Ethics, Values, Social Responsibility
Bailout of Banking Industry in United States
Ethical Compliance by Banking Industry
It is quite common in American history that government comes for the rescue of companies and organization in the time of financial crisis. General motors' acquisition was one such example where saving GM meant saving the nation. When Government takes measure for the welfare of any segment of the economy, it then becomes responsibility of the organizations that they comply with social responsibility and ethical standards so that it should respond to its social character and use the benefits provided by the government in the honest fashion. The recent bailout of banking sector by U.S. government, and the misappropriation and misuse of these funds, have raised a big question mark on the compliance to ethical standards by the bank.
United States government has a long history of bailing out its financial institutions. Some of the most famous financial crisis that required government interventions are The Great Depression, The savings and loan bailout of 1989, The collapse of Bear Stearns, an investment bank and brokerage firm, American International Group (AIG), an insurance colossus with global reach and Freddie Mac and Fannie Mae, two government-backed mortgage lenders (Investopedia, 2009).
These bailouts were in the form of direct loans to the financial institutions, acquisitions of assets and loan guarantees for bank's borrowing from the public. This recent historic bailout of financial institutions has its roots in the economic crunch that prolonged from 2008 till 2012 and still is giving after-shocks to the American economy. After the first wave of recession, the banking system of United States went through enormous depression because of huge unpaid financial liabilities from the consumers. Banks insolvency, impaired investors trust and unavailability of credit were the immediate problems that U.S. banking sector had to go through.
At this point in time, U.S. government came for the rescue of financial institutions and a bill was passed in the Senate which was intended for bank bailouts. The bill presented a plan with the name Troubled Assets Recovery Programme. Through this programme, the government bought the banks' mortgaged back securities and took debts off the banks books. For this bailout, the original amount proposed was USD 700 billion. During Bush government, till 2008, USD 350 billion dollars were lent out to the banks in terms of bailout.
This bailout was caused by the market crunch where USD 140 billion was pulled out from the money market. Since, Money market is concerned with short-term borrowings; therefore it presents the safest investment opportunities for the investors and gives chance to banks for raising finance immediately. However due to recession, the investors proposed on investing into U.S. treasuries rather than bank's securities. In the state of panic, since banks' yields were growing to zero, banks' lending were insured by the treasury for an year
Since banks were afraid of lending to each other due to market volatility therefore the U.S. government invested in these bad mortgages. This fear caused LIBOR rates to be unnaturally higher than the Fed funds rate and stock prices to plummet. At this point, the government intervenes and bought bad mortgages worth billions which caused the market interest rates to go superficially high. However, such massive intervention of course had consequences for government as well as the tax payer (Amadeo, 2012).
Through TARP, government invested hundreds of billions in banking sector. However most of the banks were accused of misappropriating the funds given to them which rose concerned about compliance to ethical standards. Also, TARP had serious flaws in its work model due to which its efficiency was highly questioned by the media and general public. Just recently, more than sixty four banks including Bank of America which is the second largest bank of United States have been accused of misappropriating these bailout funds for other unintended purposes. The report, published in July 2009, surveyed 360 banks that got money through the end of January and found that 110 had invested...
Roughly 80% of respondents, or 300 banks, also said at least some of the money had supported new lending (Appelbaum, 2009).
Banks saw TARP as a no strings attached financial aid programme which didn't levied much liability on the financial sector. Where these funds were intended for resuming the normal activities of banking sector by inducing landings to the private sector, the banks started using these funds for future investments and acquisitions. Plainscapital chairman Alan B. White saw the Bush administration's cash infusion as an "opportunity capital," noting, "They didn't tell me I had to do anything particular with it."
The most famous case that appeared after TARP was related to Bank of America which was accused of manipulating the federal government for proving more funds by merging with another bank having heavy losses. The announcement said: "Bank of America's management intentionally failed to disclose massive losses at Merrill so that shareholders would vote to approve the merger. Once the deal was approved, Bank of America's management manipulated the federal government into saving the deal with billions in taxpayer funds by falsely claiming that they would back out of the deal without bailout funds. (McBride, 2010)"
Furthermore, since these funding were providing to the holding companies, therefore the subsidiaries didn't have any financial aid. Also, it was suspected that big banks will use this amount to acquire smaller and stronger banks to gain more market share. The effectiveness of TARP was highly doubtful when The Senate Congressional Oversight Panel created to oversee the TARP concluded on January 9, 2009: "In particular, the Panel sees no evidence that the U.S. Treasury has used TARP funds to support the housing market by avoiding preventable foreclosures." The panel also concluded that "Although half the money has not yet been received by the banks, hundreds of billions of dollars have been injected into the marketplace with no demonstrable effects on lending." (Zumbrun et. Al, 2008)
Furthermore, reports showed that banks only used these funds to compensate their top executives not only for the basic remunerations but for the hefty perks and benefits.
Now that the unethical practices of many banking including the leading name has been revealed, media has raised its voice pertaining to public concern which was shown regarding the compliance of ethical standards by banks. As it is a well-established fact that before recession, banks were involved in given the housing industry a superficial hype by giving unrealistic loans to unqualified individuals. Result was a market crash when the U.S. economy was struck by recession. Secondly, when the government came to their aid, rather than correcting the mistakes that they did earlier, banks started using these funds for future investment rather than restoring the market and regaining investor's confidence which would have served in the long run.
The Congressional Budget Office estimates the bailout will cost taxpayers $25 billion after recipients repay their loans. That does not include more than $200 billion lost in the Fannie Mae-Freddie Mac bailout, which was not part of TARP. The federal government also guaranteed $4.4 trillion in debts held by large banks and other institutions as part of the bailout. This meant the U.S. government would have paid those outstanding debts if the banks failed. Those guarantees ended in 2009 (CBO, 2010).
Also one should ignore the implications of these bailouts and their unethical use by banks, on government. Where we must agree to the fact that government has been party to this crisis due to its poor management of financial sector in the first place. Secondly, regulation of the funded money to the financial sector was unsupervised and lacked detailed enactment of important clause in the bailout agreement which had put billions of tax payers hard earned dollars at stake. Also, the worst part is handling over billions of dollars to the very institutions whose poor management of the financial market caused this trouble in the first place. Also up till now, even after any cases filed against these banks, Congress has failed to come up with a legislation which would prevent or restrain further fraudulent activities. One must ignore how few banks were deprived of the financial aid under TARP. Concerns have been raised by media and general public regarding the criteria related to the selection of recipient of aid. It is crystal clear and use of influence and connection had an impact on selection process during disbursement of aid.
However; but this fact cannot be ignored that these banks are culprits to the government for misusing the funds which were actually intended for saving them for complete collapse and ensured their survival and growth. Now, that the government and its schemes have been manipulated by the bank for their own interest, U.S. budget deficit is under great pressure due to this enormous intervention. This impact will sooner, or later shift to the taxpayer which will make the…
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