Fshore Banking Institutions

The panic of 1907 and the Great Recession of 2007-2009 has both been major economic events in the United States economic history. This paper compares and contrasts these two major events and enables us to understand importance of certain financial institutions and regulations during troubled times in the financial sector. In this paper, both panics of 1907 and 2007 are historically analyzed and compared.

The financial industry had gone to several crises through the decades. Around 2008, Alex Preston notice that the investments banking industry was in a crisis. Big banks were closing its doors or selling out to other companies. As it was the case of the National City Corp.; the first ever American’s mortgage maker had to close its doors after taking a large amount of proprietary risk. Other big financial companies like Goldman Sachs and Morgan Stanley, to avoid having to go down the same way, became bank holding companies, which means that these companies could receive emergency federal funds.

The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the

The financial crisis of 2008 did not arise by chance. The meltdown was precipitated by systematic striping away of the New Deal era policies of bank regulation. Most notable of these deregulatory acts was that of the Gramm-Leach-Bliley Act of 1999. This bill repealed the legislation which held commercial banks and investment banks separate. As the beginning of the 21 century approached many bankers clamored for an end to the policy of the “firewall” between Investment and commercial banks. Gramm-Leach-Bliley Act of 1999, sought to create more competition in the financial services industry. The policy, however, lead to the conglomeration of many corporate entities as banks had the capital to invest (in the form of consumer deposits) in a

Extensive research has determined that the banking industry is in an unstable state. The industry’s profits have

Financial crisis has been prevalent since time immemorial. The world’s economies have been continually hit by the same and the 2008 financial crisis is definitely not the last appearance. The financial sector involves complexity and contains one of the world’s largest players and has continually developed into large conglomerates sometimes too big to control. These financial organizations have developed products that have become hard to regulate and impose control on which has often led to their collapse. Major world governments and financial institutions, mostly the central banks have the responsibility to make sure that these organizations are operating both ethically and legally and within the bounds of the law. This is the institution of supervisory and regulatory roles to monitor them.

Almost 10 years after the Financial Crisis of 2007-2009, a great deal of confusion and doubt still lies within the minds of the people who were affected by the crisis’ overwhelming toll. The financial crisis is still considered relevant in the world’s economy today not only because $16 dollars vanished from the financial system, but also the financial recovery from the crisis is still in progress (Lam, NPR). There are multiple reasons to why the Financial Crisis of 2007-2009 came into effect. However, the most identifiable origin for the cause of the financial crisis was the financiers of the economy themselves. At the time of the crisis, the financiers of Wall St. believed to have eliminated most of their risk within the economy, when in fact the financiers had only lost track of their risk. The Financial Crisis of 2007-2009 came into effect due to the burst of the United States real estate bubble as well as the failed oversight of total risk in the economy by big bank financiers.

The largest banks, including Bank of America, removed most barriers limiting their high-speed expansion, and the loose regulation and supervision had exposed the whole financial system to higher risks. The largest banks became more powerful in a booming parallel banking system, and the fast growing banks stressed the regulators to remove barriers against their growth and competition. (P52) As a result, Bank of America along with other four largest banks owned 55%, jumping from 25%, assets of the industry, and the combined assets became more than tripled. (2) Additionally, the bank added more leverage, which rose form 18:1 in 2000 to 27:1 in 2007 (60). With the barriers removed and less capital to absorb losses, Bank of America was obviously vulnerable to huge and continual losses, which is a hint foreshadowing future struggle in the crisis.

America’s most resent crisis was the global financial crisis that started in 2008. It began with the bankruptcy of Lehman Brothers on September 14, 2008 and it spread like a flood through financial markets. At first the U.S banking sector had a great fall in liquidity, with this contraction in commercial lending banks could not pay their expenses. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. This crisis was further compounded because the majority of the banking industry in the united states was is managed by four banks. These banks are referred to as the “Big Four” them being: Bank of America, Welles Fargo, CitiGroup and JPMorgan Chase. These four banks managed 39% of the entire banking market in the U.S., because they manage such a large amount they have been deemed “Too big to fail”. The 2008 global financial crisis is essentially three interrelated financial crises; subprime lending crisis, housing crisis and the contraction of commercial lending within the banking industry.

As a capitalistic society, the United States banking sector has flourished ever since the chartering of its first bank, Bank of North America in 1781 (Smith). Historically, banking has brought on significant industrialization in the United States, enabling our nation to stand among the most powerful today. However, the current United States national debt is at $19.2 trillion, and every second it is increasing exponentially (“U.S. National”). How did we manage to fall into such a dark abyss of financial debt? Poor banking, continuous deregulation of the banking sector, riskier and higher leveraged investments, sub-prime mortgage loans, and fraud. These are all factors which have led our economy to collapse over and over again. In this mess

Scholars who researched The Financial Crisis of 2007-08 agree that bank deregulation starting in the early 1970’s a major contributor. The deregulation allowed for banks to increase in size by absorbing subsidiaries and allowed for banks to take more risks. Matthew Sherman dictates, “Many argued that consolidation in banking was an inevitable evolution and championed it as financial ‘modernization,’ but the changes posed

The fourth and final threat facing our economy is the necessity of short-term loans. In an effort to reestablish tangible capital, banks are beginning to cut back on short-term loans. “If the short-term commercial paper and money markets were to break down, the economy could go into a severe collapse because solvent and profitable businesses would be unable to attract working capital” (Sachs, 2008). This kind of collapse in financial liquidity is the basic reason why the United States economy fell by around twenty-five percent during the Great Depression (Sachs, 2008). Already, some of the biggest names on Wall Street have disappeared into thin air. Some attempts have been made to bring liquidity back to financial institutions.

In March 2008, the government of the United States was abruptly confronted with the first signals of what later became the greatest financial crisis in U. S. history since the Great Depression. The beginnings of the financial crisis began with the government intervention or bailout of Bear Sterns, the smallest of the five giant Wall Street investment banks, but the first one known to be in financial trouble. After the government’s rescue of Bear Sterns, more major financial institutions were found to be financially unstable as the meltdown of the financial markets continued, and the U.S. government was confronted with the dilemma to let the other Wall Street investment banks and businesses fail, or to rescue them since they were thought to be too big to fail (Sorkin, 2009).

The Savings & Loans crisis of the 1980s produced the biggest collapse of US financial institutions since the Great Depression. It emerged due to volatile interest rate climate in late 1970s when depositors withdrew from these S&L institutions in large number and put them in money market funds where they could get higher returns as these money market funds were not under the purview of Regulation Q which restricted the interest these S&Ls could offer to their depositors.

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of