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Government Intervention (Bailout) - Term Paper Example

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RUNNING HEAD: THE US GOVERNMENT BAILOUT PLAN Name Date Class Instructor Most financial experts are of the opinion that investment banks are converting to holding companies in a bid to survive the financial crisis. The mortgage crisis in the US had adverse effects on many investment banks, and this is a strategy to avoid further damage in preparation for the future…
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Government Intervention (Bailout)
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Download file to see previous pages According to Nelson (2008), one of the main reasons that made investment banks undergo this transformation is panic. Panic is often the indirect result of any financial crisis, and banks have their own usual set of standard reactions in any financial crisis or recession. Since many financial companies, some of which were considered market leaders like Lehman Brothers have collapsed, there is panic among the remaining investment banks. The collapse of large banking industries puts pressure and fear in the banking world. Some of them the remaining banks are financially stable, but due to the fact that the financial market is unpredictable, they seek to consolidate their position through transformation to bank holding companies. Therefore, even though they have financial security, their own feelings of fear are dictating their responses to the market. Transformation to holding companies will enable the companies to have access to large deposits, which is considered to be a funding method that is more stable. Therefore, panic is one of the leading factors in the bank reactions to the economy and the United States government’s bailout plan. Other issues are also affecting the banking response in the United States. According to Plantin (2007), another reason for the change to holding banks is that the investment banks have realized that the model that propelled them to their success does not work anymore, as evidenced by the mortgage crisis, which necessitates a change in strategy. Changing up focus and goals can often be difficult for banks, since they are such large financial institutions, and therefore movement and change can be not only difficult, but frightening. The investment banks have realized that unlike them, commercial banks can mitigate risks through use of deposits from mortgages and savings accounts that are held by customers. This is in contrast to their operations which use majority of financing from other banks, and this is prone to uncertainty, since such transactions can be recalled at any time, sometimes using mere telephone calls. Such investment banks have seen it fit to change their nature of operations and venture into commercial banking business that poses lesser risks. So a change of strategy is imminent, although usually slow in large financial institutions, and also quite stressful, only adding to the panic that banks are currently feeling. There is still one more aspect left to consider as far as the banks are concerned. Another major reason that has made investment banks convert to holding banks is to place them in a better position to benefit from various initiatives introduced by the Federal government to support institutions in the US financial sector. This is a response to the Bailout and will hopefully see banks improve their economic situation during this crisis. There are several benefits of shift to bank holding companies that need to be addressed in order to create a better understanding of the bailout concept. The access to large deposits will enable the companies to increase the effectiveness of their operations throughout the globe. In fact, some experts say that American Express stands to gain by as much as $3.8 billion. American Express' application was approved a month after applying for it (Sloan, 2008). This is due to the reason that while they were investment banks, they only had ...Download file to see next pagesRead More
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