September is traditionally a rough month for the market – far rougher than October, despite the so-called October effect. This week in financial history is no different. It features two bailouts, a high-profile retirement and much more. (For background reading on financial bailouts, check out Bailout Acronyms 101.)
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It seems someone is always eager to remake a classic horror movie, but these expensive updates often fail to live up to their predecessors. However, the ongoing taxpayer horror of the Chrysler bailouts proves that sometimes a remake can be more terrifying than the original. On September 7, 1979, Chrysler Corporation asked the U.S. government for $1 billion to help it avoid bankruptcy – approximately $2.65 billion in today's dollars. (Learn more about Chrysler's bailout history in Chrysler And The 1979 Bailout.)
Chrysler later "paid" back the government, but it never settled up for the lower cost of capital the explicit government backing gave it – rates lower than Ford (NYSE:F) got with its solid balance sheet. Fast forward to 2009 and the latest Chrysler bailout came in around $12 billion, although GM (OTC:MTLQQ) is in there now too. Once again, Ford has been left out in the cold when it comes to the support and tax breaks that were given to its weaker compatriots by the U.S. and countries around the world. It seems that history does repeat itself.
The Beginning of the End
On September 7, 1988, an SEC civil complaint was filed against Drexel Lambert. The firm became a Wall Street power broker during the LBO and junk bond craze of the 1980s, with the firm's own Michael Milken popularizing junk bond financing for LBOs and hostile takeovers. The complaint eventually led to Drexel's bankruptcy, as the players involved began to talk. The Drexel Lambert saga was immortalized in "The Predators' Balls", a book that gets its title from an annual Drexel Lambert event where raiders, financiers and even target company executives would gather. (Learn more about the junk bond scandal in 4 History-Making Wall Street Crooks.)
"Neutron Jack" Retires
On September 7, 2001, Jack Welch retired as the CEO of General Electric (NYSE:GE). By this time, Welch was one of the most famous CEOs in the world, well-known for his demanding management strategies and focus on corporate culture. During his tenure, Welch created a soft economic moat for GE, delivering double-digit growth that was thought impossible for the old stalwart. Welch's superstar CEO status is a double-edged sword in that it spurred many companies to spend even more on their management in the hope of building a team like Welch assembled at GE. That said, Welch's record did confirm that the right CEO could be worth a multimillion-dollar salary. (Find out more about Welch's storied career in You Don't Know Jack Welch.)
Fan and Fred Join the Bailout Family
On September 7, 2008, it became clear to the public that Fannie Mae and Freddie Mac would be placed in "public conservatorship" – a term that means "bailout" without having to say it outright. This extraordinary measure meant that taxpayers were on the hook for the trillions in mortgages that Fan and Fred oversaw.
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The government mandates for affordable housing that the two operated saw the risk and the size of their balance sheets balloon leading up to the subprime meltdown. However, investors still held onto these government-sponsored enterprises (GSE) due to the implied backing of the U.S. government. While they were proved right when implied backing became explicit backing, the toxicity of Fannie's and Freddie's balance sheets meant that there was no money to be made for anyone – and little to be salvaged. To date, the bailout of these former GSEs has lasted two years and cost more than $140 billion. (For related information, see The Government And Risk: A Love-Hate Relationship.)
The Day the Earth Stood Still
Of all the stories that occurred on September 11, 2001, the financial ones were the least significant. However, the destruction of the World Trade Center marks one of only a handful of occasions when the New York Stock Exchange was shut down. After a four-day shutdown, the NYSE opened again to record volume of more than two billion shares.
That's all for this week. Next week we'll look at the greatest currency trade ever and much more.
Find out what happened in financial news this week with Water Cooler Finance: The New iPod And The Roller Coaster Market.