Discuss about   Ethics, Values and Social Responsibility………………..

Federal Bailout

Federal bailout is an emergency fund which is provided by the United States Treasury department to help in the purchase of assets which are in trouble and also to provide loans to companies which are financially struggling. In the United States of America the federal bailout is enacted as a law under the emergency economic stabilization act of 2008. Many of the banking and financial institution within the United States of America have benefited from the federal bailout (Jeffrey, 2011). However most of the federal bailout to these banking and financial institution have been surrounded with controversies regarding the use of these funds by the institutions. The controversies regarding the misuse of the federal funds by the banking and financial institutions have necessitated the federal governments to come up with policy measures that will ensure that the bailout funds are used by the banks and financial institution more appropriately.

Bank of America

Bank of America initially received federal bailout in 2008. This was during the global financial crisis. In 2009 the Bank of America acquired Merrill Lynch and through this acquisition the bank suffered big losses. In order to rescue the Bank of America from the consequences of the losses realized as a result of the acquisition of the Merrill Lynch, the federal government provided the bank with a federal bail out of $ 45 billion through Trouble Asset Relief Program. The bailout was in terms of massive capital investments. In a deal with the federal government the Bank of America also agreed to minimize the losses of troubled assets from $ 118 Billion but the Bank of America pulled out of the agreement before it was accomplished. The Bank of America finally ended up paying $ 425 Million in fees to various regulatory bodies in the United States of America with the treasury receiving $ 276 Million from the payment. Bank of America soon returned to the treasury $45 billion in December 2009.

Citygroup

In the 2008 financial crisis Citygroup was among the beneficiary of the federal bailout. Towards the end of 2008, Citygroup received an additional fund from the government in form of aid. The fund given to Citygroup during this time was meant to address the issue of its stock price which was coming down. In this bailout Citygroup received a total of $ 50 billion. The aid was in the form of capital investments and through guarantees for limiting of losses from $ 301 billion. The agreement was later terminated by the Citygroup and the treasury in December 2009 and citygroup paid back $ 20 billion, leaving $ 25 billion in arrears.

JP Morgan Chase

JP Morgan Chase received a total of $25 billion in trouble asset relief program funds. The find was received despite the fact that JP Morgan made profits both in 2008 and 2009. It repaid its federal fund by June 2009 and its workers were given bonuses amounting to $463000 during the same year. JP Morgan also acquired Bear Stearns with the help of the federal governments.

Goldman Sachs

Goldman Sachs received $ 10 billion in the form of Troubled Asset Relief Program Funds. It decreased it balance sheet by an equivalent of 25 % and increased the cash on hand amount. In 2008 the total bonus for Goldman was $ 4.82 billion and the total worth of the company was $7.8 billion in November 2009.  Goldman paid back its bailout amounting to $ 10 billion by the end of the year 2009.

Ethical implications

Lack of confidence in the government

The government has the sole responsibility to identify institutions that needs a federal fund. When the government decision to identify appropriate institution fails there will be a cause of worry to the general public. In some cases the firms or institutions that receive the federal funds have been found to have some connections with government officials or influential people within the government. This implies that the government may give federal funds in favor of some institutions in which they have some interest (Sloan, Burke & Newmyer, 2011).

Corruption

The misuse of the federal funds is seen by the public as a form of corruption practice. It has been found that politicians sometimes do have influence in the decision of identifying the institutions to benefit from the federal funds. Politicians do use the power they have to direct such funds to institutions which they have interest in (Lefebvre, 2010). This contributes to corruption practice in the society. Banking and financial institution which received the financial grant, have also used them in activities which was not the main objective for such federal bailout. Some banks have even used the funds to support the campaigns of certain politicians.

Lack of transparency

The misuse of the federal funds by various banking and financial institutions contributes to lack of transparency in the management of the institutions. The management of this institution some times gives false information regarding their financial status to the federal governments in order to receive such types of bailouts (Niepmann & Schmidt, 2011). The information given by the bank management in real sense does no necessary reflect the actual facts about the institutions hence there will a question of accountability.

Poor governance

The government should be held accountable for any particular activity which will eventually lead to loss of tax payer’s money (Klose, 2010).  Giving federal fund to institutions which do not deserve such fund accounts to great misconduct of the government decisions. There should be a proper mechanism from the government to be able to identify the institutions that deserves such funds. The government should also be able to follow and make sure that such funds given to such deserving institutions and are used appropriately.

Ethical issues surrounding federal government

The misuse of the federal funding has some ethical issues that surround the federal governments. It illustrates the level of irresponsibility of the governments towards tax payer’s money. The government in issuing of the federal funds to institutions that do not deserve such type of fund will show the level of the government’s responsibility in safeguarding and protecting the tax payer’s money. The government should be held accountable for its actions and hence it should have good mechanism to help identify the areas or institutions where such funds are deserved. Misuse of the federal funds brings about the issue of corruption in federal government. Policy makers can influence the award of federal funds to certain firms that they have some interest. In some cases politicians are bribed by the banking institution to make decisions regarding federal fund award in their favor. There is also inconsistency in the government’s activities. A government that is inconsistent can be considered as unjust government (Criveli, 2011). The government should equally treat its citizens. Hence for the government to ensure consistency the bailout should not be given to specific groups of businesses, in other words the government should not show partiality when giving bailout. If the government show partiality in giving the bailout it will mean that some businesses will pay heavy taxes and suffer from inflations at the expense of their competitors.

Private business sector

Private business sector have in most cases channeled the federal bailout in programs which were not primarily meant for those funds. Most of the financial institution has used their funds to sponsor campaigns for some politicians. This has greatly reduced the level of confidence that investors do have in this firms. The mismanagement of the financial institutions can reduce the level of confidence of investors to such an extent that it can lead to its collapse. The management policies of the financial institution can be termed as poor as it allows for flawed practices that will eventually lead to the collapse for those particular institutions. There will also be unequal distribution of resources by the governments to the private business sector, since some businesses will be favored while others neglected when giving the government bailout (Glassman, 2010). The partisan allocation of the federal fund will also contribute to unhealthy competitions between firms. Firms who receive the federal fund will have comparative advantage as opposed the ones which are neglected.

Public in general

The misuse of federal funds will impact negatively to the general public. The public will loose confidence in their government’s policies (Brian & Kirk, 2012). They will view their governments as untrustworthy and this to some extent can lead to political unrest. The general public will feel isolated from the key decision making by the governments. They will feel as if they are not part of the government hence they will not participate actively in the government development projects.

Future administration of federal funding

Federal government need to come up with good administrative practices that will ensure that the federal funds are not misused or abused within the banking industries. Federal government should form an independent body that will look into the affair of all the federal fund disbursements. The body should be non political and composed of members of various professional bodies and civil society within the country (Fahi & Triole, 2012). They should be given the mandate of identifying the firms that are in need of federal funds, as well as to monitor and report how these funds are being used by the firms.

Conclusions

Federal bailout programs have been instrumental since the advent of financial crisis that hit the world economy since 2008. Many companies struggling financially have benefited from the program as well as the economy in general. However, these programs have been misused by both the government and benefiting companies. The selection of companies that benefit from the program need to transparent to instill public confidence. The given funds need to be used for the intended purpose to which should contribute to economic recovery. The funding of federal programs should not lead to high budget deficit and increased taxation and government borrowing which may further worsen the economic condition of the nation.

 

References

Brian, G & Kirk, J (2012). Federal tools for preventing state budget crises. Indian law

journal. 87, 599. Indiana University. India.

Criveli, E (2011). Substantial fiscal behavior under the expectations of federal bailouts.

Journal of economic policy reform. Washington DC USA.

Fahi, E & Triole, J (2012). Collective moral hazard, maturity mismatch, and systematic

bailouts. The American Economis Review. 102 (1), 60-93.

Glassman, J.(2010) The failure of the liberal economic experiment. Commentary. 130(20),

34-37.

Jeffrey, M (2011). Building better bailouts: The case for a long term investments approach.

Florida Law Review. 63, 1349.

Klose, K (2010). A federal bailout for papers. American journalism Review. 32(1), 2.

Lefebvre, A (2010). Government bailout: Troubled Asset Relief Program. Nova science

publishers.eBook collection (EBSCOhost)

1. Niepmann, F & Schmidt, T (2011). Bank bailouts, international linkages and cooperation.

Working papers 170, 1-40

Sloan, A, Burke, D & Newmyer, T (2011). Surprise! The big bad bailout is paying off.

Fortune. 164(2), 64-71. USA.

Surowiecki, J (2007). Beware bailouts. New Yorker. 83(25), 33.

 

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