Newsweek January 6, 1975, UNITED STATES EDITION
FINANCE:
Reviving the RFC?
It's a nightmare that shakes economists awake in a cold sweat: a big corporation goes bust because of a liquidity squeeze and this sets off a chain of events that turns a recession into a crushing depression. As the recession deepened last week, the illiquidity fear was very real.
Thus, a number of powerful and diverse voices - including William McChesney Martin Jr., former Federal Reserve chairman; Felix G. Rohatyn, the New York investment banker; Henry Ford II; Frazar B. Wilde, chairman emeritus of Connecticut General Life Insurance Co. (opposite page), and the Democratic Party leadership - were pushing a controversial remedy to avert an economic calamity. They were calling for the revival of the long-defunct Reconstruction Finance Corp., which bailed out thousands of banks, railroads and businesses during the Depression through massive loans and investments. Congress killed the RFC in 1954 amid charges that it had been swayed by favoritism and political influence when making loans.
Proponents of a new RFC say that the agency is needed because corporations are overburdened with debt at a time when sources of capital are drying up and the economy is slumping. They argue that there is simply no way for many financially troubled corporations to get needed capital unless it comes from a source - such as a new RFC - that does not now exist.
Many opponents of a latter-day RFC assail it as socialistic and a bail-out for big business. Other critics warn that such an agency, drawing its funds from the U.S. Treasury, would simply worsen the country's economic woes by fueling inflation. Still others question whether the agency is needed. They note that most of the RFC's old lending functions have been taken over by the Small Business Administration, Department of Agriculture, Federal National Mortgage Association and other government agencies.
According to investment banker Henry Kaufman of New York's Salomon Brothers, the main beneficiaries would be big corporations that have been poorly managed and have run up big losses. He questions whether such firms deserve to be helped. SBD