Money and Banking

The AIM or American Indian Movement, was created in July of 1968. The AIM was a pivotal period of time for Native American people. The American Indian Movement made Native Americans visible in the eye of the public again. Dennis Banks and Russell Means were just two people who helped the AIM reclaim what was taken from Native Americans. Banks and Means were two people who fought day and night to reclaim what the government had taken away from there people. With Banks and Means creating such a legacy within the AIM, they broke down walls that had been up forever when it come to relations between Native Americans and the government.

C/D = 0.1; T/D = 2; ER/D = 0.2, [pic], [pic], MB = 1000. Compute the money multiplier, the money supply, the level of currency and checkable deposits, the level of time deposits and excess reserves, and the level of total reserves and required reserves. Use the model of money supply determination discussed in class. Show your work.

First, an overview of the Twentieth Century American Banking System. Banking regulations are implanted to strengthen the banking sector and to eliminate bank panics. For example, the creation of the Federal Reserve System in 1913 was largely a response to lessons learned in the Panic of 1907. Industry regulation and structure, risk management viz. moral hazard, adverse selection.

The Federal Reserve attempted to restore the wellbeing of the keeping money segment and expand the stream of credit to family units and organizations. With the expansion of liquidity to the keeping money framework, The Fed gave fleeting collateralized "markdown window" credits to banks. The Federal Reserve, working with other administrative offices, directed careful examinations of 19 noteworthy banks to guarantee they had the assets to survive a serious retreat.

The banking industry is highly competitive. The financial services industry has beenaround for hundreds of years and just about everyone who needs banking servicesalready has them. Because of this, banks must attempt to lure clients away fromcompetitor banks. They do this by offering lower financing, preferred rates andinvestment services. The banking sector is in a race to see who can offer both the

Many people know what the bank is but how many people know where and why it started? Banking in its modern form originated in the city-states of Italy during the 1400’s. This innovation developed slowly, however, and when the American colonies were founded, banking was still not an established practice in England. A text excerpt from “Banking Industry” in the Salem Press Encyclopedia states that:

The only bank that refused the join the syndicate was Bear Stearns. In the Bear Stearns case, the sudden collapse of the firm and the impossibility to calculate the risk of taking Bear’s mortgage holdings forced the Federal Reserve to be involved actively into the bailout instead of the “advisory” role it took in the LTCM case 10 years earlier.

The intervention of the Federal Reserve Bank is a precedent of its role bailout in the event of bankruptcy of a fund. On September 23, 1998, a group of 14 banks and brokerage firms invested $3.5 billion in LTCM to prevent its imminent collapse. Most of the major banks took part, including Federal Reserve Bank, Bear Stearns, Salomon Smith Barney, J.P. Morgan, Chase Manhattan, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs. (Stephanie)

Ultimately, U.S Treasury Secretary Henry Paulson directed CEO of Lehman Brothers, Dick Fuld to declare bankruptcy before the market opened. They decided against bailing them out and preached to the public about moral hazard. In this situation, if they were to bail Lehman Brothers out, it would promote the theory that, it wouldn’t matter if banks are careless with others money if they are going to get bailed out anyway, and also what is stopping these banks from not repeating the same mistake if the Fed bails them out in the end. This came over well initially in the public for those exact reasons but soon turned. Because of Lehman Brothers counterparty risk, it affected the entire financial market and another giant, AIG, began to collapse. With AIG failing it would cause the entire financial system to fall and cause massive problems. Due to these reasons Paulson lobbied for the government to intervene and eventually they did and passed the Emergency Economic Stabilization Act of 2008, which allowed Paulson to spend up to 700 billion to purchase securities and inject cash directly into banks. They ended up doing exactly what they weren’t willing to with Lehman Brothers and their preaching against moral hazard went right out the window when they decided to bail out AIG. Moral Hazard is a double edged sword because in the end, what is to stop these banks from doing the same thing again? Also, if

Enter Northern Rock, who needed this short term lending to maintain business as usual. We know what happened to them subsequently. Banks all over the world were suffering losses by this stage, and headlines were made when US bank Bear Stearns had to go to the Federal Reserve for funding. They were taken over by JP Morgan shortly afterwards. Then the floodgates opened, with the bankruptcy of Lehman Brothers in 2008 prompting a consolidation of banks (Lloyds bought HBOS, Bank of America bought Merrill Lynch). The whole financial system was under such a strain at this point that government intervention was required.

Banks became increasingly worried about both the value of their own mortgage books and particularly the value of the mortgage-securitised investments they had bought from other institutions As a result they became reluctant to lend to other banks in the short-term money markets. This crisis of confidence led to major liquidity problems for many banks and insurance companies worldwide. Liquidity

Another type of risk faced by banks is Liquidity Risk. The liquidity risk faced by the bank is that it has to have the ability to meet any financial obligations it has, using its available equity, when they are called upon, without suffering heavy or crippling losses. If a bank were unable to satisfy its depositors’ demands a ‘bank run’ may occur. This occurs when depositors lose confidence in the bank and rush to withdraw their deposits. An example of this recently was with Northern Rock who lost their consumers’ confidence and triggered the first run on a British bank in over a hundred years. The resulting bank run caused a severe liquidity crisis, which then transformed into a solvency crisis for the bank. It was at this point the government had to intervene and bail the bank out to safeguard Northern Rocks customers’ savings. To make sure that a bank is able to come good on its liabilities it must constantly make sure that adequate liquidity is maintained, that is to maintain a balance between its primary liabilities (clients deposits at the bank), that could be called upon to be paid on demand, and

An originate-to-distribute model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. This originate to distribute model had advantages over the old originate to hold model, where a bank originated a loan to the borrower and retained the credit risk. People believe that originate to distribute model of banking played a key role in the development of the financial crisis because instead of holding loans on banks’ balance sheets, banks moved to an “originate and distribute” model. Banks repackaged loans and passed them on to various other financial investors, thereby off-loading risk. Next, banks increasingly financed their asset holdings with shorter maturity instruments. This change left banks particularly exposed to a dry-up in funding liquidity.

The global market has never been larger, more dynamic, or more diverse than it is today. Financial institutions have shaped it and improved its efficiency, thereby making both the users and providers of funds better off. The process through which savings are allocated into productive investments is crucial for economic growth and general welfare. Investment banks are involved in this process, but what specific roles are attributed to them with respect to financial intermediation, and how well do they serve their functions?

determine how these problems might have been avoided, I will show the bankruptcy of Lehman