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U.S. Financial System (6 pages)

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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 (110th 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 ...

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