Banking intervention not that rare

The government has a history of taking over banks, railways and other industries.

WASHINGTON (AP) — For all the thorny free-market issues raised, the big U.S. intervention in banks does have precedents — from wholesale wartime takeovers of entire industries to the seizing of hundreds of failed savings and loans in the 1980s. Most nationalizations have been temporary, but some endure, like Amtrak.

Over the past century, the government has taken stakes in banks, railways, steel mills, coal mines and foreclosed homes.

President Bush’s announcement on Tuesday that the government would directly invest up to $250 billion in the nation’s top financial institutions was the latest step in increasingly bold efforts by the U.S. and other powers to prop up a financial system near collapse.

It was presented as a last-resort intervention.

But already this year, the Federal Reserve had taken an $85 billion stake in failing insurer American International Group — which it later upped by $37.8 billion. And it provided a $29 billion loan to JPMorgan Chase & Co. as part of its purchase of investment bank Bear Stearns. Also, the government took over mortgage giants Fannie Mae and Freddie Mac, pledging up to $200 billion to back their assets.

During World War I, the government nationalized railroads, telegraph lines and the Smith & Wesson Company.

During World War II, it seized railroads, coal mines, Midwest trucking operators and many other companies. As the war dragged on, President Franklin D. Roosevelt in 1944 even briefly seized the Montgomery Ward department-store chain for defying a labor agreement.

Not all takeover efforts go through.

President Truman tried to nationalize the steel industry in 1952 to avert a strike he claimed would hurt Korean War efforts. But the move was blocked by the Supreme Court, holding that he failed to cite any legislative authority.

Others can last and last. One major friendly takeover remains today: the government-owned National Railroad Passenger Corporation, doing business as Amtrak since May 1971.

In 1984, Washington took majority control of the failing Continental Illinois Bank and Trust. That bank continued to exist, with some 80 percent of its shares owned by the federal government, until 1994, when it was acquired by what is now Bank of America — among the first banks in which the Bush administration will take an ownership stake.

More recently, the Resolution Trust Corp. was set up to deal with the savings and loan crisis of the late 1980s and early 1990s. It took over more than a thousand failed S&Ls and all their assets, including an array of bad loans and foreclosed homes. It took six years and $125 billion in tax dollars to clean up that mess.

The RTC was modeled on the Reconstruction Finance Corp., which made loans and bought stock in distressed banks during the Great Depression.

Administration officials emphasize that the recent bank interventions are temporary and argue that they are in the national interest — even if seemingly at odds with hallowed private-enterprise principles.

“These measures are not intended to take over the free market, but to preserve it,” Bush said on Tuesday. Added Treasury Secretary Henry Paulson: “Today’s actions are not what we ever wanted to do, but ... what we must do to restore confidence to our financial system.”

Ever sensitive to wording, the administration disputes that its actions amount to nationalization, noting that the U.S. will be acquiring only nonvoting minority stakes. “The federal government will not be running banks,” said White House spokesman Tony Fratto.

Peter Morici, a business professor at the University of Maryland and former chief economist at the U.S. International Trade Commission, said that may be a shortcoming — not an advantage. “Unless the government gets involved in the management of banks, we have no assurances that they won’t get us into this mess again, that they’re really going to start lending money to people who need it,” Morici said.

The Treasury will purchase special preferred shares in a wide variety of U.S. financial institutions, beginning with the nation’s nine largest banks.

The program was authorized by a provision of the $700 billion financial rescue package enacted earlier this month.