A Project of The Annenberg Public Policy Center

Did Lugar ‘Bail Out’ NYC?


Club for Growth exaggerates when it claims Sen. Richard Lugar voted to bail out New York City "back in the 1970s" at a cost of $9.4 billion. Lugar was mayor of Indianapolis when Congress passed the famous 1975 New York City bailout. He did vote for a 1978 bill that provided the city with $1.65 billion in federal loan guarantees — but it cost federal taxpayers $0.

The main point of the ad is also exaggerated. It implies that Lugar's votes for the bailouts of Wall Street, car companies and two federal mortgage agencies have added more to the national debt than is actually the case.

New York City, 1978

The conservative Club for Growth released the ad, which it calls "Debt," in Indiana on July 11. It criticizes the Indiana Republican for adding to the national debt by voting for several federal bailouts over his 35 years in Washington. "What's he done about our debt?" the ad asks, before launching into a series of Lugar's votes.

The ad says Lugar voted for "the Wall Street bailout, the car company bailout, the Fannie Mae and Freddie Mac bailout." That's all correct (although we will have more to say about that later). The announcer goes on to say that "back in the 1970s, he even voted to bail out New York City." The ad displays text on the screen that reads: "Lugar voted for: New York City bailout. $9.4 billion." That is not true.

When we asked about the New York City bailout, Club for Growth cited Lugar's vote for the New York City Loan Guarantee Act — which President Jimmy Carter signed into law in 1978. It's true that Lugar voted for that bill — along with 57 other senators on the final vote. It provided New York City with a federal loan guarantee, allowing the city to obtain lower interest rates on bonds and loans, because the federal government guaranteed it would assume liability if the city defaulted. The law guaranteed up to $1.65 billion, if the city defaulted on its loans.

A 2008 Congressional Research Service study called "The Cost of Government Financial Interventions, Past and Present" notes that loan guarantees "may have little or no initial cost to the government." In this case, the CRS report says in Table 1, the "final cost to the Treasury" of the New York City loan guarantees was "[n]one, except for the implicit value of the loan guarantee."

Lugar not only voted for the bill, but guided its passage and proposed an amendment that changed the initial $2 billion loan guarantee limit to $1.5 billion. (Later it was increased to $1.65 billion at the Senate-House conference meeting.)

The 1978 bill was the second time in three years the city of New York sought federal help. In 1975, the city teetered on the edge of bankruptcy and appealed to President Gerald Ford for help. Ford rebuffed the city at first, prompting the New York Daily News to pen the famous headline: "Ford to New York: Drop Dead." But, in December 1975, Ford relented and signed the New York Seasonal Financing Act. That bill provided a $2.3 billion direct loan to the city.

But Lugar had nothing to do with the 1975 bailout. He was then the mayor of Indianapolis. He was not elected to the Senate until 1976. Also, it's worth noting, even this bailout didn't cost the federal government anything in the end. Pro Publica, a nonprofit investigative website, reports that "all the loans, loan premiums and fees have since been repaid."

Other Bailouts

The TV ad also exaggerates the costs of bailouts for Wall Street and the auto industry.

The announcer says that Lugar voted for the Wall Street and auto industry bailouts, which is true, but the screen shows a price tag of $700 billion for Wall Street and $64 billion for the auto industry — misleading viewers into believing that Lugar added $764 billion to the national debt. He didn't. 

Both industries were bailed out by the Troubled Asset Relief Program, which was created under a bill then-President George W. Bush signed into law in October 2008. As the nonpartisan Congressional Budget Office explained in a November 2010 report, the "authority for the Troubled Asset Relief Program was originally set at a maximum of $700 billion; however, that total was reduced to $475 billion in the Dodd-Frank Wall Street Reform and Consumer Protection Act." The total disbursed under that law, as of July 14, 2011, was $412 billion.

And TARP did not wind up costing taxpayers $412 billion, either.

Federal taxpayers turned a profit on the money spent to rescue financial institutions, including those on Wall Street. Treasury issued a press release July 5 saying that the "taxpayers have now recovered approximately $255 billion from TARP’s bank programs through repayments, dividends, interest, and other income. That exceeds the original financial support Treasury made through those programs ($245 billion) by approximately $10 billion."

The auto bailout is a different story. As we have written before, the auto bailout initially cost taxpayers nearly $80 billion, and about half of that has been paid back.

The bottom line on TARP: As of July 14, the federal government has recovered about $310 billion of the $412 billion it has spent so far, leaving about $102 billion outstanding. American International Group owes about half of that, or roughly $54 billion. (Treasury provides daily TARP updates.)

As for the bailout of Freddie Mac and Fannie Mae, the TV ad lists the cost at $163 billion. Close enough. In congressional testimony delivered June 2, CBO financial analyst Deborah Lucas said the federal government, as of March 2011, provided $154 billion in capital to the two mortgage giants and received $24 billion in stock dividends, for a net cost to taxpayers of $130 billion.

We take no position on the merits of these bailouts. We do find, however, that Club for Growth exaggerates the impact of Lugar's votes on the federal debt.

— Wendy Zhao and Eugene Kiely