Bank Bailout 2008

Bank Bailout Outline I. Introduction II. stage setting III. inverses point 1, refute, 1st support for thesis. a. doctrine cod Act of 2009 b. No Change at on the whole, Banks lighten operating the identical way IV. Oppositions point 2, refute, 2nd support for thesis. a. universe of tarpaulin b. $12. 2 trillion dollars of revenue enhancement dollars were spent wrong c. TARP allowed many an(prenominal) curses to allow source once again d. A volume of banks stick paid back TARP bills e. After TARP, Economy boosted V. Oppositions point 3, refute, 3rd support for thesis a. Toxic assets pot non be removed easily b. Government counts to a greater extent than address, so expects c.Economy impart decomposition with removal of assets VI. 4th support for thesis a. Increased national debt b. Politicians were oblige to sign this bill c. No solving of problems Lets go for we are all wealthy and retired by this house of tease falters (Bloomberg, 2007). The faith crisis is k promptlyn as the House of wittinesss, for years the banking industry has transform many American lives, which has resulted in a trouble nigh economy. many an(prenominal) factors lead to the character reference crisis, such as the rise and fall of the housing commercialise, and wide opinion ratings helped to realize the sub-prime mortgage crisis (Issues & Controversies, 2010).Low interest outranks developed elementary commendation, in which stack could get a mortgage and reference work cards based on inaccu lay out credit ratings with the creation of sub-prime mortgages. People demand the tycoon to own a shell base, with no shine acquitment or fixed income. In August of 2007, the United States began a manusout of authorization in securitized mortgages, which resulted in the federal Reserve injecting $20 trillion dollars into the pecuniary markets to ease the situation (Obama Sends Warning to Big Banks, 2010).The most important wonder to be answered in the decade is How a loss of $500 cardinal dollars from the sub-prime mortgage resulted in a $20 trillion dollar loss in equity set and an entire shock to the worlds pecuniary governance (Woellert & Kopecki, 2007). The United States organisation should not take a crap abandoned the monetary institutions bailout money, because fiscal institutions using loop holes in the system to take advantage of their clients, financial institutions operations do stayed the alike, and the governments imprint of a tree market economy goes against the bailout.The credit crisis is a widely distributed financial fiasco, which resulting from sub-prime mortgages, Collateralized Debit Obligations, Frozen credit markets, and credit default swaps (Jarvis, 2009). The credit crisis brings two concourse together, people on Main way and investors. The people on Main Street champion their mortgages or houses, while investors represent their money, which similarly represents big institutions such as pension funds, insurance companies, unwashed funds sovereign funds (Jarvis, 2009). These groups brought through the financial system, composed of banks and brokers on Wall Street.As a result of the September 11th attack, Chairman Allen Greenspan take down interest rates still to 1%, to allow credit to string up however, investors hold in a very low return on investment (S in a flash, 2008). By lowering interest rates, it allows for banks to only borrow money from the Federal Government for 1% plus the surpluses from the Asian and Middle East market, which makes adoption money easy for banks and to allow leverage (Adding up the Governments Total Bailout Tab, 2009). The definition of leverage is, borrowing money to amplify the result of a deal and is a study way banks make their money (Princeton University, 2010).Wall Street takes out a mass of loanwords and uses leverage to their advantage, and a non-buoyant flow of capital comes in. In which return, they pay back their original investment. The investors observance that Wall Street is making money very fast, and they want to create a tonic product to sell to Wall Street. The mortgage connects the home misdirecter with a mortgage lender on Wall Street who books them a mortgage, which is great because housing prices throughout America form been rebellion (Bailed out banks, 2010).The mortgage lender gets a call from an investment banker who wants to buy the mortgage and the lender sells it to him, and the investment brokers buys thousands of mortgages. Every month the investment banker gets the payments from all the mortgages that he purchased from the box and cuts the box into three slices Safe, Ok and Risky, and wherefore he packs the slices into the box and calls it a Collateralized debt obligation or CDO (Woellert & Kopecki, 2007).However, greed has locomote to the investment banker and wants more mortgages however, the lender does not have any more mortgages to sell, because everyone who has qualified for a mortgage already has one and the birth of the sub-prime mortgage is born. With a standard loan, the homeowner had to prove his cost of a home, such as a job, good standing citizen, and assets. However, with a subprime mortgage, it was basically resembling free money. The person did not have to state their income, nor prove that you had a job.The investment banker and the lender are pickings a risk, because if a home owner defaults on their mortgage, the lender gets the house and sells the house for a remuneration because home value have been increasing (Issues & Controversies, 2010). While home values have been increasing, American incomes have been plummeting for years and because of sub-prime mortgages, the person did not have to prove income, a person with a $30 thousand dollar income could own a $300 thousand dollar home. Many people defaulted on their mortgages, and foreclosures have been on the rise. In the United States, foreclosures were up 81% in 200 8 and up 225% from 206, which equals out to 19 per 1,000 households (CBS News, 2008). Due to there was a huge profit in foreclosures, instead of housing prices increasing the houses values decreased in value very quickly and resulted in more foreclosures. A $300 thousand dollar mortgages was now only worth $75 thousand dollars. So all the mortgages that was in the investment banker CDO, now are worthless, and no one wants to take the CDO, and now the CDO is acting alike(p) a bomb (Roney, 2007).The investment banker is now panicking because he borrowed millions of dollars to buy the mortgage, and now he cannot get rid of it however he is not the only one. Thousands of investment bankers throughout the world have CDOs on their hand (Bailed out banks, 2010). In result the worlds financial system has become frozen, and everyone places going bankrupt. As a result of the failure, the United States government rolls out a new program called Troubled Asset allayer Program (TARP) to preve nt an some other bank failure.Under the bank bailout, creation of new legislation to protect the consumer has rapidly increased, and supporters of the bank bailout point to the Credit Card Act of 209. Not only were subprime mortgages affected, but due to the check in the credit market in the United States government needed a way to regulate the credit card industry, but also to rock spending. Under the Credit Card Act of 2009, they require the financial institutions to give the cardholders 45 days notice of any interest rate change and financial institutions are prohibited from using misleading ground such as prime or fixed rate (The vacuous House, 2009).With this legislation in place, it protects the consumer from many of the scams that the mortgage industry used as bait to get clients into buying houses they could not afford, using the subprime mortgages (Roney, 2007). But also it allows for Congress to embrace new regulations placed on the financial institutions. The Credit Card Act of 2009 that has become part of the famous bank bailout, however, it has been shown to protect the consumer, and Congress go forth regulate the new rules placed on financial institutions.For example, there is no cap on the interest rate the credit card companies can charge, and while credit card companies cannot increase you interest rate but only if you are late on a payment, However future purchases interest rates can be raised with no reason (White, 2010). The credit card companies have the ability to raise the interest rate on any purchases, while they must still notify you of the high interest rate, the blow uping of the interest rate can take place at any time.This is exactly the same measures the financial institutions have used to misinform their consumers and kick them when they are down and corrupt the middle class of America (White, 2010). How the subprime mortgage boomed, had to come from the terms that many of the average consumers cannot understand, and a major aftermath of the subprime/credit crisis, occurred when many people defaulted on their homes and credit cards (Roney, 2007).Then the mortgage and home bequeath not exist for the family any more, and the credit card companies go away balloon their interest rate enough so that the card holders will not be able to pay their credit card/mortgage. In which hence the financial institution hounds them and attacks them at their core roots and even calls other family members to alert them of the card holder financial problems because they cannot pay their bills. The banking and financial institution have not taken any actions to prevent other(prenominal) credit crisis from happening again.Supporters of the bank bailout, commonly referred to as TARP, argue that the bailout wiped all the abominable toxic assets (CDOs) which were collected as result of the credit crisis and prevented the assets from lossing the financial institutions. The major recipients were Freddie Mac and Fannie Mae. Both were government owned enterprises which bought a majority of the sub-prime mortgages (Roney, 2007). Removing the good-for-nothing assets from the financial institutions will have a positive takings on the economy because it allows banks to start lending again and unfreeze the markets.Under TARP, some mortgages would require the government to rewrite some of the effected loans, effectively position more Americans into homes that they will be able to afford and by write the loans also increase the standard of living. John Douglas, general counsel at the FDIC, said, It doesnt make sense to give the authority to anybody else but the FDIC he goes on to say Thats what the FDIC does, it takes the bad assets out of the banks and manages them and sells them (Vekshin & Schmidt, 2009). However, the supporters of the bank bailout do not represent correct/valid points/facts.In a study by the IMF of the 124 banking crisis, they have concluded Existing empirical research has shown t hat providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse grace to take unproductive risks at government expense. The typical result of lenity is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit furnish contraction and stinting decline than would have occurred in the absence of forbearance. Valencia & Laeven, 2008) As a result of the IMF study, it has concluded that removing the bad toxic assets from the banks could actually hurt the financial institutions and a system as a whole could freeze the credit markets again with a result of an economic decline, instead of an economic incline. Also there is no definition of a troubled market or loan. If the government wants to rewrite troubled mortgages or loans, there are no set criteria to say whether a mortgage or loan should be taken by the government and given to the troubled family.Anot her point, as Steward said, The only way for this program to work is for enough of the bad mortgages/loans to be purchased to connivance lenders that the problem mortgages cannot hurt the system, or to put in simple terms, the government has to purchase enough mortgages/loans to inspire intra- institution (Stewart, 2008) Furthermore, the institutions will sell the assets that will remain depressed in value and no one is going to sell a asset that has a higher chance of making the institution money (Obama Sends Warning to Big Banks, 2010). In result, under TARP the government has a high probability of taking a majority of the loss.With the bank bailout, the economy will decline, and the government will take a great loss of the bank bailout. Supporters of the bank bailout will say that if the government did not step in and inject $20 trillion dollars into the market, an economic dissipate could have happened and set America into another Great Depression. A heavy incline of unemployme nt foreclosures were through the roof, a major decline in incomes (Solomon, Enrich, & Hilsenrath, 2009). America was becoming a very drear nation, and the bank bailout would help the economy and stimulate the financial institutions to help start lending and unfreeze the credit market.As one writer wrote, there was at no time better to inject the financial institutions at this time, if they collapse it may be the sign of the apocalypse (Bailed out banks, 2010)/ If there was no bank bailout, there is a major chance that this will be a sign of the apocalypse because the United States drives the world and if the major financial institutions such as Bank of America or Merrill Lynch fails and so the world economy could ultimately send the world in to another Great Depression.The major reason that the American government should not have passed the bank bailout was the cost to the government. Under the Bush administration, the national debit dual to a record high $10 trillion dollars (So lomon, Enrich, & Hilsenrath, 2009). There are more programs that the government has to pay for such as Social Security. Many economists call this the polluter pays which is defined as polluters must pay for the cost of cleaning it up (Princeton University, 2010).When the financial industry is bailed out of disasters, which a majority of the time throughout history, they have created those disasters. If the banking industry feels like they can be bailed out every time they make a major mistake, then the American people will pay because the bank bailout is directly affiliated to the taxpayers funds (Obama sends warning to Big Banks, 2010).A price tag of $700 meg dollar bailout has hidden costs which can go high as $3 trillion dollars, which can be the shortfall between the economies potentiality output and its actual output from the crisis (Issues & Controversies, 2010). Another factor in the bank bailout is the morality, because the banks do not pay the costs that are imposed on a world society, which the tax payers pay directly into the banks and then the banks pay back into the government. Also, the political had a major role in deciding to pass the bank bailout.A senator said, We had no choice. We had a gas pointed at our heads. Without the bailout, things would have been even worse (Woellert & Kopecki, 2007). While politicians did not have an actual gun to their head, figuratively speaking because they had a oversight on saving the banks and shareholders or have saved the banks but let the bankers and shareholders go because of the final strike hard that American tax payer will have to pay to the bailout the banks that created this muckle (Solomon, Enrich, & Hilsenrath, 2009).The bank bailout was a major mistake in the evolution of the financial world because it did not solve any problems people can still be charged higher interest rates on their credit cards/mortgages. With TARP, there is no true removal of the bad assets that caused the credit crisi s to form the bank bailouts it only hurts the government because it has to take on the debt. Truly, we have stroke the core of the American people with the credit crisis, but at the same time the financial world has been given more powers and in a free market enterprise, the credit crisis can happen again at any moment.