Essay on nationalization solvency solution of financial crisis
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Nationalization Solution
It involves the typically the assumption of
small part or full part taking control over a financial institutions as part of
a bailout. During this time the senior management and board is replaced. Due to
full nationalization the current equity shareholders are totally sweep out and
policyholders may or may not receive the value of the debt owed by them. In
this scenario suppliers are generally paid completely by the U.S government.
The nationalization concept will work when the bank in the form then it is sold
to the public as well as taxpayers will get partial or full of their initial
investment back.
Solvency Solution
The solvency defines in financial terms as the
ability of a business, person or organization to meet all of its financial
obligations or debts with some cash to spare. In this scenario the critics
argued the U.S financial system the due to combination of high leverage and
losses are effectively insolvent. Using the solvency solution they find that
the crisis progress based the equity, if it is good then called as well
capitalized otherwise looking for the solution to improve the crisis of any
financial institution. This practice started into mid 2008 and finally
minimized the total value of property (assets) held by particular firms to a
peak stage roughly it equal to their liabilities.
To achieve the solvency they applied the bit of
accounting theory which is helped to understand the accounting concepts. This
identity has ruled out as must be hold true by account defination which forms
the formula that an asset equals the sum of liabilities and equity. Here the
earnings will retain based on the company's capital which measures the equity
of the firm. This formula gives the balance sheet of the firm technically which
shows complete amounts in terms of assets and liabilities. This solvency useful
when a firm seeks short-term obligations during arrangements it has to meet the
legal protection to enable the negotiate arrangements as calculated as a
formula oriented as followed.
FIN 200 Corporate Financial Management
Assets = Equity + Liabilities
Equity = Net worth or capital = Assets -
Liabilities
Ratio of Financial leverage = Assets / Equity
If liabilities equal assets then the equity must
be zero. The asset values on the balance sheet are remarked as down to reflect
expected loss; these institutions still obtain the creditors the full amount of
liabilities. The simple example if Company A used $20 equity or capital base to
borrow another $280 and invest the $290 amount in various assets, which then
fall 10% in value to $260. This firm was leverage shown as 28:1 (280 assets /
$10 equity = 28) and now has assets worth $260, liabilities of $280 and equity
of negative $30. Such leverage ratios were typical of the larger investment
banks during 2007. At 28:1 leverage where it only takes a 3.13% loss to
minimize the equity to zero.
Actually the finance organizations use various
regulatory calculations to define the strength of a particular firm. It also
called as tier 1 capital. Mainly the banks and regulators have been criticizing
the tangible amounts in regularity capital measures. Finally the firm has to be
good solvent to run the business operations with banks to get money to invest
in short-term and long-term plans.
Regulatory Control
The credit crunch of 2008 fired many
high-profile financial failures which has sweeper out and widespread debate how
the U.S government regulates financial markets. U.S has kept efforts to resolve
the financial crisis, where policymakers are considering for long-term efforts
which is significantly identify the rules governs financial firms and the
regulatory agencies charged with enforcement. The Treasury Secretary Henry M.
Paulson reforms the rules and regulations in March 2008 and pushed them for an
immediate implementation. U.S. Federal Reserve shutdown one regulatory agency,
and merge tow others includes Office of Thirst Supervision (OTS) ,Securities
and Exchange Commission(SEC) and Commodities Future Trading Commission (CFTC).
All these analysts planned empower of another regulator of US interrupted the
rules. The analysts and policy holders advocate different approaches which
discarded many financial safe guards and applied during the Great Depression
time. Finally the banks and insurance companies compete with brokerage where
houses offering more complex investment in products. During the rescission period
most of the financial institutions which took undue risks those are allowed to
collapse.
Government bailouts
Bailout is an injection of liquidity to help the
organizations from going under low levels which cause to the business as well
as country economy. The bailout will consider when the authorities believe that
collapses of the business occurred in consequences. As example if investment
organization went under then it will be ripple effect in the business trading
of stocks and securities which could cause financial problems. So finally all
the economist experts justified and believed and say bailout prevents calamity.
Majority of U.S markets recovered and helped a lot to safeguard the financial
system.
General Motors Corporation (GM)
The biggest automobile industry General Motors
(GM) was most dependent to recover bankruptcy with the help of U.S government
bailout. In December, 2008 President Bush sanctioned $13.4 billion as Troubled
Assets Relief Program (TARP). Again in March, 2009, Obama government has given
60 days to prove the viability.
Chrysler LLC
The president Bush announced $13.4 billion
bailout for American automakers including Chrysler LLC in 2009. Actually in
December 2008 Chrysler announced to close many plants to survive in next year,
but with the help of bailout it has survived to run its operations
successfully. In March 2009 again $6 billion was managed to deal the wrap of
the operations but finally managed in the bailout package otherwise it would
have walk away from Washington.
Bank of America Corporation
U.S Government considered the Bank of America
Corporation as one of the healthiest survivors of the 2007 financial crisis. It
shown as recovered after the purchase of Merrill Lynch at the time of late
2008. Finally it got $25 billion through TARP to absorb the Merrill Lynch along
with the losses incurred by the Merrill Lynch.
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