U.S. Financial System


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I Introduction The EESA enacted October 3 2008 commonly refered to as the bailout of the U S financial system is a law authorizing the U S Secretary of the Treasury to spend up to 700 billion dollars to purchase distressed assets creating by lending institutions across America The EESA proposed by the Treasury Secretary Henry Pailson was the answer to the sub prime mortgage crisis The idea behind the bailout was to purchase and insure troubled assets and provide support and stability to the stock market Lending institutions not adhearing to ethical practices were distributing loans with no financial accountablitiy from the loan purchasers The loans were then sold to the stock market causing the stock market to suffer The final result was to provide stability and prevent further disruption in the economy II The intention of the Act There were several reasons the Act was enforced and passed The main ones are as follows 1 To protect home values prevent foreclosures protect retirement accounts assist renters from losing their units and protect life savings 2 To preserve home ownership jobs and economic growth 3 To maximize overall returns to the tax payers and 4 To provide public accountibility for exercise of authority 110 th Congress The bailout describes buying troubled assets To simply explain troubled assets they are properties banks paid too much for This involved banks making loans to people who could not afford ot pay them and securing the loans with collateral that was worth less than the loan Banks unethically allowed people to take loans for homes cars shopping malls and construction knowing the people had no real income to pay the loans back Lenders were allowed to miss lead people to think they could afford large loan amounts These individuals more often than not were not working or earning at or below national average poverty levels Lending institutions did not educate and glided over loan terms letting individuals think they would be able to afford the loans they were applying for III Why the housing market collapsed To begin it is important to understand financial officers issuing loans are in the business of sales Sales work off commission and usually come with added pressure to reach their sale quotas Meeting and exceeding quotas led a majority of lending institutions across America to process loans under unethical work practices Lenders quotas were reaching an all time high with sales and were able to get away with it due to the institutions were the financial officers worked not being the ones to service the loan Servicing loans means to take responsibility for the loan and carry the debt until paid off Instead lending institutions were selling the loans to the stock market for them to carry This is commonly referred to as selling on the sub prime market Lending institutions were under no regulations to help homeowners keep their homes and choose to let foreclosures happen as it was less paperwork for them and the fear of being sued by the loan holders was then negated There was no responsibility handed to the lending institutions to modify loans and assist customers Another reason corruption occurred was due to bribes The bribing occurring during this time caused home prices to stand above the value The Developers bribed officials to acquire land cheaply and to overlook certain building approvals Developers were able to construct homes with sub par materials and get away with it as they were not the ones paying the bribes The home prices were raised dramatically to cover the cost of the bribes upon sales Doing so homes were selling way above appraised value and not worth the money loaned out These ethical and financial problems changed the perception of our economic worth seen by the rest of the international trade community as a whole Short run GDP stands for Gross Domestic Product This is a measurement of the market value for all things made in America This is often referred to as an estimate of our standard of living Since our mortgage market started suffering the world saw that our economy was slipping and lost confidence in buying American This means buying American products but mostly and more importantly those who had the means did not trust if they loaned money or took debt from us we would be able to pay them back That affects the worth of our dollar as a whole because money being a medium for trade if what we are producing goes down in worth so does the dollar For example China owns a great deal of our debt and we promise to pay it back but they are still making interest while they wait for us to do that They are losing faith that our economy will rebound and those loans might go into default Our worry is that they will decide to sell that debt to other countries or even worse just flat out call them in If they do either of those our credit rating as a nation would go down and all other countries would see us as sub prime lenders of sort That would mean less ability to sell stock in America if you would IV Alternative to the Act Many U S citizens were opposed to the Act due to their hard earned tax paid dollars now going towards unethical business practices and assisting individuals who were granted loans knowing they could not pay for them Several U S Government Officials tried to step forward and introduce alternatives to the Act Hilary Clinton offered a plan to help stimulate the economy based of the Home Ownership Loan Corporation HOLC model utilized in the 1930 s during the Great Depression The plan would allow for 1 Expand the governments capacity to stand behind mortgages that have been reworked into affordable terms 2 Form a Non Partisan group to oversee FHA and other government agencies sponsoring loan programs and getting them more involved in the bailout 3 Offering a stimulus 4 package granting 30 billion to be used by States in neighborhoods with the highest foreclosure rates and to provide counseling and refinancing 5 Pass legislation to clarify legal ability for mortgage companies to help borrowers stay homeowners The plan was discounted because of the comparison to the 1930 s In the 1930 s lending institutions were just getting started and were developing rules and regulations to go by Being in the 20th Century now several Government officials felt lending institutions were well above what they were and could not be compared to the 1930 s Lending institutions feared the terms of the bailout anticipating lawsuits to arise from the investment holders of the loans Clinton asked legislation to pass a law protecting the lending institutions from lawsuits to better assist families facing foreclosure and increase efforts from banks to clean up the loans Long Term Affects To prevent something like this from happening again the Government will now hold all assets to maturity or for resale to ensure maximum return to taxpayers and stock market investors They will also sell assets at a price determined only by the Government to again maximize return on investments All lending institutions now have strict Government guidelines to follow regarding investments and loans This is done by the new creation of a government oversight committee whose sole responsibility is to watch bank practices in the hope of avoiding these problems in the future Not only did the government set up this oversight but it also used some of the bailout money to obtain partial ownership in some big business corporations as well The combination of partial ownership and oversight has the potential in the end to turn a profit The earnings will take some time to become profit but once it does those dividends will go to government surplus allowing possible future stimulus checks These checks will probably go to our children though since billions of dollars takes some time to be recouped It was Michael Douglas in the movie Wall Street that said Greed is good That motto almost destroyed our economy in the last couple of years The average taxpayer did not profit from that motto and is actually paying for it right now We bailed out big business by loaning money or buying their debt which should never of happened Doing this hurt trust in our companies and has affected our standard of living in the short run In the long run it may have been the best thing that could of happened Target Audience The target audience is people who are interested to buy a property We would like them to be aware of what happened during the past Awareness of the past will prevent from happening again Many people lost their homes because lending companies did not disclose or did not proceeded with the proper manner to qualify borrowers People engaged into buying homes that could not pay for With reliable information on their hands they could have prevented the foreclosure of their homes Those interested in purchasing homes are scared they are going to be one of the foreclosed statistics due to not understanding what is really happening They know the housing market is in shambles but may not really know why Some even have knowledge of predatory lending but do not understand how this refers to hidden loan terms and fees

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