Introduction
The main aspects that have crippled the economy have been the subprime mortgage loan crisis which eroded the credibility and capital base of many large financial and lending institutions. Many firms like Lehman Brothers went into liquidation and some companies like Goldman Sach and Morgan Stanley were bailed out with Government bail out plans. It would be necessary to consider the case of Goldman Sach and Morgan Stanley as part of an exemplification strategy in order to glean information on the government bail out packages to private banks and firms.
“Goldman Sachs Group Inc. also profited handsomely from Wall Street’s rally and the recovering credit markets to post $2.7 billion in earnings — even as it repaid $10 billion in bailout money. Goldman pared back its lobbying outlays in the quarter to $630,000 from $670,000 in the first quarter and $980,000 in last year’s second quarter.” (Gordon, 2009, Some bailout firms up lobbying spending in 2Q, para.11).
These firms might have taken loans from banks or financial institutions against the security of their property. For running the business the firms need working capital funds. Funds are required for many purposes like payment of salary to employees, acquiring resources for production, payment of interest on borrowed funds, payment of taxes etc. In case the firms fail to meet their financial obligations and result in stoppage of business activity, there will be a lot of problems like many employees lose their job, banks and financial institutions lose the money lent and owners lose their property along with venture capital.
So in order to bailout the private sector firms which are in crises, the government starts helping them in their rehabilitation schemes. The government helped the private sectors in many ways. The government provides funds and loans with softer rates of interest and effects changes in the repayment schedule and loan terms, which is intended to bail out the troubled firms.
Government helps the bankrupted banks
A good government is always helpful to the public as it aims for the welfare of the people. The government helps the firms which are in deep crisis and the help is not a temporary solution, but the desire for deep involvement in the private sector. If the industries are on the way to ruin, their consequences will be unpredictable. The collapse of such industries affects the government also as it has a lot of benefits out of them. For instance, if a bank is in the edge of fall and the government does not give much consideration to it, the consequences will be higher. The banks are the cornerstone of a nation as they play a major role in the economic development of a nation. Very often the government helps the private industries, mainly banks as seen in US. Major banks which were bankrupted are now running with the assistance of the government. The government provides sufficient helps to the banks in various ways, such as:
- Financial Assistance: The government grants necessary financial support when the banks are under great debt. Government’s help in the time of crisis will save the banks from absolute collapse. Often the government offers huge funds and reduce the taxes, which help the banks financially.
- Framing Laws supporting Banks: Government helps the banks by framing appropriate laws not only to overcome the crisis and also to continue to exist.
- Regulation of foreign investment policy: The government’s direct involvement in the operations of banks will help the bank to certain extent. The government controls the banks’ operations especially its foreign investments and thereby restrict all their operations within the home country.
Conclusions
However, it is seen that some of the bail out firms like Goldman Sach and Morgan Stanley were found to have enough capital to repay their bailout packages and have since returned their bailout money.
References
Gordon, M. (2009). Bank of America, Morgan Stanley, other bailout firms up lobbying spending in second quarter: Some bailout firms up lobbying spending in 2Q. Breaking News24/7.