Banks and government bailout money

Over the last few years, US banks over-leveraged their positions by disbursing an increasing number of unsecured loans. Coinciding with an economic downturn, this led to their business being severely affected with several banks like the Bank of America, Morgan Stanley, and Citigroup, among others. With over $700 billion of government spending diverted to these troubled banks, this became one of the largest bailouts in US history. To add to this, many of these banks outsourced several of their functions, leading to an even greater impact on the US economy in terms of unemployment and instability. The figure is expected to run into trillions of dollars in the long term.

With investor confidence being at an all-time low, the steps taken by the US Treasury was primarily to improve the liquidity, stabilize the economy, and gain back the confidence of investors. The bailout was also to reduce the impact the financial crisis on the US Economy and GDP.

Morgan Stanley was among the largest outsourcing U.S. banks to receive a bailout package from the U.S. Treasury Department to help bolster its growth. Goldman Sachs Group Inc., Citigroup Inc., Wells Fargo & Co, Bank of New York Mellon, JP Morgan Chase, and Bank of America Corp. were the other initial participating banks. Goldman Sachs, a bank holding company engaged in investment banking and securities services, received a $12 billion package to cover up for their losses.

Citigroup on the other hand received a total of $45 billion as capital relief, after being plunged into a deep financial crisis. With $306 billion in troubled assets, the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., took on any additional losses, after an initial absorption of $29 billion. In this way, the government has been able to bring back a sense of stability to the company and its investors.

Wells Fargo was one of the first banks to get a bailout of $25 billion in exchange for stock to increase lending in October 2008. The value of Wells Fargo stock help by the US Treasury stands at $23.3 billion today. In spite of the buyout of Wachovia, the company is now allegedly in a position to return their bailout money.

Bank of America received $45 billion in capital relief after its troubles increased following its decision to take over Merrill Lynch, another victim of the global credit crunch. The lifeline was needed to put a halt to the bank’s mounting losses. While shares fell to an all time low, the government’s decision to support one of the country’s major banks was due to a number of write-offs on mortgages and commercial real estate.

The recent economic crisis saw a record number of bailouts by the US government in order to stem an already weakening economy and global credit crunch. Debates still rage over how these funds have been utilized with some critics even terming it as corporate welfare which encourages corporate irresponsibility. However, the real long-term effects of these bailouts will only be determined in the years that follow.

September 10, 2009   Posted in: Good Corporate Citizens