Government Bailouts Through the Years

This year, we've seen an extraordinary string of U.S. government-led or engineered multibillion-dollar bailouts of major financial companies -- from Bear Stearns to AIG (AIG Quote).

However, this is not the first time in history that a government has had to run to the rescue of an individual company or a whole financial system. And I have no doubt that 2008 will not be the last time, as there is likely to be another financial breakdown in the future that will arise from a yet unknown set of risks.

2008: Bear Stearns and Beyond

In March, Bear Stearns, faced with a liquidity crisis was taken over by JP Morgan Chase (JPM Quote), aided by Federal Reserve loan guarantees. Absent these loan guarantees, Bear Stearns would go bankrupt and accelerate the bad debt-induced liquidity crisis across other banks and broker-dealers.

By September, the GSEs (governmental sponsored entities) of Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) were in the proverbial financial hot seat. The implicit guarantee of these GSEs became explicit guarantees as Uncle Sam stepped in and took over these two failed mortgage giants.

This month, we also saw the roughly $85 billion in loans given to AIG (AIG Quote) to help prevent the global insurance company from defaulting on its debt and derivative contracts. Unlike the deal with Bear Stearns, the government received equity warrants as part of the deal with AIG, while AIG remained a public company.

And just this morning, the Federal Deposit Insurance Corp. (FDIC) announced that it facilitated a deal to save Wachovia from failing. How? Citigroup (C Quote) will buy Wachovia's senior and subordinated debt as well as its banking operations. (Don't miss: "Citi Buys Wachovia Banking Operations")

Now as U.S. lawmakers on Capitol Hill work to strike an accord for a rescue of our entire financial system, here is a look back at three cases of government intervention in the private sector, and how each one played out.

1982: The Latin American Debt Crisis

What happened: Over the course of nearly a decade, beginning in the early 1970s, countries such as Mexico, Brazil and Argentina (to name a few) amassed record amounts of debt. Unlike the financial engineering that helped cause our current crisis, this huge debt was the result of Latin American countries trying to emerge as modern economies.

Fueled by increasing crude oil prices, natural resource-rich Latin American countries saw their exports rise. However, rising crude oil prices resulted in global runaway inflation, which caused Latin American countries to borrow heavily to support their existing account deficits. These countries relied on foreign debt, which was increasingly subject to higher interest rates. A recession in 1981 led to a drop in crude oil prices, but not a corresponding drop in interest.

Capital began to flow out of Latin America, particularly its largest debtor nation, Mexico. This resulted in massive depreciation of the Mexican Peso and other Latin American currencies. In August 1982, Mexico declared that it could no longer service its debt.

The workout: In stepped the IMF (International Monetary Fund) and World Bank to stabilize the credit crisis in 1982. The IMF and World Bank forced the debtor nations to restructure their debt and agree to a strict domestic economic program which would focus on reducing government spending and restrict domestic economic policy.

Many U.S. institutions were the creditors of the Latin American countries, so in 1989, U.S. Treasury Secretary Nicholas Brady devised a plan to convert the Latin American bank debt into a new structure called a "Brady Bond." Brady Bonds were U.S. Dollar denominated bonds which were collateralized by zero coupon U.S .Treasury bonds. The debtor nations would exchange their defaulted bank debt for Brady Bonds and then purchase the zero coupon bonds. The zero coupons were held in escrow by the U.S. Federal Reserve.