The bonus culture & management incentives in banks were a key factor in the Irish and US Crisis. The system was flawed from the beginning; bankers took risks to get short term bonus, with no regard to long term consequences to the economy. Within the financial system the bonus culture is unique. The banks present a high percentage of it award based on bonus driven remuneration. For the employees of the bank it became a high percentage of their annual salary. This gave bank employees the incentive to offer risky loans and mortgages.
During the boom years from the mid 90’s to 2006 in the U.S. housing market experienced a boom. During this period many mortgages were offered to people who were in the high risk category of defaulting. This was very relevant in the investments bankers took, including in the profile of mortgages they gave out. The culture that evolved was get as many mortgages on the books as possible, even if the recipient of the mortgage was not a sound investment and in many cases had not the wages to cover the mortgages they received from the banking institutions. Ridiculous coverage of 100% mortgages was being issued to folks who could never ever pay back the loan. These customers did not have to go through the normal credit checks, these loans became known as subprime loans. These high risk mortgages were processed as securitisation; this is a financial practice of combining mortgages into one large pool. Most of the pools became mortgage – backed security (MBS) and were traded on the financial markets by firms such as Fannie Mae and Freddie Mac. These MBS delivered high rate of return for the traders increasing their bonus but were not sound investments for the bank. This careless disregard of the compan...
... middle of paper ...
... to guarantee these banks & their debts, economies & Countries would collapse. Society as a whole could have collapsed. The situation was a loaded gun and the pulling of the trigger started by bankers being greedy by trying to get the biggest bonus and not being regulated when making investments that went bad. See Fig 6 Bank Run Northern Rock
References
1. http://www.un.org/esa/desa/papers/2012/wp115_2012.pdf
2. http://www.theguardian.com/business/2013/feb/28/bonuses-the-essential-guide.
3. http://en.wikipedia.org/wiki/Subprime_lending#Subprime_crisis.
4. http://www.theguardian.com/business/2013/feb/28/european-union-cap-bankers-bonuses.
5. http://www.davidmcwilliams.ie/2013/06/27/how-the-banking-collapse-turned-into-a-dramatic-hostage-crisis.
6. Philippon and Reshef (2009)
7. Crotty (2009)
8. Bebchuk, Cohen and Spamann (2010)
9. (Acharya, 2009).
The Savings and Loans Crisis of the 1980’s and early 90’s created the greatest banking collapse since the Great Depression in 1929. Over half the S & L’s failed, along with the FSLIC fund that was created to insure their deposits.
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
The shares values had fallen and this left people panicking. Many businesses closed and several of the banks did not last because of the businesses collapsing. Many people lost their jobs because of this factor. Congress passed Roosevelt’s Emergency Banking Act, which helped reorganize the banks and closed the ones that were insolvent. Then three days later he urged Americans to put their savings back in their banks and by the end of the month basically three quarters of them reopened. Many people refer to the Banking Act as the Glass Steagall Act that ended up prohibiting commercial banks from engaging in the investment business and created the Federal Deposit Insurance Corporation. The purpose of this was to get rid of the speculations in securities making banking safer than before. The demand for goods were declining, so the value of the money was
Jake Clawson Ethical Communication Assignment 2/13/2014. JPMorgan Chase, Bailouts, and Ethics “Too big to fail” is a theory that suggests some financial institutions are so large and so powerful that their failure would be disastrous to the local and global economy, and therefore must be assisted by the government when struggles arise. Supporters of this idea argue that there are some institutions that are so important that they should be the recipients of beneficial financial and economic policies from government. On the other hand, opponents express that one of the main problems that may arise is moral hazard, where a firm that receives gains from these advantageous policies will seek to profit by it, purposely taking positions that are high-risk, high-return, because they are able to leverage these risks based on their given policy. Critics see the theory as counter-productive, and that banks and financial institutions should be left to fail if their risk management is not effective.
Leading up to the crisis of the housing market, borrowers got mortgages without understanding the terms. Banks were giving out loans to people the banks weren't sure could pay the money back. The closer to the crisis, the higher the frequency of illegitimate loans and mortgages. Because there were so many mortgages on houses that could not be paid back, millions of mortgages were foreclosed on, and the houses we...
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
In the article Predatory Lending and the Devouring of the American Dream, the article talks about how subprime mortgages were a booming success in the mid- nineties to the early two-thousands. It was a success because subprime mortgages offered an opportunity for people with bad credit history or people from the lower class of society to actually be able to purchase a home. The only consequences of doing subprime mortgages is that there is a high interest rate which makes paying off the home in a reasonable time impossible. More and more people started to apply for subprime mortgages, therefore, causing a crisis. The crisis was because people could not keep paying on their homes, so foreclosures happened. The percent of people applying and getting approved for subprime loans went up anywhere from seven to eight percent every year which also was a contributing factor in the crisis. The fact that the perfect home went up nine hundred square feet in four years, and eighteen years later was up by eighty-five hundred square feet is just an example of how the American Dream was going up in size but down in value.
Banks all around, especially the large ones, sought to support the market before it could crash down. As the stock prices crashed, banks struggled to keep their doors open (“Economic Causes and Impacts”). Unfortunately, some banks were unsuccessful. Customers wanted their money out from their savings account before it was gone and out of reach, leaving banks insolvent (“Stock Market Crash of 1929”).
Banks failed due to unpaid loans and bank runs. Just a few years after the crash, more than 5,000 banks closed.... ... middle of paper ... ... Print.
Men and women lost their life savings, feared for their jobs, and worried whether they could pay their bills.” (Richardson) Many United States Banks was closed and failure. Many people were going to banks and take all the money they have in banks, which cause the bank running out of cash. If the bank is failure or close that means the people that was saving money in the bank willlose all the money they have in that particular bank.
The subprime mortgage crisis is an ongoing event that is affecting buyers who purchased homes in the early 2000s. The term subprime mortgage refers to the many home loans taken out during a housing bubble occurring on the US coast, from 2000-2005. The home loans were given at a subprime rate, and have now lead to extensive foreclosures on home loans, and people having to leave their homes because they can not afford the payments. (Chote) The cause and effect of this crisis can be broken down into five major reasons.
At the time, there were not adequate facilities available to meet the demand for additional funds. Bank’s reserves of money were stored around the nation at 50 locations. The reserves were not able to be shifted quickly to the areas that were experiencing increases in withdraw demand. The immobility of reserves only added another element to the financial panic (Schlesinger pp. 41). The credit situation would become tense. Since the banks coul...
We have a responsibility as a society to care and to respond appropriately to affronts to our way of life. Millions of people lost their homes and their jobs, yet there was only a minor public outrage and it was quickly forgotten. No one was held accountable and the banks are the biggest they have ever been due to the mergers that occurred following the 2008 crisis. They even continue to lobby congress in their favor and have effectively blocked the reinstatement of Glass-Steagall, which allows them to continue the same practices which caused the 2008
Individuals like the two young and rambunctious mortgage consultants portrayed in the film gave loans to anyone and everyone that could sign the paper, regardless of the recipient’s ability to pay the loan in full. It is doubtful that all consultants fully understood the ramifications of their actions, but undoubtedly the overall disregard for consequence was the start of the collapse. Mortgage consultants mislead and tricked people into loans they could never afford by playing on their desire to live the American dream. Distributing adjustable rate loans to individuals without jobs, without collateral is unconscionable. Unfortunately, from their perspective they were helping these individuals. In a twisted way, these consultants were acting ethically from a utilitarian point of view. The consultants won because they received utility in the form of a bonus for distributing the loans, and the loanee won because they could now afford the home of their dreams. What the consultants didn’t consider in their calculations were the long term results and utility of their actions, unethically building the flawed foundation of the housing
Firstly, the main reason for the systematic failure, according to the report was the expansion of the property bubble financed by the banks. Between 2002 and 2008 bankers demonstrated high levels of greed combined with disregard for the risks and gross misjudgement which few bankers’ could disagree with. This was evident from the surge in lending between sectors which was very uneven. Residential mortgage lending and lending to the construction and property sector considerably out-paced growth in all the other sectors combined (see Fig1 15). For instance, lending to this sector increased at an annual rate of almost 45%. This effectively created a property bubble and like all bubbles, they burst, and this heavily influenced Irelands’ financial crisis. This tied with the world- wide economic crisis heavily increased the rate of the crisis.