Gale Encyclopedia Of American Law 3Rd Edition Volume 4 P8 pot

ECONOMIC BAILOUT An economic bailout is a plan through which the government provides financial assistance to trou-bled industries and companies, often during times of national economic c

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and for civil liberties During her life she worked

to improve working conditions for U.S laborers,

helped establish theAMERICAN CIVIL LIBERTIES UNION

(ACLU), and lobbied for the enactment of the

EQUAL RIGHTS AMENDMENT In many of her exploits

she partnered with her younger brother Max

Max Eastman gained fame as a Marxist writer

and journalist who later rejected SOCIALISM and

became a supporter of the virulently

anti-communist senator, JOSEPH MCCARTHY In

con-trast, Crystal Eastman was a consistent supporter

of socialist politics, the suffragist movement, and

feminism throughout her life

Eastman was born on June 25, 1881, in

Glenora, New York, to Samuel Eastman and

Annis Ford Eastman Both her parents were

ordained church ministers and ardent believers

in women’s rights, beliefs that Eastman

absorbed In a 1927 autobiographical essay

written for Nation magazine, Eastman talked

about her father’s support of her mother’s goal

of becoming a minister and his support of

Crystal when she decided to study law He even

supported the rebellious Crystal when she led

her teenage friends in revolt against the

wearing of skirts and stockings as part of the

swimming attire of proper young ladies Her

father knew that he would not want to wear a

skirt and stockings when he went swimming,

she wrote, so he could see why his daughter

would not want to either Eastman also

credited her mother with encouraging Crystal

and her two brothers to be independent

thinkers and to advocate for the causes that

were most important to them

Eastman graduated from Vassar College in

1903 and earned a master’s degree in sociology

from Columbia University in 1904 She attended New York City School of Law where she graduated second in her class in 1907 Until

1911, Eastman lived in a Greenwich Village commune that included her brother Max

Paul Kellogg, social work advocate and editor of a publication called Charities and the Commons, hired the young attorney as part of a team charged with investigating conditions among steel workers in Pittsburgh, Pennsylva-nia The resulting survey, published between

1909 and 1914, was a groundbreaking six-volume study that was the first to combine the collection of scientific data with management techniques Eastman’s portion of the survey, a report titled Work Accidents and the Law, was published in 1910 The report, which focused

on unsafe working environments and the corruption of officials and others, was a startling revelation to many politicians and citizens In

1909 Eastman became the first woman appointed to the Employer’s Liability Commis-sion In that role she drafted the first workers’

compensation law for the state of New York

Eastman married Walter Benedict and moved

to Milwaukee, Wisconsin, where she continued

be involved in women’s suffrage issues Eastman eventually separated from her husband and moved back to New York where she became an investigating attorney for the U.S Commission

on Industrial Relations in 1913 That same year, Eastman, along with suffragist ALICE PAUL and several others, helped to found the militant Congressional Union for Woman Suffrage that was a forerunner of the National Woman’s Party In 1915 Eastman joined over three thousand women for a meeting in Washington,

◆

1881 Born,

Glendora, N.Y.

1914–18 World War I

1903 Graduated from Vassar College

1920 Nineteenth Amendment ratified, gave nationwide suffrage rights to women

1918 Palmer Raids target left-wing political dissenters

1912 Congress passed eight-hour day labor law for federal employees

1904 Earned M.A from Columbia University 1907

Graduated from New York City School of Law

1917–21 Editor of

The Liberator

magazine

1928 Died, Erie, Pa.

1923 Authored Equal Rights Amendment with Alice Paul

1910 Published Work Accidents and Laws 1913

Helped found Congressional Union for Women Suffrage

1916 Helped found National Civil Liberties Union

EASTMAN, CRYSTAL 59

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D.C., where they founded the Woman’s Peace Party with famed social worker JANE ADDAMS as chair Eastman became president of the New York branch of the party which, in 1921, was renamed the Women’s International League for Peace and Freedom That organization, which exists to this day, supports disarmament, women’s rights, civil liberties, and ABOLITION of CAPITAL PUNISHMENT

Eastman also served as executive director of the American Union against Militarism (AUAM), an organization that lobbied to keep the United States from entering into war against Mexico in 1916 and to support American neutrality during WORLD WAR I Within the AUAM, Eastman along with social reformers ROGER BALDWINand Norman Thomas established

a subsection called the National Civil Liberties Bureau (NCLB) whose primary purpose was to advocate for and protect the BILL OF RIGHTS Eastman worked on the left-wing political journal The Masses with her brother Max who was editor When that periodical was closed down due to lawsuits, Eastman and her brother joined with several others to found a similar journal, The Liberator Eastman was editor of the magazine from 1917 to 1921 In 1922 The Liberator was taken over by the Communist Party, which later renamed it The Workers’

Monthly

Eastman had always been a passionate defender of free speech, but her support for the concept strengthened in the face of the suppression of antiwar activists during and after World War I President Woodrow Wilson’s attorney general A Mitchell Palmer and Palmer’s special assistant J Edgar Hoover used the ESPIONAGE ACT OF 1917 and the 1918 Sedition Act to commence a campaign against those perceived to be radicals or members of left-wing organizations Palmer and Hoover conducted Palmer Raids, casting a large net that involved the arrest, in over 30 cities around the country, of thousands of suspected anarchists and supporters of socialism and COMMUNISM Arrests were often made without warrants and several hundred, including noted feminist and radical EMMA GOLDMAN, were deported

In 1920 the NCLB, which had been established with the aim of protecting the Bill

of Rights against encroachments such as those encompassed by the Palmer Raids, became

the American Civil Liberties Union (ACLU) The purpose of the organization was to advo-cate for FIRST AMENDMENT rights including FREEDOM OF SPEECH, freedom of RELIGION, and FREEDOM OF THE PRESS, as well asEQUAL PROTECTION and due process rights, and the right to privacy

In 2003 the ACLU, which remains headquar-tered in New York City, had grown from a roomful of activists to an organization with over 300,000 members, and supporters and offices all over the country

In the 1920s Eastman traveled between New York and London where her second husband, British poet and peace activist Walter Fuller, had gone to look for work During this period she worked as a journalist, writing columns for several U.S periodicals including the Nation and Alice Paul’s Equal Rights, and British publications such as the Daily Herald and a British feminist weekly called Time and Tide

Shortly after women gained the right to vote, Eastman, along with Alice Paul, became one of the authors of the Equal Rights Amendment (ERA), which proposed amend-ing the U.S Constitution to invalidate numer-ous state and federal laws that discriminated against women while purporting to “protect” them No action was taken on the ERA when it was introduced in Congress in 1923, and it languished until 1966 when the NATIONAL ORGANIZATION FOR WOMEN (NOW) revived interest in it The amendment was approved

by Congress in 1972 and given a seven-year deadline for ratification by 38 states The amendment was ratified by 30 states within one year of Senate approval But opposition from conservative political and religious groups halted the momentum Despite an extension of the deadline to 1982 and ratifica-tion by five more states, the amendment failed

to be ratified by the required three-fourths and did not become law

After her husband’s death in 1927, Eastman returned to live permanently in the United States She died just one year later, in July 1928,

at her brother’s home in Erie, Pennsylvania She was 48 years old In 2000 Eastman, along with

19 other distinguished American women, was inducted into the National Women’s Hall of Fall in Seneca Falls, New York, the birthplace of the women’s rights movement

INTERESTED IN

WOMEN JUST

THAT THEY ARE NO

LONGER CLASSED

WITH CHILDREN AND

60 EASTMAN, CRYSTAL

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FURTHER READINGS

Counterculture, edited by Rick Beard and Leslie

Berlowitz Cohen Newark N.J.: Rutgers Univ Press.

Cook, Blanche Wiesen, ed 1976 Toward the Great Change:

Max and Crystal Eastman on Feminism, Antimilitarism,

and Revolution New York: Garland.

Kerber, Linda K., and Jane Sherron DeHart, eds 2003.

Women’s America: Refocusing the Past 6th ed New

York: Oxford Univ Press.

vEATON, DORMAN BRIDGMAN

Dorman Bridgman Eaton was born June 27,

1823, in Hardwick, Vermont He was a

successful lawyer who achieved prominence

for his work in the establishment of the U.S

CIVIL SERVICECommission

After receiving a doctor of laws degree from

the University of Vermont in 1848, Eaton

attended Harvard Law School in 1850 and was

admitted to the New York bar, practicing law

there until 1870

Eaton was a staunch believer in a merit

system as opposed to a spoils system in the

acquisition of local or national government

employment In 1873 he became the

chairper-son of the U.S Civil Service Commission, an

organization that embodied the ideas of the

merit system He served until 1875, when

funding for the commission ceased, and he

subsequently went to England to examine the

structure of the English Civil Service

Commis-sion In 1883, he formulated the Pendleton Act

(5 U.S.C.A § 1101 et seq [1883]), which

provided for the foundation of the permanent

Civil Service Commission He performed the

duties of chairperson of this new commission

from 1883 to 1886 Eaton died December 23,

1899, in New York City

In 1880, Eaton wrote the publication The Civil Service in Great Britain: A History of Abuses and Reforms and their Bearing upon American Politics

ECCLESIASTICAL COURTS

In England, the collective classification of particu-lar courts that exercised jurisdiction primarily over

Dorman B Eaton.

LIBRARY OF CONGRESS

1823 Born,

Hardwick, Vt.

1850 Graduated from Harvard Law School;

admitted to New York bar

1873–75 Served as chair of the U.S Civil Service Commission

1899 The Government of

Municipalities published;

died, New York City

1861–65 U.S Civil War

◆

1883–86 Served as chairman of the Civil Service Commission

1850–70 Practiced law in New York

1886 Returned to New York City to work on municipal government reform

1880 The Civil Service in Great Britain: A History of Abuses and Reforms and

their Bearing upon American Politics published

1883 Formulated the Pendleton Act, basis for U.S civil service system

ECCLESIASTICAL COURTS 61

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spiritual matters A system of courts, held by authority granted by the sovereign, that assumed jurisdiction over matters concerning the ritual and religion of the established church, and over the rights, obligations, and discipline of the clergy

ECONOMIC BAILOUT

An economic bailout is a plan through which the government provides financial assistance to trou-bled industries and companies, often during times

of national economic crisis

At many times throughout U.S history, companies and other entities have sought economic assistance during different crises

Most of this assistance has come from the government, though in some instances, private entities have also been involved Turbulent economic periods have often been marked with instances of government bailouts Such periods include the Great Depression during the 1930s, the recession of the mid-1970s, the savings and loan crisis of the 1980s and 1990s, and the difficult economic periods of the 2000s

Government bailouts often cause

controver-sy, especially when entities have been accused of mismanagement During 2008 and 2009, several financial institutions, as well as the three largest automobile makers in the United States, were

on the verge of BANKRUPTCY Although the declining economic condition hastened these near-collapses, some analysts and commenta-tors believed that the companies were in poor economic health because of poor management

as much anything else Critics of government bailout programs often note that the free market system in the United States demands that companies face the risk of failure Eco-nomic bailouts generally shift the risk of failure

to taxpayers Plus, some critics characterize bailout programs as something more like a system of SOCIALISM than part of a system of capitalism

Despite these criticisms, economists argue that bailouts are necessary because the collapse

of certain important entities, including those in the transportation and financial sectors, could lead to a more widespread collapse of the economy in general Moreover, studies have shown that the government typically earns its money back with interest when it devotes funds

to struggling companies Though bailouts are

seldom popular with the public, especially when the companies seeking assistance are accused of poor management, the bailouts have saved a number of businesses and other entities throughout U.S history

History

Bailouts are nothing new in U.S history In

1791 the U.S government assumed debts that several states owed as a result of the American Revolutionary War The government’s assump-tion of these obligaassump-tions increased the naassump-tional debt but also spurred a market for debt SECURITIES New York businessman William Duer developed a plan to bring down the stock prices of the Bank of New York so that he could take control of the bank Duer also planned to corner the market on certain types of govern-ment bonds His plan led to a sharp decrease in the value of the government bonds The collapse in the bond value led to a sharp decline

inREAL ESTATEvalues, which could have led to a massive depression

ALEXANDER HAMILTONwas the Treasury secre-tary and one of the founders of the Bank of New York Hamilton devised a plan in which the TREASURY DEPARTMENTbought bonds by borrow-ing money from the banks This action increased the value of the bonds Hamilton also instructed banks to accept bonds as collateral for loans that the banks made to securities brokers, and the government guaranteed this collateral The result of Hamilton’s actions was that the Bank of New York did not collapse, and the United States did not fall into a major depression In fact, no bank in the United States failed until 1809

History has seen a number of other banking panics A notable panic occurred in 1907, when several banks and trusts had made loans for an attempt to corner the market on stock in a copper company When that attempt failed, confidence in the banks and trusts waned, leading depositors to withdraw their capital The Treasury Department attempted to inter-vene by injecting millions into the banking system However, it was the actions of banker J Pierpont Morgan that helped to resolve the crisis He worked with several bankers to create

a joint pool of capital that could be used to save banks that were at risk of collapse One result from the panic in 1907 was the creation of the Federal Reserve System, which was designed to

62 ECONOMIC BAILOUT

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create a lender ofLAST RESORT for U.S financial

institutions

The Great Depression of the 1930s led many

homeowners to default on their mortgages By

1933, banks were foreclosing on nearly one

thousand homes per day PresidentFRANKLIN D

ROOSEVELT and Congress responded by creating

the Home Owners’ Loan Corporation, which

purchased defaulted mortgages from the banks

and then refinanced the mortgages at lower,

fixed rates The agency issued mortgages to

about one million homeowners By the time the

agency dissolved in 1951, more than 80 percent

of the borrowers had repaid their mortgages on

time or early Lee Davison, a historian with the

FEDERAL DEPOSIT INSURANCE CORPORATION, noted

that the program earned the government a small

profit “You save 80 percent of the people from

being tossed out of their homes, and it didn’t end

up costing the government a dollar,” he said

Several companies during the 1970s and

1980s sought government assistance when they

faced collapse These companies included Penn

Central Railroad in 1970, Lockheed in 1971,

Franklin National Bank in 1974, Chrysler in

1980, and Continental Illinois National Bank

andTRUST COMPANY in 1984 In several of these

instances, the companies repaid the government

loans, and the government earned interest from

these loans and otherwise recouped funds

through other transactions

One of the more costly bailouts involved the

savings and loan industry During the 1980s,

savings and loan institutions started investing

heavily in commercial real estate By the

mid-1980s, though, interest rates had risen, and

the savings and loan institutions were paying

more in interest to their depositors than they were

earning from their loans Between 1986 and 1995,

about half of the more than 3,200 savings and loan

institutions in the United States closed, leaving

federal insurers with billions in bad debt

In 1989 Congress enacted the Financial

Institutions Reform Recovery and Enforcement

Act of 1989 (Pub L No 101-73, 103 Stat 194)

This act authorized $293.8 billion in financing

for folding savings and loan institutions The act

also created the Resolution Trust Corporation,

which was responsible for making depositors

whole and for investigating wrongdoing in the

savings and loan industry The savings and loan

crisis eventually cost taxpayers an estimated

$124 billion

Bailouts of the First Decade of the 2000s

Several different kinds of bailouts occurred in the early 2000s

Airlines Even before the terrorist attacks on the United States in 2001, the airline industry was suffering financially Analysts estimated before September 11, 2001, that airlines would lose $2 billion in 2001 After those terrorist attacks, the government ordered all airplanes in the United States to be grounded, thus causing greater losses in the airline industry

Eleven days after the terrorist attacks, Congress approved and President GEORGE W BUSH signed the Air Transportation Safety and System Stabilization Act (Pub L No 107-42,

115 Stat 230) This act provided $5 billion in direct relief to the airlines and also included $10 billion in loan guarantees Other provisions included tax relief, insurance, and limited liability to certain air carriers

The airline bailout plan allowed the Trea-sury Department to purchase stock at prices below market for any airline that received a loan guarantee Although the loan guarantee pro-gram suffered a loss when one of the minor airlines filed for bankruptcy, the government earned at least $140 million from its acquisition

of stock in the airlines

Subprime Lending Crisis The 1990s saw a boom in the issuance of what is known as subprime lending Lenders initially targeted those with impaired credit or no credit for the types of loans offered within the category of subprime loans The most common of these loans has been the adjustable rate loan, under which a mortgage begins at a certain rate but which the mortgage company can change depending on the market situations Other types of subprime loans include, for example, interest-only loans and zero-down loans involv-ing more than one mortgage company (also known as piggy-back loans)

Although these subprime loan packages can help some homeowners to purchase houses that these homeowners would not be able to purchase otherwise, many who took out sub-prime loans ran into unforeseen problems In most instances, mortgage companies will in-crease the rates of adjustable rate mortgages

Thus, a borrower may be able to afford the initial rate of, for example, 7 percent interest, but when the lender increases the rate to

ECONOMIC BAILOUT 63

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8 percent, the borrower has more difficulty paying As the percentage continues to increase, the borrower’s ability to pay is progressively weakened Similar problems arise with interest-only loans and zero-down loans with piggy-backs, the terms of which tend to favor mortgage companies and not the borrowers

To make matters worse, many of the subprime lenders did not require borrowers to show proof

of income

Prime loans have remained the most preva-lent, representing 80 percent of the total mortgages in the United States as of 2010

However, subprime loans became increasingly popular even for those with a sufficient credit

history to qualify for a conventional loan In many cases, the rate of a subprime loan (especially an adjustable rate mortgage) initially may have been less than a conventional loan However, when the mortgage companies in-creased those rates, the rate of the subprime loan surpassed the rate of the conventional loan Between 2001 and 2006, the percentage of new loans characterized as subprime or near-prime rose substantially

Between 2002 and 2005, housing prices had steadily increased, which helped the subprime loan market Companies also continued to ease their credit standards Moreover, interest rates during this time remained low as a result of the

Bailout of the American Auto Industry

For most of the twentieth century,

the U.S auto industry was

domi-nated by the “Big Three” of Detroit:

General Motors, Ford Motor Company,

and Chrysler The Big Three sold most of

the automobiles in the American market,

in the process becoming central to the

U.S manufacturing economy

Unioniza-tion of the companies in the 1930s led to

high wages and benefits for union

work-ers However, problems began to develop

in the 1970s, as imported cars began to

enter the market and labor disputes with

the United Auto Workers (UAW)

esca-lated The federal government intervened

in 1979 to keep Chrysler afloat, and the

industry rebounded By 2005, Japanese

auto companies commanded a large

share of the U.S market The loss of

sales eventually drove the Big Three to

the brink of collapse in 2008 The U.S

government again intervened, this time

by loaning billions to General Motors

and Chrysler As of the end of 2009, it

was unclear whether these efforts would

ultimately save these companies

The federal loan of $1.5 billion to

Chrysler in 1979 saved the company

During the 1980s the Big Three again

prospered, due in large part to Congress

exempting truck-based vehicles—pick-ups, SUVs, and minivans—from fuel-economy regulations Japanese and other foreign automakers initially did not try to compete with these sectors of the market, which left Detroit in the driver’s seat

Though these truck-based vehicles were not fuel efficient, the price of oil dropped steadily through the 1990s; sales in these sectors became the most profitable for Detroit

By 2000, the Big Three were making record profits and building their cash reserves Pickups accounted for large profit margins, whereas smaller cars produced no profit and sometimes losses This trend started to crack when oil prices began to rise in 2001 Con-sumers began to look at more fuel-efficient autos, which reduced the de-mand for trucks and SUVs In response, Detroit began closing factories and laying off workers, yet this was not enough In the spring of 2008, gas prices increased dramatically, rising to over $4 per gallon

Consumers panicked and stopped buying pickups and SUVs Then, in September

2008, theSTOCK MARKETand some finan-cial institutions collapsed, driving the United States into a recession Auto sales

dropped over 30 percent in October, forcing the Big Three to spend their cash reserves on parts, labor, and other overhead

Realizing that their existence was in danger, the Big Three asked the federal government in September for loan guar-antees so that they could retool their plants to produce more fuel-efficient cars The request generated political controversy, as federal intervention went against free market ideas Moreover, critics pointed out that many businesses were suffering from the recession, yet they could not obtain federal relief The automakers and the UAW, along with some economists, responded that the auto industry was a linchpin of the U.S economy If the automakers went bank-rupt, more auto workers would be added

to the unemployment lines, and the ripple effect would take down many of the companies that supplied parts and other services to Detroit

General Motors By the end of November, General Motors announced

it would run out of money in early 2009 and be forced to close if it did not receive federal assistance On December 20, 2008,

64 ECONOMIC BAILOUT

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recession of 2001 During this period, when

many borrowers had difficulty making their

mortgage payments, borrowers often had a few

options In many cases, borrowers could borrow

against their homes through home equity loans

to make mortgage payments Borrowers could

also sell their homes to settle their mortgage

debts Lenders took these circumstances into

account when the lenders continued to market

these subprime loans aggressively

A variety of factors caused subprime lenders

to begin to experience heavy losses First, home

prices in 2006 began to decline, meaning that

borrowers lost equity in their homes In many

cases, subprime borrowers owed more on their

mortgages than their homes were now worth, meaning that the borrowers had few options when they could not make their payments

Delinquency rates of subprime loans issued in

2006 greatly exceeded the rates of 2004

In April 2007 one of the nation’s largest subprime lenders, New Century Financial, filed for bankruptcy By the summer of 2007, Bear Sterns announced that it had experienced huge losses as a result of its subprime mortgage holdings Bear Sterns had been one of the world’s largest investment banks and securities and brokerage firms, but by 2008 the firm was

in ruins In March 2008 the Federal Reserve orchestrated the acquisition of Bear Sterns by

the Bush administration loaned General

Motors $15.4 billion in three payments

The government ordered the company to

submit a plan in February 2009 that

would explain how it could restore itself

to long-term profitability To make this

plan work, the UAW had to agree to cuts

in benefits, and suppliers and creditors

had to agree to make concessions If the

government approved the plan, it would

continue to loan General Motors money

The plan that General Motors

submitted dramatically altered the size

of the company It proposed to cut

47,000 jobs out of a total worldwide

workforce of 244,000 by the end of

2009 The Obama administration

rejected the plan in late March, giving

the company another 60 days to gain

concessions from unions and

bond-holders A White House taskforce told

the company more job cuts were needed

and that more brands would have to

eliminated General Motors responded

with a plan in April that would

elimi-nate the Pontiac, Saturn, and Hummer

brands, shed 42 percent of its dealers,

close 13 plants, and layoff 21,000 jobs

More jobs would be cut in coming years

Under the plan the federal government

would become majority owner, in

ex-change for another $11 billion General

Motors concluded that this plan would

allow it to break even

In late May 2009 the UAW agreed to

concessions involving retiree benefits and

the funding of the retiree trust However,

bondholders refused an offer that would have traded their $27 billion debt in return for 10 percent of the company

Though the negotiations continued, General Motors finally decided to file

its best assets into a new company called General Motors Company and was able

to exit bankruptcy quickly The federal government owns 60 percent of the new company, the Canadian government 12 percent, and the UAW 20 percent The Obama administration agreed to provide

$30 billion in additional financing, bringing the total federal bailout money for General Motors to $50 billion By November 2009, the company an-nounced it was returning some of the bailout money Though it had reduced its losses, the introduction of new vehicle models in late 2009 and in 2010 would

be key to the future of the company

Chrysler The financial and manage-ment history of Chrysler has been checkered In 1998 the German auto-maker Daimler-Benz merged with Chrysler, but it soon became apparent that Daimler had taken over the com-pany The marriage never worked out, and in 2007, Daimler sold the U.S assets

of DaimlerChrysler to Cerberus Capital Management Cerberus, a private equity fund, had no luck in turning around the fortunes of Chrysler The smallest of the Big Three, Chrysler sales fell 25 percent

in 2008, in large part because of its

reliance on selling pickup trucks and SUVs

Chrysler received a $4 billion loan in December 2008 to avoid bankruptcy and began negotiating with Italian automaker Fiat to purchase a substantial part of the company

As with General Motors, negotiating concessions from bondholders and hedge funds proved difficult Chrysler filed for bankruptcy on April 30, 2009, and emerged from it 42 days later The federal government paid $6.6 billion in exit financing to Chrysler but required the company to sell most of its assets to Fiat Chrysler closed plants, laid off workers, and shuttered dealerships It was expected that smaller, fuel-efficient Fiat models would be sold at Chrysler dealerships

The Ford Motor Company did not ask for federal bailout money The company had begun to restructure in

2006 It introduced smaller, more fuel-efficient vehicles in 2008 and improved the quality of it products By November

2009, the company reported increasing sales It also stated that its North American units were profitable

FURTHER READINGS Harbour, James 2009 Factory Man: How Jim Harbour Discovered Toyota’s Quality and Productivity Methods and Helped the U.S Auto Industry Get Competitive Dearborn, Mich.: Society of Manufactur-ing Engineers.

ECONOMIC BAILOUT 65

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JPMorgan Chase & Company The Federal Reserve agreed to finance up to $29 billion to help JPMorgan to cover Bear Sterns’ losses The government’s action represented the first bail-out of a broker since the Great Depression

Several firms that had loaned money to Bear Sterns experienced problems as a result of the Bear Sterns collapse These firms included JPMorgan Chase, Merrill Lynch, Citigroup, and Goldman Sachs

The crisis continued in 2008 In February, with the U.S economy as a whole struggling, President George W Bush signed the Economic Stimulus Act of 2008 (Pub L No 110-185, 112 Stat 613) The act injected $168 billion into the economy over the course of two years

Howev-er, the economy continued to suffer due to the mortgage crisis By 2008, agencies that rate the value of securities reduced the ratings on $1.9 trillion in mortgage-backed securities The rating reductions had the effect of lowering the stock value of several financial firms

The situation appeared to hit rock bottom in September 2008 Fannie Mae and Freddie Mac, which owned or backed more than $5 trillion in mortgages, had experienced billions in losses in

2007 and 2008 On September 6, 2008, Treasury secretary Henry Paulson announced that the government would take over those firms The Treasury Department also agreed to provide up

to $200 billion in loans to provide funding for banks and other home lenders

Several Wall Street firms also reached the point of collapse in September 2008 Insurance company American International Group (AIG) suffered more than $18 billion in losses during a nine-month period The company sought and received loans from the Federal Reserve to help the company avoid bankruptcy In return, the government received a large equity stake in the company, meaning that the government effec-tively took control of one of the world’s biggest insurers One day later, Bank of America announced that it had agreed to acquire Merrill Lynch, one of the largest brokerage firms in the world Another major Wall Street firm, invest-ment bank Lehman Brothers, was unable to receive a government bailout and was forced

to file for bankruptcy protection By mid-September, Lehman stocks were virtually worthless Yet another major player in the mortgage market, Washington Mutual, also collapsed On September 15, 2008, the credit

rating firm Standard and Poor’s reduced the Washington Mutual rating toJUNK BONDstatus Several other firms suffered severe losses, but they survived Banks such as Citigroup, Morgan Stanley, and Goldman Sachs lost billions as a result of the credit crisis The meltdown led to record-setting decline in the STOCK MARKET, as the Dow Jones average dropped precipitously throughout the final quarter of 2008

Automobile Industry

One of the industries hit hardest by the economic downturn in 2008 was the automotive industry Nearly every automaker lost money in 2008, though the so-called Big Three (General Motors, Ford, and Chrysler) were hit hardest When exe-cutives with these companies approached Con-gress for bailout money, the business strategies

of these companies came into question Though the government eventually agreed to provide the loans these companies requested, the loans came with a steep price: unprecedented govern-ment oversight of the automotive industry Between 1998 and 2008, the market share of the Big Three fell from 70 percent to 53 percent During this period, the number of car sales in the United States fell significantly from the all-time high of 17.4 million in 2000 The growth in the number of cars during that decade out gained the growth in the total number of drivers during the same time period Jobs in the automotive industry also suffered a steady decline Part of the difficulty that U.S auto-makers had related to labor costs, which were higher due toCOLLECTIVE BARGAININGagreements reached with the United Auto Workers Rising oil prices in 2008 turned the decline

of the automakers into a crisis With gas prices rising well above $4 per gallon, consumers seeking more fuel-efficient models turned away from the vehicles offered by the Big Three and instead opted for models offered by overseas competitors Compounding the problems for U.S automakers was the credit crisis that deeply affected the economy in 2008 As consumers lost their ability to borrow money to make auto purchases, sales continued to drop significantly With each of the Big Three on the verge of bankruptcy, executives during the fall of 2008 began to lobby Congress for bailout loans that would help the companies survive the crisis

In September 2008 Congress and President George W Bush approved $25 billion in loans

66 ECONOMIC BAILOUT

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to the automakers The plan for these loans had

been in the works for some time, but the need

became more pressing with the dire economic

news The companies received a very low interest

rate (estimated at about 4 percent) and did not

need to begin paying off the loans for five years

Troubled Asset Relief Program

Congress passed the Emergency Economic

Stabilization Act of 2008 (Pub L No 110-343,

122 Stat 3765), which created the Troubled

Asset Relief Program (TARP) Under this

program, the Treasury secretary was authorized

to spend $700 billion to help curb the financial

crisis in the United States caused in large part by

the subprime lending crisis TARP most

specifi-cally authorized the Treasury secretary to

purchase mortgage-backed assets from banks

and bank holding companies

Several large financial institutions received

TARP funds, including AIG, Citigroup, and

Bank of America Other funds went toward

programs to assist mortgage lenders and

home-owners; lending programs for small businesses;

and other support programs

Congress in December 2008 agreed to $17.4

billion in loans to automakers that came out of

the TARP package Despite the availability of

money from these loans, Chrysler and General

Motors continued to suffer, and both filed for

bankruptcy in 2009 By contrast, Ford executives

said that the company had enough credit that it

would not need to take its part of the loans

As of December 2009, the Treasury

Depart-ment had extended its use of the fund until

October 2010, but officials said they planned to

distribute no more than $550 billion from the

fund

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