Bailouts

August 12, 2026

Central bank bailouts

Here’s a review of major financial crises in the U.S. and Europe in recent years.

Most involved too-big-to-fail firms,[1] most were caused by runs on short-term debt, especially repurchase (“repo”) agreements, and all were resolved by complex bailouts.[2]

1998: The Fed[3] convinced 14 of the nation’s largest banks to invest $3.6 billion to keep the Long-Term Capital Management hedge fund’s losses from damaging world markets. A key reason for the hedge fund’s collapse was a run on the fund by its repo lenders.[4]

2001: After the terrorist attacks of 9/11, the Fed had to take historic steps[5] to keep the stricken repurchase market alive.[6]

2007: Between 2007 and 2010, the Federal Reserve, the FDIC and the U.S. Treasury evoked emergency powers and poured trillions of dollars into the worldwide financial markets[7] to control a global financial crisis triggered by a run on repo.[8] Major financial institutions were saved, a 1929-style crash was averted and JP Morgan Chase[9] (assets at $1.56 trillion) acquired failed competitors and grew. Meanwhile, more than eight million Americans lost their jobs and the net worth of American households fell by more than $10 trillion,[10] “… a definitive moment in the rise of wealth inequality within America,” said some economists.[11]

2010: Greece’s debt problems caused panic among investors who used Greek debt as repo collateral, and the European Central Bank had to intervene in May. In November, the scenes replayed with Irish debt as the troublesome collateral.[12]

2014: U.S. Treasuries, which investors often buy with repo loans and use as repo collateral, suffered a “Flash Rally”[13] shock in October, “unprecedented in the recent history of the Treasury market,”[14] forcing the Fed to launch a series of studies and changes.[15] This panic was when we learned that even Treasuries are vulnerable to repo runs.[16]

2017: Crises at two Italian banks were resolved with lots of government intervention.[17]

2019: In September an unexpected massive spike in the interest rate on repo loans forced the Fed to lend billions of dollars into the repo market and buy Treasuries[18] to fortify that market.[19]

2020: When COVID-19 hit in March 2020, the Fed and other central banks had to intervene in a “Dash for Cash”[20] crisis, beyond anything they tackled in the 2007 crisis,[21] to try to prevent another financial collapse.[22]

2022: British pension plans used repo loans to buy investments as a way to try to solve their underfunded problems. Market turmoil rocked repos and swap derivatives and forced the Bank of England to intervene to avoid a pension meltdown.[23]

2023: Three U.S. banks failed in an otherwise healthy economy, and depositors started taking their money out of other banks.[24] Instead of letting the banks fail, as regulations require,[25] the FDIC launched a bailout of all depositors and the Fed started a fund to stabilize other troubled banks.[26] JP Morgan (assets now at $3.5 trillion) acquired failed competitors and grew, while other FDIC-insured banks have to pay for the intervention.[27]

2023: Swiss authorities decided they couldn’t let megabank Credit Suisse fail, because it could trigger a panic in global financial markets, and instead they convinced even larger megabank UBS to acquire Credit Suisse.[28]

2025: Seeing that its Standing Repo Facility was not serving as a reliable source of cash for repo traders as hoped, even though regulators had made several key adjustments, the Fed restarted quantitative easing (buying securities) to calm end-of-year financial markets[29] and that continues in 2026.[30]

After Italy bailed out two banks in 2017 and the U.S and Switzerland bailed out four in 2023, some observers concluded that the goal to let failing banks fail — set by the Dodd-Frank Act in 2010[31] and by various European regulations[32] — has failed.[33]

“I have come to the realization in recent weeks that a globally active, systemically important bank cannot simply be wound up according to the ‘too big to fail’ plan,” Swiss Finance Minister Karin Keller-Sutter told reporters.[34]

“Thanks for telling us,” wryly commented the Wall Street Journal editorial board.^[35]

The Fed’s Bailout Machines

How does the Fed bail out the financial markets? Here are the Fed’s three main bailout machines.

Read about how this all works here.[44]

Watch the daily volumes of the first two programs here.[45]

But sh-h-h-h. Don’t call any of it “bailouts.”

(1) The Overnight Reverse Repurchase Agreement Facility,[36] where approved banks, government agencies and money market funds can park money at a decent interest rate. At year end 2025 it held $106 billion,[37] mainly from money market funds.

(2) The Standing Repurchase Agreement (Repo) Facility,[38] where Primary Dealers and banks can get cash. Concerned that traders weren’t using the facility, the Fed has redesigned it several times recently to make it more attractive. For example, the Fed added a morning auction to the afternoon-only schedule, eliminated the $500 billion daily limit, authorized up to $40 billion per request, and changed the name of the facility to Standing Repo Operations. That worked. On Dec. 31[39] firms, mainly banks, drew out a record $74.6 billion in repo loans collateralized with $31.5 billion in Treasury bonds and $43.1 billion in mortgage-backed securities, helping to soothe any year-end raw nerves. In 2026 traders are using the facility when needed.

(3) Quantitative Easing,[40] where the Fed buys securities from the financial markets to inject cash. The Fed began the most recent quantitative easing on December 12[41] and announced it would buy $40 billion of T-bills a month at least until tax-time in April. Throughout 2026, the purchases are continuing.[42] But the Fed isn’t calling this “quantitative easing.” The Fed’s calling this “Reserve Management Purchases.”[43]

Bailouts hurt Main Street Americans

Bailouts help Main Street Americans by preventing 2008-style financial catastrophes.

But they also hurt Americans, in many ways:

Bailouts subsidize the rich, promote inequality, encourage speculation and risk-taking, draw Wall Street money away from middle Americans and jobs, and threaten the Fed’s credibility as a force for all Americans. The Fed bails out Wall Street, not Main Street.

Bailouts also are a big financial hit to American taxpayers. That’s because when the Fed makes a profit, it gives that profit to the U.S. Treasury, often about $10 billion a month. But because of the bailouts, the Fed is losing money for the first time in its history, and it stopped making monthly payments to the U.S. Treasury in September 2022. So far, that’s a potential $480 billion we don’t have to help us pay down our debt, and the monthly shortfall continues.

“Governments and central banks have expanded their ‘safety nets’ far beyond banks and now protect the entire financial system … thereby undermining market discipline, stimulating dangerous asset bubbles, and increasing social inequality,” said Arthur Wilmarth, professor emeritus of law at George Washington University Law School and author of Taming The Megabanks, Why We Need a New Glass-Steagall Act.

Footnotes:

[1] https://www.fdic.gov/analysis/cfr/bank-research-conference/annual-22nd/papers/baron-paper.pdf

[2] https://www.federalreservehistory.org/essays/fdicia and https://www.federalreservehistory.org/essays/dodd-frank-act

[3] https://www.federalreservehistory.org/essays/ltcm-near-failure and https://tellerwindow.newyorkfed.org/2025/10/16/nbfis-in-focus-the-basics-of-hedge-funds/

[4]https://repowatch.org/1999/05/01/789/

[5] https://www.federalreservehistory.org/essays/september-11

[6] https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n2/0211flempdf.pdf

[7] https://www.brookings.edu/wp-content/uploads/2018/08/2018-09-10-10am-FINAL-Crisis-deck-00-85.pdf and https://repowatch.org/2014/04/21/2008-fed-meetings-give-blow-by-blow-of-crisis/ and https://www.federalreserve.gov/publications/files/financial-stability-report-20250425.pdf

[8] https://www.nber.org/papers/w15223

[9] https://repowatch.org/jp-morgan/

[10]https://home.treasury.gov/news/press-releases/jy2618

[11] https://hbr.org/2018/09/research-how-the-financial-crisis-drastically-increased-wealth-inequality-in-the-u-s