These CDOs structured with conflicts of interest inherent in their designs which allowed the big investment banks to bet against their own clients as they held short positions while the clients themselves lost a huge amount of money… How the abacus deal worked was like this: First , Goldman Sachs was told by hedge fund manager that he wanted to invest or rather go against the subprime mortgages by using the Over the counter financial derivatives such as CDOs. These securities were to shorted by the hedge fund manager. Second , the IKB was willing to insure them against or buy out the risk that Paulson was willing to short. But they fearing legal ramifications would only do so if they were selected by an outsider. Third , Goldman approaches ACA Management LLC in order to manage the
One very direct way the government caused the crisis is its economic policy and various public acts that were approved, the community reinvestment act that passed during the Clinton era being a key culprit. The Community Reinvestment Act allows low-income individuals to have access to homeownership by regulating banks and saving institutions in a way that steers them towards making investments that are less safe in the name of antidiscrimination by allowing more lax lending standards (White, 2008). While the objective of the act is noble, the long-term negative effects were not considered or predicted. Ultimately the act led to banks being pressured into issuing subprime mortgages that homeowners could not pay off thus leading to the housing bubble that caused the market to crash (White, 2008). There were other key acts that complimented the Community Reinvestment Act such as the Depository Institutions Deregulatory and Monetary Control Act, the Fair Housing Act and the Commodity Futures Modernization Act (Friedman, 2011) in pressuring banks and creating the financial climate that led to the
James A. Hammerton in the “ A Critique of Libertarianism” said that not all voluntary exchanges are just as the exchanges can have consequence on third parties, who might not have consented to the exchange. It contradicts the theory from Nozick that the just transfer of goods is a voluntary transfer from the rightful owner to another person, and without mention about the third parties. In additon, as Nozick said that property right is inviolable, it means that any violations should be compensated for. But in real world that may not be the case as it will be impossible for everyone who get benefits from the government compensate to those to contribute the fund. James also believe that the operation of the free market should be come along with some social rules.
I will also be emphasising how the banks that were part of this rigging affected/ how they influence the Libor rate and they left Libor as a mess. The fines that were charged to the banks or individuals who played and what the fines were for and how much they will be charged. Libor stands for London Interbank Offered Rate and is a key market benchmark interest rates used in many financial contracts with
The Savings and Loan Crisis: The defining features, the resultant deregulation, and its influence on the financial policy making. The U.S. economy's trajectory sketching the emergence of bank failures to the Savings and Loan crisis of the 1980s is attributable to the transformation of the U.S. financial system from being the one with a high degree of regulation to the one with huge deregulation. This process portrays the consequences that led to the crisis and further aggravated it. The magnitude of the crisis gave the U.S. economy a window to reform its banking industry post the crisis. The paper here traces the regulatory legislative framework in the U.S. before the crisis and how its transformation, overtime, accentuated the severity of
The bill would further worsen the situation. It would provide a loophole for payday lenders, changing the legal definition of their business from lending to deferred presentment of personal checks. And as a result, payday loans lenders would be exempt from rules governing traditional lenders. Payday loans lenders argue that they provide customers with onetime financial aid for emergency expenses. They argue that since, no one else would takeout mortgage loans at such rates it is okay for the payday loans to be expensive.
The invisible hand will guide the free market through hard times and competition according to Adam Smith and the U.S. government choose to try to artificially speed up the invisible hand. Instead of helping the U.S. Government showed that Wall Street could get away with whatever they want and still have a safety net for whatever they do. One of the reasons why the Government choose not to do this is because the people in power at the political level did not want to lose their jobs. The quick response for the politicians to avoid taking the blame was to bailout the economy and put trillions into the economy to stimulate it. This has set us up for failure in the future as it provided short term answers and not long term stability.
By decentralizing its operations into numerous subsidiaries, Enron was able to hide huge liabilities and derivative losses of their financial statements. However as these started to accumulate, creditors and investors demanded their money back but Enron was unable to meet their requirements with a negative cash flow, thus going bankrupt. Moreover, Enron’s finances were an impenetrable maze of carefully crafted imaginary transactions between the subsidiaries and itself, which masked its true financial state and therefore could not seek help when needed. The importance of internal controls in a business’ corporate culture is established through the beliefs and values of upper management. Enron focused on maintaining the appearance of value rather than creating it, thus fostering a competitive and risk-tasking environment that promoted the use of unethical accounting practises.
Some believe bailouts are critical to stop the domino effect in the financial sector and the loss of employment ”Bailing out Wall Street bankers is necessary to keep the US economy from crumbling even further and taking American workers down with it.” (Barack Obama, US president, 29 September 2008). But also state that banks can find a new equilibrium without government intervention Bailout is not necessary “The banking industry can handle this mess internally and does not need subsidies.” (Bert Ely, a leading expert on banking and finance in the Washington policy community, 24 September 2008). In my opinion I believe that government intervention that in theory government intervention is necessary to stop the domino effect on the innocent citizen. However I think that the for government intervention for example in wall street is bailing people and company out who reaped the rewards while they were successful and supply a safety net to them when they fail as is stated in Dam and Koetter Bank Bailouts and Moral Hazard: Evidence from Germany
As a result, LTI and LII had to negotiate its loan with banks again since it failed to fulfill the ratio requirements that were made by commercial banks. The principle, Haworth requested to fix the loan agreement between LIIBV and U.S. subsidiaries. He made following requests to director of LIIBV: 1) the interest rates should be set as the prime rate of ABN bank plus 2%, the maturity date was fixed; 2) Financial ratio agreements should be omitted; 3) No limitation on the loan to subsidiaries as far as the loan was available; 4) two loan accounts would be set up for LTI; 5) the changes on the amount of the loan would be recorded on a grid promissory
The Dodd-Frank Act introduced major American regulatory reform such as the end to protect financial institutions that are too big to fail (Lasher, 2014). During the financial crisis, the government was involved in protecting some institutions (e.g., Washington Mutual, Wachovia, etc) while not protecting others (e.g., Lehman Brothers). Additionally, the Dodd-Frank Act established changes requiring “mortgage lenders to ensure that borrowers have the ability to make payments,” which could have led to penalties if the lenders were not in compliance (Lasher, 2014). This provision of the Act can avoid lenders to offer products (e.g., no documentation loans) that could increase foreclosures. Due to the inconsistency of credit ratings on CDO’s during the financial crisis, the Dodd-Frank Act created a department that oversees rating agencies (Lasher, 2014).
The Dodd-Frank Act is a federal law that places regulation of the financial industry in the government. It grew out of the Great Recession with the purpose of avoiding another collapse of a major financial institution. It is intended to safeguard consumer’s procedures to prevent borrowers from being taken advantage of by banks and financial institutions using misleading or deceptive activities or procedures when lending money for mortgages or other purposes. Personally, I think this law is a failure. The act presented that it would terminate the “Too-big-to-fail” and help financial stability.