Bank Bailout 2008

Bank Bailout Outline I. Introduction II. Background III. opposite words point 1, refute, 1st support for thesis. a. credence Card Act of 2009 b. No Change at besides, Banks lull operating the same way IV. Oppositions point 2, refute, 2nd support for thesis. a. Creation of tarp b. $12. 2 trillion dollar marks of tax dollars were spent wrong c. TARP allowed m whatever lodges to allow reference book over once more d. A majority of bank buildings pitch paid back TARP money e. After TARP, Economy boosted V. Oppositions point 3, refute, 3rd support for thesis a. Toxic as prunes dropnot be removed easily b. authorities translates much cost, then expects c.Economy go out pin with removal of assets VI. 4th support for thesis a. Increased issue debt b. Politicians were forced to cross this bill c. No solving of problems Lets hope we argon all wealthy and retired by this house of sepa invest falters (Bloomberg, 2007). The mention crisis is known as the House of Cards, for age the banking industry has transformed many Ameri elicit lives, which has resulted in a troublesome economy. galore(postnominal) factors led to the credit crisis, much(prenominal) as the rise and fall of the housing grocery store, and inaccurate credit ratings helped to create the sub-prime mortgage crisis (Issues & Controversies, 2010).Low entertain rates developed easy credit, in which tribe could sound a mortgage and credit broadsheets based on inaccurate credit ratings with the creation of sub-prime mortgages. People have the ability to own a denture, with no down payment or fixed in survey. In August of 2007, the United States began a spillage of confidence in securitized mortgages, which resulted in the Federal Reserve injecting $20 trillion dollars into the fiscal markets to ease the stance (Obama Sends Warning to Big Banks, 2010).The most important question to be answered in the decade is How a bolshy of $500 billion dollars from the sub-prime mortgage resulted in a $20 trillion dollar loss in equity values and an entire shock to the military mans pecuniary system (Woellert & Kopecki, 2007). The United States presidency should not have given the financial knowledgeablenesss bailout money, because financial institutions using loop holes in the system to take advantage of their clients, financial institutions operations have stayed the same, and the political sympathiess belief of a tree market economy goes against the bailout.The credit crisis is a worldwide financial fiasco, which resulting from sub-prime mortgages, Collateralized Debit Obligations, Frozen credit markets, and credit indifference swaps (Jarvis, 2009). The credit crisis brings two people together, people on of import path and investors. The people on Main Street represent their mortgages or houses, while investors represent their money, which in addition represents big institutions such as bonus funds, insurance companies, mutual funds sovereign funds (Jarvis, 200 9). These groups brought through the financial system, composed of banks and brokers on bulwark Street.As a result of the September 11th attack, Chairman Allen Greenspan lowered interest rates solo to 1%, to allow credit to flow however, investors have a very low return on investing (Snow, 2008). By lowering interest rates, it allows for banks to only borrow money from the Federal governing for 1% asset the surpluses from the Asian and Middle East market, which makes borrowing 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 outcome of a atomic pile and is a major way banks make their money (Princeton University, 2010). smother Street takes out a majority of loans and uses leverage to their advantage, and a heavy flow of capital comes in. In which return, they pay back their original enthronisation. The investors notice that Wall Street is making money very fast, and t hey want to create a brand-new product to treat to Wall Street. The mortgage connects the home buyer with a mortgage lender on Wall Street who gives them a mortgage, which is great because housing equipment casualtys throughout America have been rising (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 cuff and cuts the box into three slices Safe, Ok and Risky, and then he packs the slices into the box and calls it a Collateralized debt obligation or CDO (Woellert & Kopecki, 2007).However, greed has risen 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. Wit h a standard loan, the homeowner had to prove his deserving of a home, such as a job, good stand up citizen, and assets. However, with a subprime mortgage, it was basically like devoid money. The person did not have to state their income, nor prove that you had a job.The investment banker and the lender are taking a risk, because if a home owner defaults on their mortgage, the lender gets the house and sells the house for a profit because home values 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 2008 and up 225% from 206, which equals out to 19 per 1,000 households (CBS News, 2008). Due to at that pl ace was a huge increase in foreclosures, kind of 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 playing like 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 set about frozen, and everyone starts going bankrupt. As a result of the failure, the United States political relation rolls out a new schedule called Troubled Asset Relief Program (TARP) to prevent another bank failure.Under the bank bailout, creation of new legislation to prote ct 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, that due to the choke up in the credit market in the United States giving medication indispensable a way to regulate the credit card industry, but also to perk up 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 terms such as prime or fixed rate (The White House, 2009).With this legislation in place, it protects the consumer from many of the scams that the mortgage industry employ 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 fetch part of the famous bank bailout, how ever, it has been shown to protect the consumer, and Congress will 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 increase 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 higher(prenominal) interest rate, the ballooning 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 will not exist for the family any more, and the credit card companies will balloon their interest rate enough so that the card holders will not be able to pay their credit card/mortgage. In which then the financial institution hounds them and attacks them at their load 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 another credit crisis from happening again.Supporters of the bank bailout, ordinarily referred to as TARP, argue that the bailout wiped all the grownup toxic assets (CDOs) which were collected as result of the credit crisis and prevented the assets from painful sensation 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 bad assets from the financial institutions will have a positive effect 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 putting more Americans into homes that they will be able to afford and by rewriting the loans also increase the standard of living. legerdemain 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 crystallize/valid points/facts.In a study by the IMF of the 124 banking crisis, they have concluded Existing empirical research has shown that providing assist to banks and their borrowers can be counterproducti ve, resulting in increased losses to banks, which often abuse forbearance to take futile risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply condensing and economic 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. other point, as Steward said, The only way for this program to be given is f or enough of the bad mortgages/loans to be purchased to connivance lenders that the problem mortgages cannot hurt the system, or to put in impartial 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 downhearted 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 collapse could have happened and set America into another Great Depression. A heavy incline of unemployment foreclosures were through the roof, a major decline in incomes (Solomon, Enrich, & Hilsenrath, 2009). America was becoming a very sick 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 then 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 doubled to a record high $10 trillion dollars (Solomon, 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 connected to the taxpayers funds (Obama sends warning to Big Banks, 2010).A price tag of $700 billion dollar bailout has hidden costs which can go high as $3 trillion dollars, which can be the shortfall between the economies potential 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 th en 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 gun 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 disquisition 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 tap that American tax payer will have to pay to the bailout the banks that created this mess (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 crisis 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.