Federal Bailout in the US - Research Paper Example

In these times of great economic uncertainty, it becomes imperative for the government to seek solutions, that will hopefully assist their ailing national economic systems. For the United States, this will have been of the utmost concern. By the end of 2007, according to most accounts, the United States economy was entering into a period of very low economic performance that would translate into, among other things, considerably high unemployment numbers. At any point in time where more individuals find themselves out of work, that in turn, creates increased panic within the business world to the tune of questioning such things as work force levels and prices to place upon goods and/or services. With these higher unemployment numbers and the fear amongst those in the banking industry, more and more restrictions were placed upon the opportunity to guarantee new credit to consumers, while the already issued credit lines were at risk of being defaulted on. As a way to intervene in the matter, the federal government would seek to purchase existing debt from major banks, in the hopes of creating more room for new growth. Like anything else the government seeks to do, their plan for the banking industry would have its supporters, along with its vocal naysayers. With a considerable amount at stake going into the Presidential election of 2008, it would become important for both candidates to respond in their own ways, to the legislation that was being proposed by their fellow elected representatives and such legislation, that would be signed into law by the very man that each candidate was hoping to replace come November 2008. At the beginning of debate towards the end of the third quarter in 2008, the initial proposers of such action, would be then-Treasury Secretary Henry Paulson and current Federal Reserve Chairman Ben Bernanke. This action would see support from both men, the White House, along with both Presidential candidates and the Democratic leaders on Capitol Hill. Considerable opposition to the plan itself, would come from many Republicans, who felt it would be too much government control. In this case, “The first proposal for a sweeping bailout of financial institutions came at the height of the panic in mid-September, 2008. Mr. Paulson, with the backing of Mr. Bernanke, asked Congress for $700 billion to use to buy up mortgage-backed securities whose value had dropped sharply or had become impossible to sell, in what he called the Trouble Asset Relief Program, or TARP. As originally outlined, the government would have bought up toxic mortgage-backed securities at a premium over their current deflated values,” (“Credit Crisis”, para. 5). By doing so, the banks themselves would be able to reconcile the existing debt itself, thus wiping it out and would in turn, have the available capital to offer more loans to more people if so needed. While the plan itself would come to formation under the previous White House administration, the further implementation of the plan and the resulting ramifications, if any, would be most present for those individuals that who assume office in January 2009. “President Bush signed the $700 billion financial bailout package into law Friday afternoon after the House voted 263-171 in favor of the legislation,” (Hoover, p.1). While not a clear and decisive vote in favor of the plan, the majority of the US House of Representatives, would conquer with the President that, with the health of the economy as it was, something would in fact need to be done in order to bring life back to it. In considering the old cliche of people needing to spend money so that they can make money in business, this would ultimately be the idea for those behind the bailout plan. While the end result would only be assumed from the onset, the hope for a positive outcome would undeniable. The plan which would have garnered passage by the House, would not have been the first draft but rather, the second draft that would have been formulated after consideration being given by all stakeholders. The mortgage modification aspect of the bailout plan would be beneficial, essentially, as it would enable more people to maintain ownership of the very homes which they would have owned. By doing so, it would free up the underlying stress of keeping up with high rate mortgages and give rise to the ability to turn however much of the extra money saved, into increased spending in the greater marketplace. Business thrive when consumers feel as if they are able to purchase and consume what they wish. In that respect, whenever financial concerns proceed to take hold, that can lead to decreases in consumer spending that filter into the business system by means of decreased profits and the higher probability of laying off staff to offset losses. To best understand the nature of the plan from the perspective of those in favor of it, “Supporters of the bill pointed to provisions aimed at protecting the taxpayers. Companies that sell mortgages and mortgage-back securities to the government will be required to provide warrants to the government so taxpayers will benefit if the companies earnings improve. The bill also includes limits on golden parachutes and executive compensation for companies that participate in the program,” (Hoover, p.1). As millions of Americans would find themselves in the position of pinching pennies and being worried about their individual futures, it would be heartening to know that, as a part of the bill, there would be consideration given in regards to the prevention of corporate gain of excess while receiving federal aid from the bill. Ultimately, opening up the avenues of accessing credit for those who needed it for their purchases and giving those most affected, the opportunity to handle existing problematic debt that would have been accrued. A shift of sorts, would come shortly after the initial passage of the TARP bill. In regards to this period in time, “Shortly afterward, Mr. Paulson reversed course, and decided to use the $350 billion in the first round of funds allocated by Congress not to buy toxic assets, but to inject cash directly into banks by purchasing shares, an approach that many Congressional Democrats had pushed for earlier. In an initial round of financing, nine of the largest banks were given 25 billion apiece,” (“Credit Crisis”, para. 8). From a mathematical standpoint, that would mean that 9 of the largest banks, would in fact receive a combined total of half of the $700 billion marked for the bill itself. As part of this, the process would generally be that the larger banks, would in turn take ownership through outright purchase, or the smaller banks in the system. Unfortunately in this case, it would become apparent to some that, with the act itself of giving the banks these funds, the government may have intended that the banks would utilize the money for aiding consumers but in turn, gave no appearance of setting forward any form of requirements for how the funds were meant to be handled. Instead, it would have given the banks the opportunity, in most cases, of using these funds to act as a lining for the banks personal financial portfolio. The Congressional Research Service report, in discussing the financial turn of events, provides the following graph that illustrates the losses for the United States, as well as two other regions, that serves to bring forward the diar circumstances surrounding the economies themselves. The author of the report would be Dick K. Nanto, whose job description would have been a Coordinator and Specialist in Industry and Trade. As far as the United States was concerned, the information below is reported within the services findings dated January 29, 2009. Table 2. Losses on Selected Financial Assets (in billions of U.S. Dollars) United States Outstanding amounts Losses as of April 2008 Losses as of October 2008 Home equity loan $757.0 $255.0 $309.9 asset-backed securities Home equity loan ABS 421.0 236.0 277.0 collateralized debt obligations (CDOs)(c)(d) Commercial 700.0 79.8 97.2 mortgage-backed securities Collateralized loan 340.0 12.2 46.2 obligations Investment-grade 3,308 79.7 600.1 corporate bonds High-yield corporate 692.0 76 246.8 bonds Total 738.8 1,577.0 (Nanto, p.29). For any type of government assistance program, one of the questions to arise, would be the issue as to when the monies provided, would be paid back to the lender. With the lender in this case being the federal government itself, it would lead to greater implications if the money was not returned as promised. With this line of thinking, “On June 9th, after months of lobbying and strong performances on recent stress tests, the Treasury Department cleared the way for 10 big banks to start repaying billions of dollars in taxpayer aid, a crucial step in easing the governments grip after an unprecedented series of interventions,” (“Credit Crisis”, para. 17). The very repayment of these loans, that would further allay any doubt by consumers, in regards to the judgment shown by the government when it came to making such loans available in the first place. Most notably, “The first banks to return TARP funds included American Express, Bank of New York Mellon, the BB&T Corporation, Capital One Financial, JPMorgan Chase, the State Street Corporation and US Bancorp. Morgan Stanley, which needed to raise $1.8 billion after the stress test, also received permission, as did Northern Trust, a large custodial bank that did not undergo the stress test. Goldman Sachs was cited as the 10th bank,” (“Credit Crisis, para. 18). After receiving financial assistance from the government, these banks would in turn take the good faith shown to them and give such faith back by the repayment of the monies given to them in the first place. With what started out being an assistance program to aid those institutions that needed it, would become one that would see the majority of its recipients, repay that which would have been given to them. As of December 2009, Bank of America would make known its intent to repay what was given to them by raising money internally. “Once that payment is made, Citigroup would be the last big bank tethered to the state,” (“Credit Crisis”, para. 19). In the just over a year since the passage of the TARP legislation, 9 of the 10 largest banks, would fully return the funds provided to them. In further translation, the success rate of the operation would be calculated as 9 of the 10 banks, or a 90% return rate at the present time. Fortunately, the White House would have the opportunity to see its loss projections for the TARP program go down almost $300 billion, from where they were expecting them to be six months ago. Further visual representation of the impact of TARP includes the following graphs/tables provided at the end of this report. Both being provided by the article “How To Celebrate TARPs One-Year Anniversary”, written by JJ Hornblass. Conclusion The bailout itself was very controversial when it was first proposed. For those who wished to see it happen, they saw it as a way for the economy to grow. The opportunity for more people to feel as if they could spend and consume, while still being able to take care of their basic needs as they saw them. It would also be the opportunityy for the banking industries, such as Bank of America and Capital One, to name a few, to be able to handle any preexistingg debt they may have had within their corporate registries and in turn, give consumers the chance to gain access to new lines of credit. Credit that would give them the ability to make new purchases, or also, the chance to refinance an existing loan and achieve a more agreeable interest rate. From a political standpoint, the passage of such legislation, would reap potential benefits for the legislators themselves, in the form of favorable views from their respective states that they represent. With that being said, the ramifications as such, can also be mixed as each individual human being, takes the time to assess the broader strokes of the TARP legislation as it was written. From the climate of concern over corporate malpractice and questioning of motives, it would cause many to question the validity of providing major banks with such funding and no apparent guidelines for which to use the money. With the economy already strapped for cash, it would appear to be risky to loan such a considerable amount of money collectively to the banking industry and be faced with the debt while each and every bank worked to pay back what they were given. With the 90% payback rate of the ten major banks that were given the funds, leaving one still left to organize and pay back their funds, it would surely seem as if, at least for the most part, the TARP process would be working. It would also be promising that initial estimates of financial losses for the federal government, in regards to this plan, would actually be considerably lower as of the end of 2009, than they would have been the previous June. The importance of cultivating economic growth and saving it from further demise, would be something that many would see as a positive and a must to occur. Deciphering the financial and political language abound and delving into the short term, as well as the long term, results of the cash infusion into the marketplace that would transpire in large part, due to the financial bailout that members of the executive and legislative branches of government would have fought to see happen. With the need to best serve the general populous by providing the necessary means that would allow economic prosperity, there are never sure answers as to how best to go about attempting that. Intentions may be true and the best of information may be given that would have been had at the time but in the case of the economic crisis that would have facilitated the need for TARP, the outcome of the legislation would be continuously seen throughout the circumstances surrounding the language of the bill and those who participate with its implementation. Economists alike would seek to consider the avenues within the written verbiage of the bill and take apart the language of the bill, piece by piece, as a way of deciding whether or not the bill itself, could be considered sound or not. Both graphs provided by (Hornblass, 10/5/09). These graphs truly to summarize the weight of the TARP legislation as it stands. Illustrating the amount of funds already allocated, while also taking note the among of funds not already provided. With the end of the 2009 calendar year drawing to a close, the question remains as to how much longer the US economy will continue to perform as it has. For the most part, the economic health of the nation has improved, as what man have alluded to but in all honesty, not to the levels at which most would have hoped for. While a considerable chunk of the bailout money will already have been dispersed, according to the pie chart above, a sizable amount of funding still remains present and needs to be taken care of. With the danger of foreclosure being seen by millions of American homeowners, it would be very disheartening to those individuals, to see the amount of money spent to assist them, pail in comparison to the amount of money spent on helping banks and the auto industries for one. The possible logic behind the allocation of funds to the banks, has already been addressed in detail. The average American taxpayer will remain the primary owner of the financial assistance given as part of the TARP plan. Whether that will be seen in increased tax plans, that is not quite certain as of yet. References “Credit Crisis-Bailout Plan”. (2009). The New York Times Online. Section: Times Topics. Paragraphs 5, 8 &17-19. Retrieved from http://topics.nytimes/com/reference/ timestopics/subjects/c/credit_crisis/bailout_plan/index.html?inline=nyt-classifier Hoover, Kent. “Bush Signs $700B bailout bill into law”. (2008). Triangle Business Journal. Retrieved from http://triangle.bizjournals.com/triangle/stories/2008/09/29/daily64.html Hornblass, JJ. “How To Celebrate TARPs One-Year Anniversary”. (2009). Retrieved from http://www.bankinnovation.net/profiles/blogs/how-to-celebrate-tarps-oneyear Nanto, Dick K. (2009). The U.S. Financial Crisis: The Global Dimension with Implications for U.S. Policy. Congressional Research Service. Page 29. Retrieved from http://graphics8.nytimes.com/images/2009/02/02/business/CRSGlobalDimension.pdf Read More