Free Essay

Bank of America's Most Toxic Asset

In: Social Issues

Submitted By naaman14
Words 3144
Pages 13
Table of Contents Case Summary 2 Affected Stakeholders 3 Ethical Dilemma 4 Why would a $500,000 salary cap prompt personnel to leave for other banks? 5 Was stripping of Lewis’ chairmanship a significant move on the part of BoA shareholders? 6 How could Thain justify spending $1.2 million on his office when Merrill Lynch was on the verge of bankruptcy? 7 What did Ken Lewis hope to gain by claiming that he was “pressured” into completing the Merrill Lynch deal? 9 Of all decisions made by Ken Lewis in this case study, which one do you think did the most damage to his reputation? And why? 10 What should Lewis have done? 12 Conclusion 13 References 14

Case Summary

Bank of America (BoA), founded in 1998 is an American multinational banking and financial services corporation. They were notably a key player in the global financial crisis that struck in 2008. Ken Lewis, a former CEO acquired Countrywide Financial and Merrill Lynch. To his dismay, the acquisitions turned out to be disastrous as the first week of January 2009 enlightened the problems that existed within Countrywide Financial and Merrill Lynch; they were bankrupt with assets in their balance sheet that set a new mark for toxicity in the financial market. This required attention and direct aid from the Federal Government itself. However, following this month BoA fell by 65 percent. Just a month after the first quarter of 2009, Ken Lewis was made CEO and stripped off chairmanship by the shareholders’ consent. (Tanoh, 2013)

The aftermath of the two acquisitions of Countrywide and Merrill Lynch allowed BoA to become a dominant mortgage provider as well as the biggest financial services company in the world at that time.

Amid the weekend of the 13th and 14th of September 2008, auditors and other staff from the Bank of America performed due diligence preceding a potential merger. A merger understanding was publically reported on the 15th of September, with Bank of America acquiring Merrill Lynch & Co. for $50 billion in stock. However, right after the deal had been signed; it didn’t take long for the actual state of the acquired companies to show its true colors as BoA revealed immense losses at Merril Lynch. Ken Lewis claimed that the bank wanted to opt out of the deal due to the revelations of the extent of Merrill’s trading losses. Howbeit, on December 21st, Lewis was cautioned that the administration would consider supplanting the top managerial staff and administration if Bank of America retreat from the deal. The authorities additionally recommended that if Lewis vacated, then any future government help would be a great deal harder to acquire. Right now, Lewis surrendered in his endeavors to vacate the deal. This led to a record low in 17 years for the bank in terms of its stock price.
Affected Stakeholders

Stakeholders can be defined as anyone who is in direct affect by business decisions. In the case of BoA, considering its global stance, one can determine the affect of business decisions that it has on its stakeholders. The affects of the decisions made were not just limited to the board of directors or the CEO; they had an adverse effect on the US economy, the company’s shareholders, and the government particularly but also globally. (Sienkiewicz, 2014)

Another debacle from a Wall Street corporation would sequel inexorable crisis in an unstable financial climate. This would consequently jeopardize the health of the US economy that could lead to distress resulting in untold damage to the civilians. In addition, the taxpayers would consequently face financial obligations of a declining Merrill Lynch no matter the severity of the collapse. On the other hand, millions of shareholders had a major part to play in decisions Lewis had to face. The interests of about 200,000 employees and contractors were to be taken into consideration by the CEO.

Ethical Dilemma

Ken Lewis’ decision to acquire Countrywide and Merrill Lynch were rather ambitious as their crises were inevitable and obvious to many. Misrepresentation of key information was crucial.

Although the shareholders approved the decision, Ken had hidden the Merrill losses prior to the approval. In addition, shareholders should have been made aware of the possible losses that could incur and that could have a devastating affect on the shareholders’ equity in the case of further financial assistance by the government.

On the other hand, Thain misrepresented the actual performance of Merrill Lynch as the bonuses were approved for the executives despite the company being in a critical position. Ken Lewis and John Thain failed to disclose vital information to key individuals before the acquisition that led to a travesty economically.
Why would a $500,000 salary cap prompt personnel to leave for other banks?

Obama administration issued a 500,000 salary cap for bank executives causing many to leave and find employment elsewhere such as other banks that didn’t receive bailout orders. This rule also stated that the bonuses could not exceed 50% of the salaries i.e. $250,000 in this case. (Ahrens, 2009)

Banks overseas that were unaffected by the US financial meltdown in 2008 and willing to pay more than $500,000 could also be potential opportunities for the CEO’s affected by the salary cap. The main reason behind the potential switches would be the fear to lose their highly styled life. Ken Lewis earned $16.4 million in 2007 that consisted of just $1.5 million salary payments. This could mean CEO’s that have their expenses settled according to their lifestyles would be exposed to a huge dip in their disposable income that could immensely affect their psychological state. A huge income dip could be shattering an individual’s self esteem. CEO’s at much midtier and much littler banks are paid significantly more than what did the White House set, or the reward top of 33% of aggregate remuneration set by the revision. (News, gogoi and today, 2009)

A $500,000 salary is subject to tax, in the US at that time; the tax for this particular income group was at 36-37% accumulated of a few types of taxes. Not only the taxes, the CEO’s had other expenses such as social security etc. However the taxes alone brought down the $500,000 to a disposable amount of $308,000. For such talented individuals, the income is not attractive and not enough, as they have seen and been in a different stage prior to the salary cap. (Asbery, 2013)

Was stripping of Lewis’ chairmanship a significant move on the part of BoA shareholders?

Ken Lewis was removed as Chairman but remained the CEO in April 2009. It isn’t a significant move from the shareholders’ end in this case because he remained CEO. However, Ken Lewis had blundered due to his non-ethical approach to the matter; the fact that he failed to provide the shareholder’s with accurate financial statements prior to the acquisition potentially raised questions. (Tanoh, 2013)

The downfall of both Countrywide and Merrill Lynch was imminent but Lewis’ misrepresentations to shareholders led to an approval for the acquisition. He misrepresented Countrywide and Merrill Lynch as financially stable firms, operationally efficient and forecasted a stable growth rate. However within a few months, the companies were bankrupt. Consequently the obvious outcome would have been dismissal for Lewis altogether from the company but that wasn’t the case although Lewis resigned himself 5 months later. (Currier, 2012)

Although Lewis might claim that he was not only the culprit; it was obvious that Countrywide and Merrill Lynch were not in a stable condition as their assets had no or little value in the market. Despite the fact that Lewis had misrepresented the financial health of the firms, the shareholders and other concerned personnel believed Lewis and approved the acquisition. Lastly, Lewis also claimed that he was pressured by government officials to not back out of the deal considering the overall economy and not just the firm itself.

However, as the leader of one of the biggest financial institutions, Lewis was additionally obligated to the global financial system. Interestingly enough, the shareholders are a subset of the global obligations.
How could Thain justify spending $1.2 million on his office when Merrill Lynch was on the verge of bankruptcy?

Thain spent lavishly on his office, this was unjustifiable considering the fact that Merrill’s was in an unhealthy state. As Merrill’s acquisition by BoA allowed Thain to become the bank’s wealth manager and head the investment banking divisions. Thain had an obligation to manage the firm in good faith, guarding his decisions and actions that will not serve his ambition but consider the consequences on a larger scale i.e. the US economy as a whole (Tanoh, 2013)

The refurbishment of his office revealed his self-centeredness as the firm was firing employees at that time. Amy Borus, deputy director of the Council of Institutional Investors said, “Spending company money on a lavish re-do at a time when Merrill’s finances were rocky sends the wrong message, also Thain was compensated well enough to foot the bill himself if he wanted such an upscale redecoration.” Also president Obama without naming the company pointed out at Thain by saying “the government should give more scrutiny to companies “that have received taxpayer assistance then going out and renovating bathrooms or offices or in other ways not managing those dollars appropriately.” (Green, 2009)

Thain had also overspent in cases such as paying $837,000 to Michael Smith who was also chosen by the Obama family to decorate the White House for just $100,000. (Weisenthal, 2009)

The items bought were of huge value; consisting of antiques that are seldom encouraged to be had in offices. Some of the items were a 19th Century Credenza worth $68,000, a pair of guest chairs worth $87,784 and an area rug for $87,784 to name a few major items. (Weisenthal, 2009)

To sum it up, his actions were unethical as Thain spent lavishly when the company was in a critical stage firing employees, suffering humungous losses and losing shareholder’s stock equity value tremendously when a turnaround in the company’s future was unforeseeable in at least the short run.
What did Ken Lewis hope to gain by claiming that he was “pressured” into completing the Merrill Lynch deal?

Considering the experience and success Lewis had in his past years, he had considerably great reputation. Before the congress, Lewis had testified that he was reluctant to commit to the deal for any longer but was pressured by the federal officials to proceed with the deal. Not only that, he claimed that his job was endangered and also the bank’s relationship with the federal regulators if he backed out. His sayings were supported by internal emails. (Tanoh, 2013)

In this case, Lewis is looking for public sympathy and seeking to share the blame. If he had admitted that he only let the deal through due to his ambition would solely put the blame on him that he did not want to happen that would also endanger his already well-built reputation. His ambition to become a giant was evident and he was aware of the consequences in one way or another. Although Merrill’s losses were far greater than expected but highly inevitable; hence claiming pressure was just to divide the blame and involving the government in his argument. Also, Lewis had enough experience to avoid such a disaster prior to signing the deal. Consequently, the situation he got himself into was nevertheless due to his ambitious approach to the acquisition. Lewis also argued that Paulson, The Treasury Department at that time did not want public disclosure of Merrill’s losses as government and the firm were in negotiation of possibly further provision of direct aids. (Clark, 2009) (Rappaport, 2009)

Lewis was put into this situation due to his own actions as every action has a reaction. In this case, Lewis’ ambition led to bad decision-making that were unethical initially i.e. misrepresentation to stakeholders
Of all decisions made by Ken Lewis in this case study, which one do you think did the most damage to his reputation? And why?

Decisions and integrity are vital for any CEO, they are the determinant of success and failures of any company regardless the size. Lewis made various choices that led to his downfall but the crucial one proved to be the nondisclosure of the actual state of Merrill Lynch to the shareholders. As a leader, his statements later on highlighted his shortcomings and inability to perform ethically. He failed to take responsibility for his own actions that not only hindered his reputation but also shattered the stakeholders’ trust in him.

His ambition and success was unquestionable as he had his good days behind him but dishonesty led to his downfall. Despite his successful mergers, takeovers and acquisitions in his career, he needed to be much more thoughtful prior to stepping into the deal. He allowed his ambition and his egoistical personality get the best of him. Baltasar Gracian once said, “A single lie destroys a whole reputation of integrity”. In this case, his lies that led to the acquisition were vital for his reputation. It may have been a different story if Merrill had been able to do well but Lewis failed to see and realize the ugly side of the picture. The acquisition of Merrill Lynch was unlikely to take place if Lewis had shown the actual financial position of Merrill Lynch but since he opted not to, the situation only points to him to take the blame.

For example, if Merrill had been acquired by BoA and faced the same travesty but the difference would be that Lewis had revealed the actual state of Merrill Lynch prior to the acquisition; he would not solely be blamed for the disaster.

What should Lewis have done?

The vital factor that led to Lewis’ downfall were the choices he made prior to the acquisition such as overpaying for Merrill Lynch, lack of research and control over his ambition, and even the nondisclosure scenario.

Prior to the purchases, Lewis should have been considerate and responsible and carry out effective analysis of both Countrywide and Merrill Lynch rather than being inconvertible and taking over companies due to his own motives and beliefs. Furthermore, Lewis should have thoroughly considered the economic situation as a whole before making the decisions and their potential outcomes. Also, a good manager offers enough protection to its shareholders and the company itself by protecting them through his actions whether monetarily or socially. His failure to forecast and reveal the originality of the financial statements of Merrill Lynch proved to be devastating to both himself as a person, his job position and his career. In addition, it would have also been much more appropriate to resign from his position at the time of accusations. He should’ve not accused other individuals for the results of his own actions. Being a CEO of the company, it was his responsibility to do everything possible to protect the shareholders and the company regardless of severity or outcome.

Dishonesty and lack of ethics are evidently seen in this case, as Lewis not only hid financial statements of Merrill Lynch, he also approved bonuses for individuals in the top management despite their troubles. Lewis should have shown integrity prior to the acquisition, as it would have not only saved his reputation; it would have also somehow played a lesser active role in the economic crisis. Lack of integrity was the root cause of the collapse.
Conclusion

No matter how big or small the firm; having integrity, thoughtfulness and the ability to forecast the consequences of your actions are vital for any manager in this globalization era. Despite the outcome, integrity can benefits your job and your career although problems may arise in the short run but the truth is never hidden just like the lies cannot be hidden either. Hence choosing what’s right over your personal motives can give you a brighter future in the long run.

As a result of the Lewis’ and Thain’s actions, it evident that they played a detrimental role not only in the US economy but also across the globe. Hence, to conclude; every action has its consequences, considering your future, your company’s and doing what’s right leads to greater heights than one can imagine.

References

‘A Merger of Corruption | Let’s Get Ethical on WordPress.com’ (2013). Let’s Get Ethical. Available at: https://bizgovsoc9.wordpress.com/2013/11/17/a-merger-of-corruption/#more-1290 (Accessed: 17 April 2015).

Ahrens, F. (2009) ‘Economy Watch - Bank Of America’s Lewis Opposes $500,000 Executive Pay Cap’, Bank Of America’s Lewis Opposes $500,000 Executive Pay Cap. Available at: http://voices.washingtonpost.com/economy-watch/2009/02/bank_of_americas_lewis_opposes.html (Accessed: 15 April 2015).

Asbery, N. (2013) ‘The Assault on CEO Compensation.’ Newsmax. Available at: http://www.newsmax.com/Finance/NealAsbury/CEO-pay-Switzerland-jobs/2013/11/21/id/537840/ (Accessed: 16 April 2015).

Clark, A. (2009) ‘Bank of America chief “told to buy Merrill or face sack”’, The Guardian, 23 April. Available at: http://www.theguardian.com/business/2009/apr/23/us-government-threatened-bank-board-on-merrill (Accessed: 17 April 2015).

Currier, C. (2012) ‘How Bank of America Execs Hid Losses—In Their Own Words.’ ProPublica. Available at: http://www.propublica.org/article/how-bank-of-america-execs-hid-losses-in-their-own-words (Accessed: 16 April 2015).

Green, P. (2009) - Bloomberg. Available at: http://www.bloomberg.com/apps/news?pid=newsarchive (Accessed: 15 April 2015).
News, A., gogoi, pallavi and today, usa (2009) ‘Stimulus bill’s CEO salary caps affect small banks, too.’ ABC News. Available at: http://abcnews.go.com/Business/story?id=6892884 (Accessed: 17 April 2015).

Patel, P. (no date) ‘Merrill Lynch Takeover by Bank of America.’ Seven Pillars Institute. Available at: http://sevenpillarsinstitute.org/case-studies/bank-of-americas-takeover-of-merrill-lynch (Accessed: 17 April 2015).

Rappaport, L. (2009) ‘Lewis Testifies U.S. Urged Silence on Deal.’ WSJ. Available at: http://www.wsj.com/articles/SB124045610029046349 (Accessed: 16 April 2015).
Sienkiewicz, J. (2014) Businesss Ethics Case Analyses: Bank Against America (2014). Available at: http://businessethicscases.blogspot.com/2014/11/bank-against-america-2014.html (Accessed: 16 April 2015).

Tanoh, S. (2013) ‘The Bank Of Americas Most Toxic Asset.’ Available at: http://www.businessteacher.org.uk/essays/finance/the-bank-of-americas-most-toxic-asset.php (Accessed: 15 April 2015).

The Bank of America and Merrill Lynch Merger: Ken Lewis’ Moral Dilemma (2009). Available at: http://www.fundamentalfinance.com/opinion/bank-of-america-merrill-lynch-ken-lewis.php (Accessed: 15 April 2015).
Weisenthal, J. (2009) ‘$1.2 Million Spent To Redecorate Thain’s Office’, Business Insider. Business Insider. Available at: http://www.businessinsider.com/2009/1/12-million-spent-to-redecorate-thains-office?IR=T (Accessed: 15 April 2015).

Similar Documents

Free Essay

Bank of America

...NUMBER: TP027192 INTAKE CODE: UC2F1501IBM BM061-3.5-2-BEG MODULE NAME: BUSINESS ETHICS GOVERNANCE TOPIC: BANK OF AMERICA’S MOST TOXIC ASSET (CASE B) INDIVIDUAL ASSIGNMENT LECTURER: FARAHIDA BINTI ABDUL JAAFAR DATE ASSIGNED: 06th MARCH 2015 DATE DUE: 17th APRIL 2015 Table of Contents INTRODUCTION. 3 Summary. 3 Ethical Dilemma. 3 Affected Stakeholders. 4 ANSWER FOR QUESTION 1. 4 ANSWER FOR QUESTION 2. 5 ANSWER FOR QUESTION 3. 6 ANSWER FOR QUESTION 4. 7 ANSWER FOR QUESTION 5. 8 ANSWER FOR QUESTION 6. 8 CONCLUSION. 9 REFERENCES. 10 BANK OF AMERICA’S MOST TOXIC ASSET (CASE B). INTRODUCTION. Summary. Ken Lewis was a Chief executive officer of Bank of America, he was appointed as American Banker’s "banker of the year "after purchasing Countrywide Financial and Merrill Lynch. The bank acquisition of Merrill Lynch in 2008 made Bank of America the world's largest wealth management Corporation and a major player in the investment banking market. The deals were applauded and made Ken Lewis even more worth being named as American Banker’s “banker of the year” During first week of January 2009 both Countrywide Financial and Merrill Lynch were bankrupt with assets in their balance sheet which set a new standard for toxicity in financial market, resulting in forfeiture for the bank and requiring financial assistance from the Federal Government. Bank of America was forced to welcoming U.S. taxpayers as the company’s largest shareholder. BOA stock was down...

Words: 2993 - Pages: 12

Premium Essay

B of a

...Bank of America: Challenges and Expecations Economic ups and downs are natural phenomena in today’s society. Specifically, American consumers want a good life financed by credit. The American way is, "live today, pay tomorrow". Over the years, America’s obsession for living above their means grew, even if their incomes didn’t, as revealed by the U.S. 2004 Census. A preferred standard of living and feeling of entitlement is what has dominated U.S. consumer spending habits over the last few decades. “This mentality worked so well in the 1960's and 1970's, when there were high-paying jobs, but failed miserably in the 21st century. Inability of the bulk of the U.S. population to change its mentality and live sensibly has resulted in expensive purchases that were not backed by economic realities. Lenders have helped fuel the public mentality by providing easy credit. Anyone who wanted to buy an expensive car or a mansion was a precious customer. To further boost profits, financiers engaged in risky business deals and did not keep enough cash reserves.” (lucidpages.com). This credit driven economy was unsustainable and became daily practice by business, banks and government which as a result has led to the financial meltdown that we are still experiencing today. Financial institutions, specifically Bank of America, engaged in predatory lending practices, poor acquisitions with Countrywide and Merrill Lynch, and faulty balance sheet management in which have all contributed to the collapse...

Words: 1829 - Pages: 8

Premium Essay

The Troubled Asset Relief Program

...Troubled Asset Relief Program Basic Finance for Managers BUSN 5200 Troubled Asset Relief Program The Troubled Asset Relief Program as part of the Emergency Economic Stabilization Act was an initiative signed into law on October 3, 2008 by then President George W. Bush. TARP authorized the U. S Treasury to purchase up to $700 billion in assets and securities from financial institutions in a response to a potential financial crisis and to stabilize the U.S financial markets. The big picture financial system of the nation is configured in such a way that it acts as the channel between corporations and individuals. Essentially the financial system is the system that enables lenders and borrowers to exchange funds. This is a process that takes place at all levels. Individuals, banks, insurance companies, and all manner of financial companies are borrowers and lenders to some degree. The ability of money to generate money is accomplished by taking deposits from other sources and lending them out at higher rates than the borrowing rates. This has become the basics of the U S economy. If for any reason the ability to continuously conduct these types of transaction were to be threatened, slowed or stopped the economy itself would suffer significantly and possibly halt as a result. This paper purposes to explore the circumstances within the U.S financial market that led to the apparent need for this initiative, it also purposes to examine the intent of...

Words: 1923 - Pages: 8

Free Essay

Bank of Shorewood

...While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves. Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy. Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red. The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses. The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners. In some cases, they tighten lending and make it harder for longtime customers to obtain loans or favorable terms. In other cases, managers of the new bank make other changes, like ending offers for high-interest certificates of deposit and calling in certain lines...

Words: 597 - Pages: 3

Free Essay

Questions and Answers

...Chapter Two Economics: The Framework for Business Review Questions 1. How did the global economic crisis unfold? The economy changed for the worst when the dot.com bubble burst in 2000, and 9/11 terrorist attacks happened in 2001. 2. What steps did the Federal government and the Federal Reserve take to mitigate the crisis? They decreased interest rates, and subprime mortgage came into play. They seized a few companies that controlled a lot of the mortgage. The congress passed a bill on dollar bailout plan. As the new administration began Obama passed a 825 billion dollar bailout plan. 3. Compare and contrast microeconomics and macroeconomics. How do the two approaches interrelate? Use a specific example to explain. Macroeconomics is the study of a country’s overall economic issues such as performance, structure, behavior, decisions making, and study rates. Microeconomics focuses on smaller economic units such as individual consumers, families and businesses. They can affect how much and what you can buy for your family. 4. What is the difference between fiscal and monetary policy? What role does politics play in shaping these policies? Fiscal policies refer to government efforts to influence the economy through taxation without representation and spending decisions that are designed to encourage growth. Monetary policies refer to actions that shape...

Words: 2326 - Pages: 10

Premium Essay

What Are the Determinants of Financial Access in Latin America

...opportunities, by simplifying corporate control over managers, by mobilizing savings, and by facilitating exchanges and thus promoting specialization and innovation. The author discusses that another financial indicator that suggests the region has a significant progress to make is the interest rate spread which is the margin between rates paid on liabilities and those received on assets. This chapter provides new evidence on the extent of firms’ access to financial services in the Latin America and Caribbean region and the relationships between access and selected policy-relevant variables. Moreover, the chapter explores the determinants of access by firms in the Enterprise Surveys sample. Also, the chapter studies the relationship between quality of courts and access to financial services. According to the Enterprise Surveys, the analysis of access focuses on the following six principal measures: First, Checking, which is an indicator variable that equals 1 if the enterprise has a checking account. Second, credit, is an indicator that equals 1 if the enterprise has overdraft, loan, line of credit, or any bank financing for working capital or investment. Third, Unconstrained which is an indicator variable for those enterprises that are not constrained. This indicates if the firm has applied for a loan but has been rejected of that the firm has not applied for a loan before. Moreover, Access index...

Words: 3707 - Pages: 15

Premium Essay

Too Big to Fail

...retrieval system, used in a spreadsheet, or transmitted in any form without the permission of the Toronto Leadership Centre for Financial Sector Supervision. Sources: This document is based on information that was in the public domain at the times mentioned or which became public after the resolution of the issues. It does not include information confidential to the financial institution involved. 1 LEHMAN BROTHERS: TOO BIG TO FAIL? WILLIAM RYBACK This case study is written and presented by William Ryback, former special advisor to the Financial Supervisory Service in Seoul, Korea; Deputy Chief Executive of the Hong Kong Monetary Authority; and career bank supervisor in the United States. The material presented is derived from public media sources. INTRODUCTION In this case study an example of a large bank failure and its after effects on the financial markets is presented and raises issues relating to "too big to fail". In this situation government, regulatory, and supervisory agencies were forced to address the public policy issues surrounding when, and if, an individual financial institution should be bailed out . In the case presented here the decisions needed to be made during a time of unsettled market conditions and, as is always the case, within a...

Words: 4616 - Pages: 19

Premium Essay

The Subprime Mortgage Crisis

...duration of the loan, and the adjustable-rate mortgages (ARMs) are loans with variable interest rates. Subprime mortgages are a combination of both FRMs and ARMs, because they provide for a fixed rate for the first 2-3 years as “teaser-rate”, following this period the interest rate becomes adjustable semi-annually (Kirk). Subprime mortgage is a type of mortgage that is normally made out to borrowers with lower credit ratings (often below 600), who, as a result of their deficient credit rating, would not be able to qualify for conventional mortgages. These loans are characterized by higher interest rates and less favorable terms in order to compensate for higher credit risk. Investors/homeowners receive the funds to make these purchases from banks...

Words: 1595 - Pages: 7

Free Essay

Lehman Brothers Holdings, Inc.

...Lehman Brothers Holdings, Inc. Introduction - The Rise and Fall of Lehman Brothers. Loose regulations, deception, and greed were the root of all evil for one of the largest investment banks in the world. Lehman Brother’s was founded in 1850. Lehman Brother’s survived the Great Depression, WWI and WWII. In 1969 Lehman Brother’s hired Richard “Dick” S. Fuld Jr. as an intern who in 1994 became CEO of the Company. During Bill Clinton’s Presidency government started to support middle and lower class people to own their own houses. During this time a XX”Fair Housing Act” was created which was supposed to stop mortgage banks from discriminating lower income people from owning their own houses. The 911 attacks from 2001 created the greatest loss in Wall Street since The Great Depression. George Bush and the government encouraged Americans to buy more property. Mortgage companies started to take advantage of all these factors and lured low income uneducated people to buy mortgages with introductory rates. They never warned these buyers that these were just introductory rates that would later increase. This in turn created a larger problem for the new uneducated homeowners. These new loans created havoc for the homeowners that were struggling to make payments, and then came the massive layoffs. The economy nearly came to a standstill, and the housing market was one of the hardest hit sectors in the global economy. With the perfect situations created by loose regulations, and...

Words: 9454 - Pages: 38

Premium Essay

Research on Usa's Financial and Constructive Crisis

...CONSTRUCTIVE BUBBLE ……………………………………...p.12 5. GOVERNMENT INTERVENCION ON… 5.1. FINANCIAL INSTITUTIONS FEDERAL RESERVE AND CENTRAL BANKS ………………..p.19 5.1.2. EMERGENCY ECONOMIC STABILIZATION ACT …....p.21 5.1.3 BAYLOUTS AND FAILURES ……………………………...p.24 5.2. HOMEOWNERS 5.2.1. HOMEOWNERS ASSISTANCE ……………………….....p.26 5.2.2. THE HOMEOWNER AFFORDABILITY AND STABILITY PLAN ……………………………………………….....p.29. 6. INTERVIEW WITH RICARD FERNANDEZ…………………………..p.31 CONCLUSIONS…………………………………………………………….p.35 AUTOAVALUATION………………………………………………………..p.36 BIBLIOGRAPHY AND SOURCES INFORMATION…………………….p.37 1.INTRODUCTION My initial intentions were to elaborate a research project with the objective of comparing the financial crisis in USA and Spain that were and are going through. I was planning on finding all the similarities and differences that were most important or characteristic. When I was half way on the research, I realized how extent the information was, so I reduced to the financial and banking part, and the construction bubble. I did this because I thought they were the most important or interesting (for me) subjects. Finally, I changed it so that I would only work on the financial crisis in the United States because of the fact that firstly, it is were the whole crisis began, and secondly, because I found it most intriguing. I chose to do this research project about this subject during my final weeks in First of "Batxillerato" because I felt it...

Words: 7538 - Pages: 31

Premium Essay

Capitalism

...INTRODUCTION The bank is one of the key-player in the capitalist system. The main cause of the 2008 Global Financial Crisis was the Sub-Prime Mortgage Crisis and the bursting of the housing bubble of the United States. As banks perform suspect lending practices to almost everyone, the result was the house pricing index has increased. From an ambitious point of view banks encouraged potential owners to take further loans more than they are capable of in hopes of generating more revenue. The next highlighted flaw was how the executives contributed to the crisis. No regulation was in place to observe the quality of the loans. Regardless on how the mortgages were performed as long as it was delivered; brokers that supply the chain of mortgages and investment bankers reap the benefit of exorbitant bonuses irrespective on how the loan will perform over time. There was no accountability and all the risks were ignored. This as well did not stop after the collapse in 2008, after an injection of the stimulus; bankers continue to procure excessive salaries and compensations at the expense of taxpayers. The fourth foremost contributor to this crisis is the consumers themselves and the government. The government did not take necessary actions despite the crisis and continued to be subordinates under financial institutions, and consumers unrelentingly went on unsustainable credit loans and lived beyond their means (Gallery & Gallery, 2010). The 2008 Global Financial Crisis proves that capitalism...

Words: 2008 - Pages: 9

Premium Essay

Accounting Analysis

...General Electrics: Works with Cost Information Jennifer Ortega January 24, 2010 Professor Barbara Borg General Electrics: Works with Cost Information There are many publicly traded companies that you work with cost information. I believe one of them is the General Electrics or GE. GE was named by the Fortune magazine in 2001 as America’s “most admired company” and the Financial Times identified GE as the “world’s most respected company”. (Grant, 2004) General Electric was ranked as the fourth most recognized brand in the world last 2006, estimating the company’s worth to almost $49 billion (The 100 Top Brands) The General Electrics is currently a giant producer of highly modernized equipments including aircraft engines, transportation equipments, kitchen and laundry appliances, lighting, electric distribution and control equipment, generators and turbines, and medical imaging equipments. (General Electric Company) The company currently has a long rooster of the list of acquisitions and divestitures. Despite the success, the company also faces some risk and weakness. The famous Sir Thomas Edison opened a new laboratory in Menlo Park, New Jersey in 1876 where an incandescent electric lamp was invented. After such invention, Edison organized his various businesses into the Edison General Electric Company in 1890. Few years later in 1879, the rival Thomson-Houston Electric Company was formed by Elihu Thomson and Edwin J. Houston...

Words: 2375 - Pages: 10

Free Essay

The Collapse

...“The Collapse” Mark Beasley (30 March 2010) Extract: Bill Wrinkle had it all; he was the leader of one of the most powerful financial institutions in the world, he had the respect (and some might say fear) of his rivals and colleagues and he had the beautiful wife and house. Bill had come from the tough streets of New York armed only with what many competitors called “cunning street smarts” and a propensity to bully and intimidate. He was lauded by the press as a pioneer in the “new economy” expanding his company into new exotic financial products and business lines as well as moving his firm into geographic locations not entered by foreigners before. However, that was all about to change as his life’s work began to crumble and fall all around him in the autumn of 2008. His days of enormous risk-taking and swaggering bravado was about to lead him and some 50,000 employees down a precipitous path to eventual destruction. “How had it come to this?” It was an unseasonably warm evening on the 5th of September 2008 when the lights of Bill Wrinkle’s midnight blue Mercedes lit up the forecourt of his expansive Greenwich, Connecticut home. Of all the palatial mansions that lined the treehugged streets of this part of the world, Bills was by far the most spectacular – a 12 bedroom oasis with tennis court, indoor squash court (which the talented player used almost daily), a 50metre infinity pool, and, enough land to host some of the more grander social gatherings of New Yorks...

Words: 4999 - Pages: 20

Free Essay

Financial Crisis

...09-093 July 22, 2009 The Global Financial Crisis of 2008 – 2009: The Role of Greed, Fear and Oligarchs Cate Reavis Free enterprise is always the right answer. The problem with it is that it ignores the human element. It does not take into account the complexities of human behavior. 1 —Andrew Lo, Professor of Finance, MIT Sloan School of Management The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. 2 —Simon Johnson, Professor of Entrepreneurship, MIT Sloan School of Management, Former Chief Economist, IMF On October 9, 2007 the Dow Jones Industrial Average set a record by closing at 14,047. One year later, the Dow was just above 8,000, after dropping 21% in the first nine days of October 2008. Major stock markets in other countries had plunged alongside the Dow. Credit markets were nearing paralysis. Companies began to lay off workers in droves and were forced to put off capital investments. Individual consumers were being denied loans for mortgages and college tuitions. After the nine day U.S. stock market plunge, the head of the International Monetary Fund had some sobering words: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” 3 1 2 3 Interview with the case writer...

Words: 10022 - Pages: 41

Free Essay

Too Big to Fail

...their failure will be. It is the duty of a responsible government to never leave their citizens vulnerable to such a catastrophe. The goal of this paper is to prove that too big to fail policy is what turned a period of stagnant growth into the worst financial crisis since the Great Depression. It is a well known fact that the housing market and therefore the United States economy started slipping in late 2007. As the economy was faltering, it still managed to not slip into recession status until September 2008. It is lees than coincidental that America's fifth largest financial institution, Lehman Brothers, filed for bankruptcy on September 15, 2008, the very same time the economy plummeted. The instability of the market led to runs on banking institutions, which in turn led to more bank failures, which led to massive bailouts. These bailouts, while helpful at the time, lead to unprecedented national debt. Allowing banks, securities companies, holdings companies, insurance companies, and combinations of the aforementioned businesses to privatize profits and publicize losses due to foolish risk will eventually ruin capitalism as we know it. Too big to fail is defined by Henry Paulson as “An institution whose failure would seriously hurt the economy or financial stability.” (Macey...

Words: 5770 - Pages: 24