Government Bailout, Who Benefits Essay Example

Government Bailout, Who Benefits? Essay The banks, on the other hand, that are receiving bailout funds have operating profits, they can borrow low and lend high, but suffer from capital requirement issues, which limits what they can lend. A capital infusion helps meet capital requirements, frees up lending and the banks can make a profit. Auto companies are not similar. Unless the auto companies can build and sell a car or truck at a gross profit(a profit neutral of debt service or taxes) it makes no sense to ball them out. They should be liquidated. The United States has been debating what to do concerning the foreclosure and banking crisis, with the answer being the consideration of a 700 billion dollar bailout. This bailout would benefit the middle class who have enough money and credit to ay a house, but give little benefit to the rich who may already own several houses, nor the lower classes, who are not typically able to afford a house. The current focus seems to be on helping only those middle-class people who made financially foolish decisions. Our nations working poor most likely cannot get access to bank loans, and must resolve on check cashing stores that loan money at over 14 percent interest. These working class and poor most likely do not have enough credit to qualify for a loan, so the bailout to the middle class will give little or no benefit to this specific group. The bailout is for the moderately rich who were careless with the use of their strong credit and ability to borrow cheaply on an almost continuous basis. According to the U. We will write a custom essay sample on Government Bailout, Who Benefits? specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Government Bailout, Who Benefits? specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Government Bailout, Who Benefits? specifically for you FOR ONLY $16.38 $13.9/page Hire Writer S. Dept of labor, the number of workers In June 2008, among working class, as defined as construction and manufacturing non-farm employment was 21 ,565 thousand workers: retail trade at 1 5,324 thousand workers, leisure and hospitality 13,679 thousand workers (United States Bureau of Labor Statistics). Would such a bailout benefit these workers, when this group includes many who are struggling to simply survive in our society? The U. S. Government may be increasingly controlling of the economy. Rep. Rob Bishop, R-Utah, worries about a permanent shift of power and financial responsibility to the federal government. The bailout may simply put more power In an ever smaller number of people. Unlike the auto bailout, this bailout doesnt allow us to keep jobs or generate commerce plus, they were not adversely affected by the economic crisis. After already giving them $25 billion, they are still foreclosing on our homes, charging us loan shark rates on our credit cards, and refusing to loan money to business resulting in more lost Jobs and no commerce whatsoever. The goal of the new bailout Is to free up credit In consumer credit markets mortgages, car loans, student loans, Ana Creole car loans. I en mechanism AT console is interesting $200 billion, in a Term Asset Backed Securities Loan Facility, and $500 billion to buy Mbps (mortgage backed securities) guaranteed by Fannies Mae and Freddie Mac. The government is buying asset backed securities generated by the now notorious serialization process or structured finance. Academics and journalists argue that the serialization process so dilutes accountability that no one s responsible for taking excessive risks, meaning the borrower, the originator, the bundler, the rating company, the underwriter. So to get people to loan we are going to stimulate the serialization process, reward the serialization process, by buying securities to encourage more borrowers, originators, bundler, and underwriters. The biggest bank involved in the bailout is Citibank. Citreous Inc. Doing business as Cit, is a major American financial services company based in New York City, NY. Citreous was formed from one of the worlds largest mergers in history by imbibing the banking giant Citron and financial conglomerate Travelers Group on April 7, 1998. Citreous Inc. Has the worlds largest financial services network, spanning 107 countries with approximately 12,000 offices worldwide. The company employs approximately 358,000 staff around the world, and holds over 200 million custo mer accounts in more than 100 countries. It is the worlds largest bank by revenues as of 2008. It is a primary dealer in US Treasury securities and its stock has been a component of the DOD Jones Industrial Average since March 17, 1997. In October, Treasury bought $25 billion in preferred stock and warrants, at-the- market and equal to 10% of the value of the preferred. In November, the Treasury bought an addition $20 billion in preferred stock and warrants. The second batch of preferred stock pays an 8% dividend; the first batch pays 5% for five years and 10% thereafter. The new batch restricts dividends on common to $. 1 a share for 3 years without Treasurys consent; the old batch restricted an increase in dividends on common. All the preferred is non-voting. The biggest change comes in the control of executive compensation. The new preferred requires that any compensation plans must be submitted to and approved by the United States Government. The old preferred had open-ended compensation standards and a ban on oversized golden parachutes. Also, a government guarantee on a $306 billion pool of Agitprops mortgage-backed securities in exchange for another $7 billion in preferred, $3 billion bought by the FIDE. As of September 2008 the breakdown of the $555 billion running total of Wall Street aid to date went as follows: The Fed backstopped $30 billion of Bear Stearns risk in its sale to JUMP Chase in March, is loaning $85 billion to Alga in turn for an 80 percent equity stake, opened a $1 50 billion window for banks who could use risky mortgage securities as collateral, and extended the use of its discount window to investments banks who arent supposed to have that privilege, since theyre not regulated by the Fed. The Treasury has pledged to backstop Fannies and Freddie up to $200 billion, created an emergency $40 billion worth of T-bills to be auctioned to spot the Fed some extra cash, and is using a $50 Depression-era emergency fund to support the money market industry (Will the Government Bailout Work? , Naomi Prints, www. Mother]ones. Mom). In November, The federal government dedicated an additional $800 billion to two new loan programs. Bringing its cumulative commitment to financial rescue Annihilates to I Nils sum represents almost 60 percent of the nations estimated gross domestic product. With the size, complexity and originality of these programs its impossible to predict how much they will affect taxpayers. The money has been committed to a wide array of programs, including loans and loan guarantees, asset purchases, equity investments in financial companies, tax breaks for banks, help for struggling homeowners and a currency debilitation fund. Most of the money, about $5. 5 trillion, comes from the Federal Reserve, which as an independent entity does not need congressional approval to lend money to banks or, in unusual and exigent circumstances, to other financial institutions. To stimulate lending, the Fed said it will purchase up to $600 billion in mortgage debt issued or backed by Fannies Mae, Freddie Mac and government housing agencies. It also will lend up to $200 billion to holders of securities backed by consumer and small-business loans. All but $20 billion of that $800 billion represents ewe commitments, a Fed spokeswoman said. About $1. 1 trillion of the $8. 5 trillion is coming from the Treasury Department, including $700 billion approved by Congress in dramatic fashion under the Troubled Asset Relief Program. The goal of which is to restore liquidity and stability to the financial system of the United States. The rest of the commitments are coming from the Federal Deposit Insurance Corp.. And the Federal Housing Administration. Only about $3. 2 trillion of the $8. 5 trillion has been tapped so far, according to Bloomberg. And, some of it might never be. So, many ask, where is the money going? Most of the money is going into loans or loan guarantees, asset purchases or stock investments on which the government could see some return. If the economy were to miraculously recover, the taxpayer could make money. Thats not my best guess or even a likely scenario, but its not inconceivable, says Nail Shape, a professor at the University of Chicago Booth School of Business. The risk/reward ratio for taxpayers varies greatly from program to program. For example, the first deal the government made when it bailed out insurance giant Alga had little risk and a lot of potential upside for taxpayers, Sh ape aid. Then it turned out the situation (at GIG) was worse than realized, and the terms were so brutal (to GIG) that we had to renegotiate. Now we have given them a lot more credit on more generous terms. Shape says the worst deal for taxpayers could be the Citreous deal. The government agreed to buy an additional $20 billion in preferred stock and absorb up to $249 billion in losses on troubled assets owned by Cit. Its hard to say how much the overall rescue attempt will add to the annual deficit or the national debt because the government accounts for each program differently states Shape. If the Treasury borrows money to finance a program, that money adds to the federal debt and must eventually be paid off, with interest, says Diane Limit Rogers, chief economist with the Concord Coalition, a nonpartisan group that aims to eliminate federal deficits. A deficit arises when the governments expenditures exceed its revenues in a particular year. Some estimate that the federal deficit will exceed $1 trillion this fiscal year as a result of the economic slowdown and efforts to revive it. The Feeds activities to shore up the financial system do not show up directly on the federal budget, although teeny can nave an Impact.