Tag Archives: bailout

This May Hurt a Little

Depicted as a doctor, Secretary of the Treasury Henry Paulson gives a “bailout” shot, or capital injection, during the “Great Recession.”
Depicted as a doctor, Secretary of the Treasury Henry Paulson gives a “bailout” shot, or capital injection, during the “Great Recession.”

In the wake of dramatic financial deregulation (e.g. the repeal of the Glass-Steagall Act, see McDonald) that occurred in the late 20th century, questionable financial practices (e.g. over-the-counter derivatives, see Beers) and outright corruption (e.g. the Credit Rating Controversy, see CFR Staff), were abundant in many companies on Wall Street. Due to loose lending/borrowing practices, many credit rating companies that were in charge of analyzing bank’s credit and checking eligibility for loans, failed to oversee many banks on Wall Street. By the Fall of 2007, prices of homes in the US were at their highest, which enabled homeowners to use their property as equity to borrow more and more money. Due to prices of homes being so high, many homeowners applied for loans for homes that actually were out of their price range—a major step on the path towards the subprime loan crisis. A subprime loan is “a type of loan offered at a rate above prime to individuals who do not qualify for prime rate loans” (Investopedia). They were given to “borrowers with impaired credit records” because such borrowers were turned away from traditional lenders (CFPB). These loans had higher interest rates compared to the normal rate for conventional loans. Giving subprime loans was “intended to compensate the lender for accepting the greater risk in lending to such borrowers” (CFPB).  As the use of subprime loans continued, an economic downturn began when bad accounting and poor management of investment banks and other institutions were revealed among many companies on Wall Street.

Known as the “Great Recession,” it was the most “severe, prolonged economic downturn” the US had experienced since the 1930’s (Rouse). Secretary of the Treasury, Henry Paulson (2006-2009), was called in to aid the failing financial system. Paulson, with the help of the Chairman of the Federal Reserve, Ben Bernanke (2006-2014), oversaw several forms of bailout, including the $700 billion Troubled Asset Relief Program (TARP). Contrary to his conservative economic philosophy, circumstances forced Paulson to implement capital injections into big banks, to bring America out of its financial crisis.

By early Spring of 2008, many homeowners had accrued so much debt that they were not able to pay their mortgages anymore. As mortgages became too high, many people were forced to foreclose their homes, which led big financial institutions to stop buying mortgages. Big institutions such as the banks, Bear Stearns, and Lehman Brothers, and the insurance company, American International Group, or AIG, were “too big to fail;” if they failed the rest of country was at major risk of an economic downfall.

Paulson dealt with many dilemmas, including “moral hazard,” “the idea that a party protected in some way from risk will act differently than if they didn’t have that protection” (Beattie). Institutions were held to the standard, that if they are bailed out, they were not going to be bailed out again. The bailed-out companies were expected to learn from their mistakes, rather than make that mistake again. Paulson was also in charge of the Troubled Asset Relief Program, or TARP, which purchased “troubled companies’ assets and equity” for $700 billion” (Investopedia). However, along with many other conservatives, the Secretary of Treasury could not have been any more against TARP. He was a firm believer in the government refraining from intervention, and TARP did just that. Along with the use of TARP, the highly debated capital injections were implemented. Again, although very against it, Henry Paulson infused capital injections into banks, which was “an investment of capital into a company,” in return, the government would own stock in their company (Investopedia).

Warnings about a possible recession were given many times before by Brooksley Born, Chairman of the Commodity Futures Trading Commission (1996-1999). Born knew that Wall Street’s lack of regulation and over-the-counter derivatives were causing a threat to the American public (Beers). Over-the-counter derivatives were “private contracts that [were] traded between two parties without going through an exchange,” therefore posing a credit risk for many companies due to the absence of a clearing corporation (Beers). Alan Greenspan, the former Chairman of the Federal Reserve (1987-2006), refused to believe what Born had brought to the table. Greenspan’s unwillingness to believe Born would be our country’s biggest mistake.

Before the stock market crashed in 2008, unemployment was at its highest, peaking at “10 percent,” which was just “15 percent less than that of the Great Depression” (Horton). In the housing sector, supply and demand was uneven, meaning more houses were on the market than there were buyers. This caused commercial and investment banks to suffer large from the loss of payments from their borrowers.

Goldman Sachs’ former CEO, Henry Paulson, was Secretary of Treasury, while Ben Bernanke, expert on the Great Depression, was Chairman of the Federal Reserve during the recession. Bernanke and Paulson were called in to combat the panic on Wall Street. They both knew that something needed to be done immediately, but how were they going to do it? Bear Stearns was their first item of business. On March 10, 2008, Bear Stearns, one of the smallest investment banks on Wall Street, could not open for business due to lack of financial capital (Inside the Meltdown). Bernanke and Paulson agreed that the Federal Reserve was not going to interfere with banks by aiding them with money, but money was what Bear Stearns needed desperately. Bernanke was able to find a way to provide the funds to assist Bear Stearns. He persuaded JP Morgan and the Federal Reserve Bank to give secure funding to Bear Stearns, which almost immediately backfired. Other banks did not like that Bear Stearns was given money and they weren’t. Despite the bailout, Bear Stearns was back to normal for just seven days before shutting down permanently.

After Bear Stearns shut down, came the ethical concerns associated with moral hazard and the rapid decline of the economic system. Moral hazard entailed, if the government bailed out a corporation, what incentive would they have to not make that mistake again? The administration of Bernanke and Paulson was “accused of allowing the creation of moral hazard risk from its bailout of Bear Stearns” thus “raising expectations that other firms facing failure would also be bailed out” (Markham). Therefore, Bernanke issued a warning to Wall Street that they were not to loan money to any other banks.

Almost a week later, on March 17, 2008, Lehman Brothers, the “fourth largest investment bank in the United States,” went into bankruptcy, this signaled the coming of the largest financial crisis since the Great Depression (Horton). Paulson, exhausted and under immense political pressure, was searching for a buyer for Lehman Brothers. The problem was that no banks wanted to lend to another bank for fear they would not get paid back. Bankruptcy was a certainty and the government wasn’t going to intervene any further. After Lehman Brothers went into bankruptcy, Wall Street froze, and the pressure to solve the economic decline returned (Kessler).

In September 2008, AIG, the largest insurance company on Wall Street, was next to call for Paulson and Bernanke’s help. AIG did not have enough money in the bank to honor the commitments they had made with their clients (Manning). Their crisis was so severe that members of Congress were brought in to help Bernanke and Paulson. They came to the decision to save AIG by bailing them out from the US government with over $183 billion (Manning). After the efforts given to save Wall Street’s largest corporations, many believed the government was reacting but not acting (Manning). With the criticism of the government’s lack of intervention, Bernanke then called in Paulson to explain that it was time for them to do something more direct; something that would hit all investment banks.

Bernanke and Paulson went to a congressional leadership meeting held at Capitol Hill to deliver the news. Paulson told Congress that, “Unless you act, the financial system of this country and the world will melt down in a matter of days” (Inside the Meltdown). Paulson brought the Emergency Economic Stabilization Act of 2008, to Congress that stated he needed $700 billion from taxpayer dollars “to be used to buy the kinds of toxic mortgage securities that were creating so many problems for the banks” (Inside the Meltdown). Moreover, those funds were needed in a matter of days. Capitol Hill was furious, “It was an unprecedented, unaffordable and unacceptable expansion of federal power” (Inside the Meltdown). Thus, when the House voted on the bill, it failed, leading to an immediate and dramatic drop in stock prices.

After the act failed, the idea of capital injections came into play. Capital injections entailed inserting “billions of dollars into ailing banks in order to boost confidence and unfreeze credit” (Inside the Meltdown). There were insiders in Congress who liked the idea and believed it was what they needed to save the banks. Authorization of capital injections was added into the Emergency Economic Stabilization Act of 2008, but Paulson could not have been any more against it. The bill passed, and Paulson reluctantly had to “step in directly with government capital” (Inside the Meltdown).

Due to the act passing, Bernanke and Paulson had to sit down with executives from the top banks on Wall Street at the time, such as Wells Fargo, Bank of America, and Goldman Sachs. Paulson told them he would be giving each bank tens of billions of dollars in return for the government being a major stockholder in their companies; “Paulson would spend $125 billion that day” (Inside the Meltdown). For Paulson and Bernanke, government intervention was not morally right, but it was their only option. Along with enforcing capital injections, the Troubled Asset Relief Program (TARP) was created to make up for lost capital in banks.

Against Paulson’s beliefs, he was assigned as head of TARP, which “stabilize[d] the country’s financial system, restore[d] economic growth, and mitigate[d] foreclosures” (Investopedia). It allowed the government to buy stake in banks, in return, companies would lose certain tax benefits, and have limits placed on executive compensation, in order to protect funds being spent. By 2010, Paulson would spend $350 billion to save the financial system.

During the time of the Great Recession, many cartoons were printed in newspapers regarding the 21st century’s worst economic crisis. For example, in Gary Varvel’s cartoon above, Paulson is depicted as a doctor giving a shot with the term “bailout” written on it. Varvel incorporated a humorous play on the word injection, by creating a parallel image between government intervention and a shot.  Paulson is shown saying “this may hurt a little,” meaning not only the pain of a needle but portraying a poke at the government’s administrations ego and outlook. There is a play on words with capital injection, by the word “injection” being represented as a needle to symbolize companies getting a shot of capital “bailout,” as an immediate cure to the failing financial system.

The cartoon by Gary Varvel resonates with the 1930s’ era cartoon titled, “What This Congress Needs,” published in the Dallas Morning News (Knott). These cartoons depicted the main influencers during the time of the major financial crises: President Herbert Hoover and Secretary of the Treasury, Henry Paulson. Knott’s cartoon and the accompanying editorial, “Mr. Hoover Reproves,” discussed saving America’s economy and the efforts needed in order to end the financial crisis (Dallas Morning News). Varvel’s cartoon about capital injections related to Knott’s cartoon, “What This Congress Needs,” by showing how each era was in desperate need of funds and the efforts gone to preserve these funds. Both men depicted in the cartoons were harshly criticized by their peers and the people of America for their efforts in aiding their country.

The “Great Recession” was unlike anything America had seen since the Great Depression of the 1930’s. When banks started to have lack of regulation and poor accounting, it caused the beginning of the financial crisis on Wall Street. Sadly, had the advice of Brooksley Born been applied earlier on, the disaster could have been avoided. Rather than being prevented, however, the Great Recession had begun when an influx of homeowners received such large loans that they were unable to pay the banks back. Henry Paulson and Ben Bernanke did everything in their power to bring America’s finances back to normal, by loaning funds, establishing bills, and injecting capital into companies. As shown in Knott and Varvel’s cartoon’s, the efforts given in order to fix the failing financial system were actions Hoover and Paulson thought were necessary for the United States. Hoover and Paulson had many different successes and failures during their terms in the US government. Their efforts have given modern-day government an outlook on how to avoid and handle another disastrous stock market crash.

 

Works Cited:

Beattie, Andrew. “What Is Moral Hazard?” Investopedia, Investopedia, 3 Jan. 2018, www.investopedia.com/ask/answers/09/moral-hazard.asp.

Beers, Brian. “What Is an Over-the-Counter Derivative?” Investopedia, Investopedia, 2 Apr. 2018, www.investopedia.com/ask/answers/052815/what-overthecounter-derivative.asp.

CFR Staff. “The Credit Rating Controversy.” Council on Foreign Relations, Council on Foreign Relations, www.cfr.org/backgrounder/credit-rating-controversy.

Horton, Ron. “The Great Recession.” St. James Encyclopedia of Popular Culture, edited by Thomas Riggs, 2nd ed., vol. 2, St. James Press, 2013, pp. 541-543. Gale Virtual Reference Library, http://link.galegroup.com.ezproxy.lib.utexas.edu/apps/doc/CX2735801140/GVRL?u=txshracd2598&sid=GVRL&xid=87cd5064. Accessed 12 Apr. 2018.

“Inside the Meltdown.” Frontline, produced by Michael Kirk, Jim Gilmore, and Mike Wiser, PBS, 2009.

Investopedia. “Subprime Loan.” Investopedia, Investopedia, 22 Feb. 2018, www.investopedia.com/terms/s/subprimeloan.asp.

Kessler, Andy. “What Paulson is Trying to Do.” The Wall Street Journal. 2008. Factiva. https://global-factiva-com.ezproxy.lib.utexas.edu/ha/default.aspx#./!?&_suid=152528787598900347533194525429.

Manning, Robert D., and Anita C. Butera. “Consumer Credit and Household Debt.” Encyclopedia of Contemporary American Social Issues, edited by Michael Shally-Jensen, vol. 1: Business and Economy, ABC-CLIO, 2011, pp. 33-45. Gale Virtual Reference Library, http://link.galegroup.com.ezproxy.lib.utexas.edu/apps/doc/CX1762600011/GVRL?u=txshracd2598&sid=GVRL&xid=635eef03. Accessed 16 Apr. 2018.

Markham, Jerry W. “The Crisis Begins.” A Financial History of the United States, vol. 6: From the Subprime Crisis to the Great Recession (2006-2009), M.E. Sharpe, 2002, pp. 473-523. Gale Virtual Reference Library, http://link.galegroup.com.ezproxy.lib.utexas.edu/apps/doc/CX1723800208/GVRL?u=txshracd2598&sid=GVRL&xid=5e26353e. Accessed 15 Apr. 2018.

McDonald, Oonagh. “The Repeal of the Glass-Steagall Act: Myth and Reality.” Cato Institute, 16 Nov. 2016, www.cato.org/publications/policy-analysis/repeal-glass-steagall-act-myth-reality.

“Moral Hazard.” International Encyclopedia of Organizational Studies, edited by Stewart R. Clegg and James R. Bailey, vol. 3, SAGE Publications, 2008, pp. 917-919. Gale Virtual Reference Library, http://link.galegroup.com.ezproxy.lib.utexas.edu/apps/doc/CX2661400320/GVRL?u=txshracd2598&sid=GVRL&xid=7d7982a8. Accessed 15 Apr. 2018.

Rouse, Margaret. “What Is Great Recession (Great Recession)? – Definition from WhatIs.com.” SearchCIO, Mar. 2012, searchcio.techtarget.com/definition/The-Great-Recession.

“The Warning.” Frontline, produced by Michael Kirk, Jim Gilmore, and Mike Wiser, PBS, 2009.

“What Is a Subprime Mortgage?” Consumer Financial Protection Bureau (CFPB), 24 Feb. 2017, www.consumerfinance.gov/ask-cfpb/what-is-a-subprime-mortgage-en-110/.

Varvel, Gary. “This May Hurt a Little.” 28 September 2008. Found, Cartoonist Group, 20 April 2017,  http://www.cartoonistgroup.com/store/add.php?iid=26948

2008 Bailout of Wall Street

Uncle Sam struggles to bear the burden of Wall Street while distraught President George W. Bush assures Wall Street, not Uncle Sam, that everything will be okay.
Uncle Sam struggles to bear the burden of Wall Street while distraught President George W. Bush assures Wall Street, not Uncle Sam, that everything will be okay.

 

In the early fall of 2008, America’s financial system nearly collapsed. Some of Wall Street’s biggest corporations had engaged in what President George W. Bush called “irresponsible actions” that caused widespread panic. Eventually, the situation became precarious enough to warrant action by the federal government in the American free-enterprise system. The federal government’s plan was to use $700 billion dollars of taxpayer money to resolve the crisis and bailout Wall Street. President George W. Bush addressed the nation on September 24, 2008 to propose the bailout through a joint congressional bill. The federal government promised that the bailout, while costly to American taxpayers, was essential to the maintenance of the financial system, and that the “irresponsible actions” of Wall Street executives would not be ignored (C-SPAN 2). Many American taxpayers begrudgingly agreed in 2008 that the federal government’s plan to bailout Wall Street was necessary; however, the burden of funding the bailout and empty promises made by the federal government eventually led to a high degree of taxpayer dissatisfaction.

In Daryl Cagle’s humorous depiction of the 2008 bailout, Uncle Sam struggles and sweats under the weight of Wall Street. Uncle Sam, a symbol of American taxpayers, is depicted as small and skinny. He holds the entire weight of a fat pig, representative of Wall Street corporations, on his back. The Wall Street pig is dressed in a formal business suit and is accessorized with features of stereotypical Wall Street wealth, such as a large bag of money, a ring, and a cigar. President Bush, representing not only himself but the federal government at large, worriedly screams “Don’t worry! You’re going to be okay!” (Cagle) The President Bush character worries about the pig instead of Uncle Sam; this cartoon reflects the American taxpayer sentiment of dissatisfaction about the actions by the federal government and the consequences of the bailout.

The financial crisis of 2008 spurned the need for government action and the bailout after Wall Street made some risky investments. President Bush explained the crisis started when Wall Street lenders, including banks and insurance companies, began giving credit to individuals who could not afford the mortgages on the homes they purchased during the good housing market. When the housing market fell, many homeowners were left with mortgages they could not afford and homes worth very little. As a result, the institutions that had lent the homeowners the money began to fail. In addition, many of these institutions had invested in mortgage-back securities which are risky investments. According to President Bush, these securities allowed the investors of Wall Street to borrow “huge sums of money, fuel the market for questionable investments, and put our financial system at risk”. He then told Americans that action by the federal government was now vital and explained his administration’s proposal that Congress pass a bill for a bailout funded with $700 billion dollars in taxpayer money (C-SPAN 2). Congress passed H.R. 1424, called the Emergency Economic Stabilization Act of 2008, in early October 2008 (United States).

President Bush placed the blame of the crisis on Wall Street, which satisfied Americans. The unsatisfactory part of the bailout for taxpayers was that they were expected to cover the expenses of Wall Street’s mistake. While many middle class taxpayers opposed having to pay $700 billion dollars to protect what they saw as money-hungry businessmen, President Bush promised that there would be consequences for the Wall Street executives responsible for the crisis (C-SPAN 2). Regardless, many taxpayers felt that an unfair burden was being placed upon them as reflected in Cagle’s struggling Uncle Sam character. The Los Angeles Times released a poll in late September 2008 that showed fifty-five percent of Americans opposed the use of taxpayer dollars to fund the bailout (Bensinger). Other Americans showed their dissatisfaction through protest. On September 25, 2008 protestors gathered outside of Wall Street to demonstrate their opposal to the federal government’s plan. AFLCIO president John Sweeney told reporters, “We want our tax dollars used to provide a hand up for the millions of working people who live on Main Street and not a handout to a privileged band of overpaid executives” (Weissner). This statement by Sweeney reflects the sentiment of Cagle’s cartoon Uncle Sam who struggles to bear the burden of Wall Street.

As earlier presented, President Bush promised that the bailout was not a handout to Wall Street but rather a way to save America’s financial system (C-SPAN 2). This perhaps made it easier for some Americans to agree to support the bailout. However, this sentiment changed greatly in the aftermath of the bailout. President Bush relayed to Americans in his 2008 speech that top executives on Wall Street knowingly made risky investments, were responsible for the crisis, and would face consequences for those actions; However, The New York Times released an article in 2011 addressing this very issue: “no senior executives have been charged or imprisoned, and a collective government effort has not emerged” (Story). Three years after the bailout, no executives had been criminally prosecuted. In fact, many of the institutions that had received money from the bailout actually gave their top executives large bonuses in 2008 (Bernard). A joint poll released by CBS and the New York Times five years after the bailout in 2013 showed that over sixty percent of Americans did not support the bailout and over eighty percent felt that Wall Street had not faced harsh enough consequences for its risky actions and investments (Kopicki). Americans felt that Wall Street was not only saved by the federal government at the expense of regular taxpayers, but that it also faced practically no repercussions for its actions.

As similarly depicted in John Knott’s 1937 cartoon, “How About Sharing The Load”, American taxpayers are depicted in Cagle’s cartoon as struggling to carry a burden of government. In Knott’s cartoon, a figure labeled “taxpayer” struggles to carry a large bundle labeled “expenses of government”. Another man labeled “public jobholder” looks on while smirking because he has a piece of paper in his pocket labeled “income tax exemption” (Knott). This cartoon refers to the nation-wide public dissent from American taxpayers concerning federal tax exemptions for government job holders in the midst of The Great Depression. While both these depictions reflect strikingly similar sentiments and widespread dissatisfaction from Americans, these two situations in American history have reaped different outcomes. In the case of the 1937 federal income taxes, President Franklin Delano Roosevelt’s sentiments reflected those of the American population; therefore, he was able to use his influence as president to help ensure change in the form of ending the exemptions. In the case of the 2008 bailout, however, President Bush felt that the burden placed upon American taxpayers was not as great as the importance of the financial crisis on Wall Street, so he was able to use his influence as president to perpetuate the passage of the Emergency Economic Stabilization Act of 2008 despite public dissent.

The financial crisis of 2008 was a large source of public dissatisfaction for average Americans in the early 21st century. While some Americans agreed to support the federal government’s plan to use $700 billion dollars of taxpayer money to bailout many Wall Street corporations in 2008, many Americans later felt that they faced the consequences of Wall Street’s risky actions.  Cartoonists John Knott and Daryl Cagle both reflect public dissent in their respective cartoons by depicting American taxpayers as struggling under a financial burden set upon them by the federal government in a time of economic trouble. Unfortunately, public dissent and frustration did little to reap any kind of change in the 2008 bailout compared to the way it did in the 1937 federal tax exemption issue. Despite this unfortunate outcome, Americans should still voice their opinions to federal government officials in order to keep the average American spoken for as the 21st century progresses.

Works Cited:

C-SPAN 2. “George Bush Wall Street Bailout.” 24 Sept. 2008, Washington D.C., White House.

Cagle, Daryl. “Wall Street Bailout Pig.” DarylCagle.com, darylcagle.com/2008/09/23/wall-street-bailout-pig/.

United States, Congress, Cong. House, Energy and Commerce; Education and Labor; Ways and Means. “Congress.gov.” Congress.gov, 110ADAD. 110th Congress, bill H.R. 1424, www.congress.gov/bill/110th-congress/house-bill/1424.

Bensinger | Times Staff Writer, Ken. “Masses Aren’t Buying Bailout.” Los Angeles Times, Los Angeles Times, 26 Sept. 2008, articles.latimes.com/2008/sep/26/business/fi-voxpop26.

Weisner, Christian. “Labor Leaders Decry Bailout.” National Post, 26 Sept. 2008, www-lexisnexis-com.ezproxy.lib.utexas.edu/hottopics/lnacademic/p. A10.

Story, Louise. “In Financial Crisis, No Prosecutions of Top Figures.”The New York Times, The New York Times, 14 Apr. 2011,   www.nytimes.com/2011/04/14/business/14prosecute.html.

Bernard, Stephen, and Business Writer. “Bailed-out Banks Gave Millions in Exec Bonuses, NY AG Report Shows.” ABC News, ABC News Network, abcnews.go.com/Business/story?id=8214818&page=1.

Kopicki, Allison. “Five Years Later, Poll Finds Disapproval of Bailout.” The New York Times, The New York Times, 26 Sept. 2013, economix.blogs.nytimes.com/2013/09/26/five-years-later-poll-finds-disapproval-of-bailout/.

Knott, John. “How About Sharing The Load?” Dallas Morning News 10 April 1937, sec 2: 2. Print.