Bankruptcies and Bailouts: Penn Central, Lockheed, New York City, Chrysler...

Penn Central

1970. Penn Central Railroad goes bankrupt. The company's creditors (banks) take over its Board of Directors and take it deeper into debt by extending more loans to cover the losses. Stockholders are kept in the dark: the directors provide further loans so the stockholders receive a dividend and appearances can be maintained. The directors and their banks sell their stock at unrealistically high prices. When the truth is finally revealed, the stockholders are left with nothing.

Congress is told that the collapse of Penn Central would be devastating to the public interest. Congress responds by granting 125 million dollars in loan guarantees. The company fails anyway, but the banks are protected. Penn Central is nationalized into Amtrak and continues to operate at a loss to this day. Who picks up the tab? Tax payers.

Lockheed

In 1971, the Lockheed Corporation, America's largest defense contractor, is on the verge of bankruptcy. Congress is told a similar story: thousands will lose their jobs, sub-contractors will be left high and dry, if the company fails, the public will suffer...Congress responds by guaranteeing 250 million dollars in new loans, (putting Lockheed 60% deeper into debt than before). To ensure Lockheed remains solvent, the company is granted lucrative defense contracts at non-competitive bids. The banks get their pound of flesh. Who picks up the tab? Tax payers.

New York

1975. New York City runs out of credit. It is deep in hock due to the cost of maintaining an extravagant bureaucracy and a mini welfare state. Congress is informed of the imminent crisis. If New York is unable to provide public services it will be a disaster for the citizens and disgrace America in the eyes of the world. Congress authorizes an additional 2.3 billion dollars of loans, more than doubling the size of the existing debt. Interest continues to be paid to the banks. Who picks up the tab? Tax payers.

Chrysler

1978. Chrysler is close to bankruptcy. Congress is told it would be a public disaster if the company folds. It would be a huge blow to the 'American way' if people could only choose between two, instead of three, makes of automobile. Congress guarantees up to 1.5 billion dollars of extra loans. The banks' previously unrecoverable debt becomes a tax-payer-backed, interest-bearing asset.

Rinse and repeat. The system always manages to protect the interests of the banks. At the expense of the tax payers.

Source: G. Edward Griffin: The Creature from Jekyll Island