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Bad Bank Podcast Analysis

862 words - 4 pages

BFIN 2123 Assignment

The banking industry crisis addressed in the “Bad Bank” podcast was primarily a “balance sheet” problem. In its most basic form, the dilemma that was faced and that served as a catalyst of the crisis was the inability of banks to cover their liabilities with their troubled assets. This led to an imbalance in the balance sheet where liabilities (initial capital and deposits) significantly exceeded assets (loans or foreclosed assets at a diminished market value) resulting, in many cases, in insolvency. The problem arose from unjustified lending practices which led to unqualified consumer mortgages that were defaulted upon, leading to the inability of deposits and ...view middle of the document...

There are several political reforms that address the concerns raised in the podcast. Restructuring consumer mortgages by the banks was not a feasible option but rather an initiative better suited for the investment funds mentioned towards the end of the podcast. The banks were not in a position to restructure their loans on an individual basis due to the time and administrative expense involved, and were better suited to sell off their mortgages in bulk at a discount in order to eliminate them from their accounting statements. On the other hand, increasing federal regulatory oversight and enforcement powers both before and after the bailout funds were administered does address the issues surrounding the banking crisis. According to the podcast, the government felt that nationalization was not an option but, in hindsight, a strategy similar to that implemented in Oklahoma and Texas in the 1980’s whereby the FDIC took over the regional banks and supplanted management and shareholders would have been a superior action. Although this course of action was not pursued in consideration of the widely national and even global nature of this particular crisis, perhaps targeting only the major players in the industry such as Citibank and Bank of America could have lessened both the taxpayer burden as well as the economic impact of the crisis. Upon issuing the bailout, forcing banks determined to be “healthy” to resume lending to small businesses would ensure continued free market operations which also could have alleviated the overall economic decline. Furthermore, periodic government regulated stress tests similar to those set forth by the Obama administration would allow for...

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