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 at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks. 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...
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