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Bank Bailouts Often Cost Taxpayers

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The Wall Street Journal

The Tampa Tribune

Published: July 17, 2008

A long history of bank bailouts around the world provides some models for what could unfold in the United States 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 such as Japan, Sweden, South Korea and Thailand have experienced banking crises. The United States had its own financial upheaval during the savings-and-loan debacle of 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 would not 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 Fannie Mae and 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.

Meanwhile, the government pumped billions into surviving banks by purchasing preferred shares from them and encouraging them to merge with others.

In the end, Japan's biggest banks managed to pay back the government, canceling out the preferred shares.

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