Financial Collapse and the TARP Program

2021-08-10 18:12:22
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University of Richmond
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Essay
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CDO/CMO

A CDO (Collateralized Debt Obligation) is a financial product where investment firms pool together cash flow generating assets and use them to create discrete financial tranches that can be sold to investors (Berger, Makaew & Roman, 2015). Similarly, CMOs stands for Collateralized Mortgage Obligations which are inherently more back securities which are bundled together and sold as investment options. The investments as secured by the mortgages held by clients whose payments are used to pay the investors in CMO. CMO is just a type of CDO, only that CMO is only restricted to mortgages as its security, whereas CDO is secured by several other cash flow generating assets including loans.

AIG Role in Financial Collapse

AIG is an American insurance giant and one of the biggest firms in the country during the financial crisis. The firms role can be termed as a miscalculation that led them to take too much risk risks, which when they materialized threw the company on the brink of total collapse. In the period leading to the financial crisis, AIG had spotted an opportunity to invest in backed mortgage tranches. Given the perception that the tranches were secure, the firm heavily invested in CDOs believing it may never have to pay them, or even if it did, it would never amount to significant amounts. When the financial crisis started, and the mortgage industry collapsed leading to massive defaults, the company paid insured companies billions of dollars, something which strained its commercial revenues. At that point, the company became insolvent. Unable to pay other claimants and itself facing an imminent collapse, it contributed significantly to the great recession.

McGraw Hill Role in Financial Collapse

McGraw Hill Publisher owns one of the biggest credit rating agencies in the US, the Standard, and Poors. S&P, just like other rating agencies gave the collateralized mortgage obligations a clean bill of health, labeling them as safe investments. The rating misled thousands of both private and public investors. The investors put a lot of money on what would turn to be disastrous investments that led investors to lose millions of money. Firms like insurance companies that had relied on the S&P ratings to put considerable investments in CDOs went on to pay customers millions in insured investments, playing a critical role in the further deepening on the financial crisis.

Subprime Mortgage

Yes, the subprime mortgage was labeled truthfully based on the prevailing financial crisis. In the build-up to the crisis, mortgage-backed securities were considered safer than government securities, increasing their demand significantly. This subprime rise in prices for homes did not last for long, as the world discovered the deception that was behind the mortgage-backed securities.

Government Regulators

Government regulators shared the blame for not preventing the crisis. In particular, the Federal Reserve Bank was blamed for failing to use its powers to stop banks and insurance firms from taking part in high-risk activities. The banks engaged in high-risk mortgage lending whereas insurance firms offered to insure high-risk tranches. The regulators were blamed for lack of foresight, missing early warning sign and overall, being unprepared to tackle the kind of crisis that came up. Had regulators played their role efficiently, they would have managed to control one of the worst crises to hit not just the United States but the whole world.

Has TARP Program Been Successful

The success or failure of TARP program is an issue of debate, with some viewing it as a success while other being critical of the program, saying it has fallen short of expectations (Reich, 2013). The Troubled Asset Relief Program came into place purposely to provide relief to troubled investors, which included institutions that were facing insolvency. For banks and insurance companies, the program worked just perfectly. It did provide bailout which enabled bank and insurance companies to get back on their feet and start lending afresh (Gaby & Walker, 2015). The program also offered cheap loans to vetted firms willing to buy back mortgage securities again and allowed financial institutions to trade equity for cash, further promoting the liquidity of most financial institutions. But the program was also designed to provide relief to homeowners, one of the critical issues it miserably failed (Berger, Makaew & Roman, 2015). Most homeowners lost their homes, and the financial burden to continue financing the homes for others grew. The public thinks that TARP came to the rescue of firms that were responsible for the crisis, and left out the victims of the crisis (Taylor, 2013). Even though that is subject to discussion, the fact that it did not provide relief to homeowners marks it as an epic failure in the eyes of the general public.

Whereabouts of Glen Hubbard, Kirsten Davis, Barney Frank, Christine Lagarde, George Soros, Eliot Spritzer and Dominique Strauss-Kahn

Hubbard is currently a dean of the Columbia University graduate school of business while Kirsten Davis serves an Oxfam global ambassador, promoting the organizations mission of ending global poverty. Barney Frank is a retired politician and sits on a board member at signature bank whereas Christine Lagarde is the managing director at the international monetary fund, where she has served since 2011. George Soros is still a business magnate who lives in his place home in Britain and US and runs his left-leaning political foundation, which sponsors a lot of political causes worldwide. Eliot Spritzer, the former New York governor, is now into private legal practice in New York. He also engages with other businesses in the city. The disgraced ex-IMF Chief Dominique Strauss-Kahn retired from public life when he was accused of attempted rape and now lives an out of media life in Paris, France.

Condemned Ivy League Schools

The Ivy League schools strongly condemned in the film is the Columbia University School of Business and Harvard University, which are labeled as the home of corruption, where academics disclose information based on how much they are paid. They do not support independent research and use their trusted status to mislead the business world for financial gain.

President Say on Lack of Criminal Prosecution of Wall Street Executives

President Obama, who was at the helm during the crisis, did little to prosecute anyone, saying the responsibility of the crisis would not be placed on any particular individual on Wall Street. There was also lack of concrete evidence to link individual executives to what was deemed as one of the biggest financial fraudulent acts. Through the prosecution office, the president argued that any prosecution would escalate the issue, mainly if it were not conclusively investigated.

 

References

Berger, A. N., Makaew, T., & Roman, R. A. (2015). Did Bank Loan Customers Benefit from the TARP Program?. Working Paper, University of South Carolina.

Chodorow-Reich, G. (2013). The employment effects of credit market disruptions: Firm-level evidence from the 20089 financial crisis. The Quarterly Journal of Economics, 129(1), 1-59.

Gaby, M., & Walker, D. A. (2015). Impacts of TARP Financial Institutions.Taylor, J. B. (2013). Getting off track: How government actions and interventions caused, prolonged, and worsened the financial crisis. Hoover Press.

 

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