Bailout Act Of 2008 Case Analysis

2020 Words 9 Pages
The global financial crisis was triggered by the U.S. housing slump in 2007 and 2008. After the dot-com bubble burst in 2001, investors were looking for another place to invest. They found this in real estate which was thought to be safe because prices were thought to always go up. With mortgages available at low rates Americans began to take on more debt. U.S. firms also began to borrow heavily to buy assets with relatively small initial out of pocket capital costs. When the market crashed in 2007, investors tried to sell their assets to pay for their debt, but that drove lower prices and greater losses.
The rise and fall of U.S. housing prices was driven by three main factors: Low interest rates, unscrupulous sales practices, and incentives for home purchasers to avoid personal responsibility. Low interest rates led to the demand for higher returns on mortgaged backed securities (MBS) that led to the increase in subprime loans. Unscrupulous sales practices pushed people into subprime loans when they were not able to afford them. Incentives for homeowners to avoid responsibility were created by states not allowing mortgage holders to go after homeowners when the
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It discusses the intentions and unintended consequences of the act. A main discussion point is Treasury recapitalizing banks under the too big to fail doctrine, which was a broad and inconsistent bill that Pozen argues should be limited to financial institutions extending lines of credit that are entrenched in the financial system. This means to stop giving capital infusions to financial institutions that have recently converted to banks as well as insurance companies. Additionally, the Stimulus Act of 2009 did some counterproductive things by unlinking pay for performance and allowing banks to redeem preferred stock early and without paying a premium. This identified the banks that were weak and needed the capital versus healthy banks that did

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