has less leeway than it might seem.
When Fannie Mae and Freddie Mac experienced huge losses on faltering mortgage loans in 2008, the Bush administration certainly didn’t want to let them fall victim to the whims of the marketplace. But it also didn’t have much choice.When Fannie Mae and Freddie Mac experienced huge losses on faltering mortgage loans in 2008, the Bush administration certainly didn’t want to let them fall victim to the whims of the marketplace. But it also didn’t have much choice.
Those firms were “government sponsored enterprises,” entities that may have lacked an explicit legal guarantee, but existed in a gray area where federal backing was widely assumed by owners of the firms’ debts. If the administration had allowed them to go bankrupt, it could well have caused global investors to question the credibility of the United States to honor its obligations.Those firms were “government sponsored enterprises,” entities that may have lacked an explicit legal guarantee, but existed in a gray area where federal backing was widely assumed by owners of the firms’ debts. If the administration had allowed them to go bankrupt, it could well have caused global investors to question the credibility of the United States to honor its obligations.
Sometimes, in other words, the government can find itself on the hook for a bailout through the curious sequence of events in which there is an explicit or implicit legal obligation to cover some losses.Sometimes, in other words, the government can find itself on the hook for a bailout through the curious sequence of events in which there is an explicit or implicit legal obligation to cover some losses.
It’s hard to think of any parallel bailouts-of-obligation under discussion so far in the coronavirus crisis. But in a fast-moving situation that will affect nearly every worker and corner of the economy, it wouldn’t be a shock if some government or quasi-government agency ends up in the line for help as well.It’s hard to think of any parallel bailouts-of-obligation under discussion so far in the coronavirus crisis. But in a fast-moving situation that will affect nearly every worker and corner of the economy, it wouldn’t be a shock if some government or quasi-government agency ends up in the line for help as well.