Corporate Bailouts and CEO Bonuses
The U.S corporate bailouts paid by tax payer money and the big bonuses the CEOs of these companies received.
Corporate bailout paid by the government involves taxpayer money directly or indirectly. The money can be generated through printing new money, tax revenue, or foreign debts, but in any case it is only the taxpayers who suffer economically. The CEO of companies receiving bailouts paid by taxpayers gets big retention bonuses from the bailout. These bonuses are not related to the CEOs performances. The government invests most of taxpayers dollars in mortgage backers such as Fannie Mae and Freddie Mac executives, leaving very little to the IAG. The CEO of AIG requires the recipients of the bonuses to return at least half of their total bonuses, but the CEOs of the two organizations do not bother. Studies show that the government has given CEO of the organizations a mission to address the housing crisis using the bonuses. Many questions come up when analyzing the amount paid by the taxpayers and the amount of bonuses the bailed firms get.
Taxpayers find themselves paying for large bonuses received by the CEOs of these firms. Some people argue that the government should be involved in regulating the amount of bonuses earned, while others argue that the main goal of the firms is to make money, thus should not be limited by regulations. Wall Street package contains restrictions on how the CEO should be paid, but it does not restrict the firms from paying bonuses to the executive. According to President Obamas argument, the CEOs in firms receiving bailout should not get any bonus. Bonuses should be paid for good work and performance, and since these CEOs have failed in their work to an extent of involving bailout, they should be ashamed rather than being entitled to bonuses. However, this is not usually the case. These firms beg for taxpayers money in order to rescue the firm, make lot of money from the taxpayers money and then they reward themselves leaving the taxpayers to suffer economically and in other ways. (BBC, 2009).
What is the public perception of this
Public arguments involves mixed reaction towards corporate bailout paid by money collected from taxes, and the big bonuses the companies receive as a result of bailouts. Some people argue that authorities should be involved in careful weighing of the consequences of the companys bankruptcy and the cost of bailouts. If the cost of bailouts is higher than the consequences of the companys failure, then the company should be left to fall. It is common for people to buy parts of the remnant after the organization has failed. Collapse of a firm with a deep connection in the financial system is catastrophic to everybody. In such cases regulators should consider bailout which is cheaper than the systemic risks associated with the failure of such organizations.
Other people argue that the taxpayer should not be left to pay for bailout in order to save the financial system rather, the system should be left to collapse, and undergo serious depression. When the system is assured of depression as a result of its collapse, and that taxpayers will not be involved with the distressed financial firms, then the financial firms will work hard to avoid distress, reducing the number of distressed financial firms and subsequent need for bailouts. Some of the banks should be left to move to the wall. Most of these bailouts involve the money collected by the government from taxes, and most of banks become bankrupt due to over lending. In this case, the taxpayers should not pay the bill for busting banks. Bailing out banks means bankers keeping their huge bonuses.
What actions (if any) did congresssenate take to attempt to stop this The impact of these actions on the stock market
The government has developed plans to free up credit market and help banks through the governments individual intervention and private interventions.
In 1971, the United States government honored a request from Penn Central Railway. The railroad received a financial assistance of 676 million in loan guarantee, and the government consolidated the Penn Central railroad with other railroad companies struggling to survive. The Consolidated Railroads was formed as a result of the consolidation. The result of the financial assistance given to the Penn Central Railroad was positive. In 1987, the consolidated railroad was sold by the government for 3.1 billion and extra 579 million was collected as dividends, after which it was taken public.
In the same year, the Aerospace Company Lockheed received 1.4 billion aid from the governments Emergency Loan Guarantee Act. The aid stabilized the financial state of the contractor, while saving California jobs. The result of the loan was positive as the Lockheed aerospace company completed to re-pay the loan in 1977 with 112 million associated fee. (Cheryl, 2004, pp. 22).
In the first half of the year 1974, the Franklin National bank suffered catastrophic losses. The bank sort government intervention which injected 1.75 billion loan. The result of the government intervention in the Franklin National bank was negative as the government detected mafia and corruption ties. This made the government to own the bank, and sold the banks assets for 5.1 billion within five years.
In 1979, Chrysler Corporation Loan Act was developed and in 1980 when the corporation automaker became bankrupt, Chrysler borrowed 1.5 billion private-funded loan to rescue the automaker from the bankruptcy. The government backed the Corporate Loan Guarantee act, in borrowing the loan. The results of the government back up was positive as, Chrysler completed repaying the loan in 1983 and went further to purchase 14.4 million stock shares warrant from the government amounting to 311 million.
The Continental Illinois National bank and Trust Company was considered by the regulatory agencies as a very big company unlikely to fail. In 1984, the FDIC took more than 80 of the banks total share through injection of 4.5 billion as a rescue to the bank. The result of the governments aid was negative, as the government incurred a loss of 1.8 billion in 1994 when the majority of the banks ownership was given back to the public. (CLN, 2010).
In 1989, large number of savings and loan institutions recorded insolvency. As a way of responding to the issue, the Financial Institutions Reform Enforcement and Recovery Act gave taxpayers money worth 50 billion. The outcome was positive as many of the savings and Loan institution were liquidated, and the industry practices was given more restrictions
The attacks of September 2001 left the airline industry crippled. The Air Transportation Safety and System stabilization Act was passed by the congress in effort to mobilize the airline industry. The airlines received 15 billion for defense against the attacks lawsuits, and mandatory plane grounding. The result of the government aid was positive as the airline stock was purchased below the actual market prices which give the taxpayers a net profit. However the government went a cost of 23 million as a result of bankruptcy of one of the airlines assisted.
In 2008, the non-resource loan worth 29 million was issued by the Federal to insure 236 million purchase of Bear Stearns by JP Morgan, and to cater for the less liquid assets in Bear Stearns Company. The result of the government assistance was both negative and positive. (CLN, 2010).
The Treasury secretary announced bank rescue plans which were established to address the toxic asset problem. Toxic assets in the banks anchored around the banks ankles. Following the past experiences, the rate at which the banks are lending is reducing, as the banks prefer preserving capital. Continuous sell off in the stock market has continued to deplete the retirement accounts wealth.