Effects of the Policy on the bank
Primarily, when an institution changes its name, there is bound to be an effect on its clientele as the population adapts to the new name. However this may work for or against the bank as the name acquired will either instill confidence in the customers or make them lose confidence in it.
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This acquisition also means that the institution may change from a private company to a public company.This kind of transformation may have several interpretations, with the underlying factor being that its policy implementation has to have a government perspective.
On one hand, this could see the institution coming back on its feet as the government puts in money to revitalize the institution while on the other hand some clients may argue that government indulgence in running of organizations does not always have positive results.
Positive Effect -The Case of Fannie Mae And Freddie Mac
From a wider perspective, the greatest advantage that may be accrued from the intervention of the government by acquiring an insolvent bank is, perhaps, saving the deposits of the shareholders (Wechsberg, 1966).
In 2008 the U.S government placed under conservatorship two of its popular and long time highly accredited mortgage providers, the Fannie Mae and Freddie Mac. The two institutions had been largely instrumental in the mortgage market since their inception in the 1938 and 1968 respectively (Solomon et al., 2008).
Owing to various factors and greatly to the economic meltdown of 2008 the two institutions were faced by a crisis and “filed for bankruptcy, with intent to liquidate assets, leaving them financially sound and outside of the bankruptcy filing” (Petersfield, 2008).
However; the federal government stepped in and pumped a substantial amount of capital in the institutions which ensured their continued relevance in the financial market. In addition to the conservatorship, there have been other measures undertaken with several government agencies stepping in to increase liquidity and capital base within Fannie Mae and Freddie Mac.
For instance, there has been a purchase of the GSE debt by the Federal Reserve; the Treasury Department has also a substantial amount in GSE stock as well as the purchasing of mortgage backed securities. In addition, the Federal Reserve has extended primary credit rates for loans to the GSEs (government sponsored enterprises).
The acquisition of the bank ensures that the bank remains in operation thus safeguarding the deposits of its clients. This impact on the economy n that these depositors are taxpayers and contribute to he growth of the economy.
The change of management, mean that there would be a fresh mind in policy making and implementation.
In addition, investors would have more confidence in the institutions due to government backing. This has been demonstrated by the case of the two institutions where the government opted to buy substantial amounts of stock and debt to bail out the company thus protecting the interests of the investors.
This move may also harmonize the playing field as industry players reflect on what could have contributed to the fall of these institutions thus coming up with policies that aim at leveling the playing ground.
Negative Effect-The Case of Lehman
While the bail out of Fannie Mae and Freddie Mac can largely be seen as a positive move or one that had positive impact, it is worth noting that it doesn’t always have a rosy side. The acquisition or bail out of institutions’ may at times have negative effects to the economy at large.
Conspicuously, the banks that do not benefit from government bailout have higher chances of going into bankruptcy (Thomas & Ignacio, 1995) In the United States the mortgage industry was probably the worst hit by the crisis of the late 2000s.
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For a long time Lehman had done considerably well in providing what is commonly known as subprime mortgages or mortgages that have a lower security end. However, in 2008, the crisis that saw the decline of dozens of other banks did not spare Lehman and the bank faced an “unprecedented loss to the continuing low end mortgage market”.
It was observed that “Lehman’s loss could have been largely attributed to having held on to large portions in subprime and other lower-rated mortgages when securing the underlying mortgages” (Thomas & Ignacio, 1995). One thing that may not be clearly established is whether Lehman did this as a result of its inability to sell the lower-rated bonds, or it was driven by a conscious decision to take hold of them.
After all, huge losses characterized the lower-rated mortgage-backed securities in the larger part of 2008. One of the notable negative effects of failure by the government to bail out Lehman despite the obvious signs of failure is the reported losses of about $2.8 billion, accrued in the second fiscal quarter of the year.
As a result, the bank was forced to sell $6 billion in assets. In addition, Lehman stock lost 73% of its value as the credit market continued to tighten, further underlining the fact that things were getting even worse for the institution (Quealy & Dylan, 2008).
By August 2008, there were all indications that things were not getting any better for the bank and eventually it announced that it intended to release 6% of its work force, approximately 1,500 people. Inevitably, several other banks have suffered the same fate.
However, the debate of whether it is upon the institutions or the government to put in place measures that shield them from such eventualities is a lengthy one. The lack of government backing may be seen as a major contributor to the eventual fall of Lehnman.
This further contributes to the loss of billions of substantial savings by the population especially given that it is a mortgage lender and many people would have invested almost a lifetime of savings on it
The two comparisons show clear distinctions between a bank that is bailed out and one that receives no support from the government. In view of this the policy is ultimately a good intervention measure (Solomon, 2008).
However, institutions must be left to act independently to allow for growth in the sense that, if institutions looked up to governments to bail them out of crises, then there would be no creative prevention and remedial measures put in place by these institutions (Sandra, 1985).
To this end we may argue that this policy is not good since it may not provide a healthy environment for competition. Institutions are also known to interfere with their own management structure and operation policies leading to their failure in the long run (Parker, 2012).
If the government encourages a practice where it steps in for falling organizations, and more so banks, it may encourage the tampering with of the institutions’ management thus failing to cultivate strong ethical organization practice.
This may lead to the eventual rise and fall of institutions that are not founded on strong corporate practices. It would also be necessary to put in place preventive measures in place as opposed to make corrective measures.
Charles, R. (1997). The last partnerships. New York: McGraw-Hill.
Parker, M. (2012). What happens when a bank goes bankrupt? Web.
Petersfield, G. (2008).The origin of financial crises: central banks, credit bubbles and the efficient market fallacy. Hampshire, UK: Harriman House.
Quealy, K., & Dylan., L. ( 2008). A year of heavy losses. Web.
Sandra, S. (1985). At Last, Shearson makes its move. Web.
Solomon, D., Michael C., & Liz R. (2008). Mortgage bailout is greeted with relief, fresh question. Wall Street Journal.
Thomas, G., & Ignacio M. (1995). The world bank research observer. Oxford: Oxford University Press.
Wechsberg, J. (1966). The merchant bankers. London: Pocket Books.