SAN FRANCISCO — The U.S. plan to ease the credit crisis by investing in banks retraces steps taken during the Depression by an agency that accomplished its mission — but became a sprawling bureaucracy that dissolved amid fraud and corruption allegations.
The Reconstruction Finance Corp., formed in 1932, proved that making the government a shareholder in thousands of banks can restore order during periods of financial chaos.
Another heartening outcome: The RFC was repaid the roughly $1.1 billion it invested in nearly 6,800 banks. That suggests the same could happen this time, as the government invests $250 billion, or about $1.6 billion in 1933 dollars.
“I believe the government has a fair chance of making its money back because it is buying when smart investors should be buying — when everyone else is terrified,” said Alex Pollock, a resident fellow with the American Enterprise Institute.
Banking lawyer H. Rodgin Cohen, chairman of global law firm Sullivan & Cromwell, also is optimistic, partly because “banks aren’t in as bad a shape” as they were during the Depression.
But the RFC’s history also provides a critical lesson about the unintended consequences of taking such an extraordinary step. Initially conceived as a stopgap agency, it wound up spending about $50 billion before shutting down in 1957. Its tentacles extended far beyond banks as it subsidized farmers, helped the U.S. effort in World War II, invested directly in other U.S. businesses and even intervened in the gold market.
This time around, Washington has committed only to investing in banks. But opening such a Pandora’s box is bound to increase pressure to save other companies, said Robert Bruner, dean of the University of Virginia’s Darden School of Business. “My gravest concern is where do you stop?” he said. “There are number of industries in free fall, like autos, airlines and newspapers.”
Pollock said it would be important to set provisions requiring the program to disband after it achieves its goals.
