TOO BIG TOO
FAIL
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| TOO BIG TO FAIL MOVIE: MUST WACTH! |
1. Housing
Bubble Burst
The
government tries to give the opportunity to the entire public to have their own
house with a low interest rate offer for financing. Every person has the chance
whether they were lack on ability. Many developers start build home and the
customers apply for financing from the bank as the bank offer low interest rate
with easier application process. In 2008, the financial crisis was happen. It
gives the big impact to homeowners, which they were unable to make a payment.
The collapse of the U.S. Housing Bubble
has a direct impact not only on home valuations, but the nation's mortgage
markets, home builders, real estate, home supply retail outlets. According to general consensus, the
primary cause of the 2008 recession in the United States is the credit crisis
resulting from the bursting of the housing bubble.
2. Arrange
For Merging Bank
Bank’s
merger may cause moral hazard of "too-big-to-fail". It seems that the
banks are too big, their special capacity of financial intermediaries to ensure
the rescue of the government. The government’s bailout encourage banks to take
on riskier investments that will affecting money security community.
Merger can
be between commercial bank and investment bank in order to strengthen the
position on the weaknesses of the both company. Commercial banks accept
deposits from customers and makes borrowings to businesses and consumers. This
is considered a safe and stable business with low profit margins. Otherwise,
investment banks help the companies and the government raising money through
the sale of stocks or bonds, advising companies on mergers and acquisitions,
and securities trading to clients or their own account. These activities are
considered more risky than commercial banking, but the profit margins are
higher.
3. Subprime
Mortgage Crisis
Subprime
mortgage known as a “second chance loan”. It is a loan given to a group of
poor consumers while the other part does not meet the criteria approved lenders
can be viewed from a standard bank.
It is also
refer to a credit rating lower. They involve a wide range of groups, including
low income generator, there is a record debt default, speculators who had no
money but want to buy for investment purposes and others. They were given a
second chance to make a loan on the basis not want to help, but because of
capitalist greed.
When a loan
is given to those who had the potential fails to repay, the risk of failure to
pay a debt is called 'event of default' higher. The higher the risk of the
customers based on its capability to payback the financing, the higher the rate
of interest that is charged to the borrower.
This issue
is about started to threaten the U.S. economy starting in 2007 and continuing
effect the great companies such as Lehman Brothers, Merrill Lynch and AIG into
the loss. It's a domino effect on the other companies that are associated with
them. It began when the U.S. housing sector started bubble. Meaning bubble is when
the home is no longer able to rise up on the people. As a result, the number of
borrowers who fail or 'defaulters' is higher. The situation is the turmoil
spread to the crisis in August 2007.
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| James Woods AKA Dick Fuld in Too Big To Fail |
4. Seeking
External Investment
When the
housing price meltdown, Lehman Brothers start panic, and they were asking and
found for external investment in order to increase their capital. They were
seeking investors from Asian region such as from Japan, Korea and China.
Otherwise,
the investors are curious and disputing about the commitment of the banks,
whether they can long-sustain by their attitude in managing the company. The
investors are not seeking for short term profit only but for long
term-sustainabality.
5. Direct
Capital Injection
U.S Treasury
come out with the proposal that to give direct capital injection for all nine
investment bank; Bank of Amerika, Bank of New York, City Group, Goldman Sachs,
JP Morgan, Merrill Lynch, Morgan Stanley, State Street and Well Fargo. This
capital injection assists the bank in capitalized their assets.
6. Buying
Toxic Assets
Toxic asset is the
assets which have no value. In this story, the toxic asset was the house. It
was occurred when there is many homeowners that are unable to settle the payment
as the increasing in the interest rate and non-performing financing arise
affected from that. The price of the house is generally increased, but there is
a lot of homeowner unable to fulfill the payment. As the unable to make the
payment, they were declared as bankrupt, and the house have no value anymore
since there is no more people willing to buy it as the economic crisis.
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| "Hank Paulson" in Too Big To Fail: came along with the idea to buy the toxic assets. |
Troubled
Assets Relief Program (TARP) is a government program which allows the U.S
treasury to stabilize the country financial system and restore economic growth
by purchase the toxic asset from the banks which have the trouble on that asset
for about $ 700 billion. This can help the troubled financial institution liquidate
their assets, sustain for next level, and balanced their balance sheet.
7. Lehman
Brothers Declare Bankruptcy
Lehman is
the great investment bank. Hence, impact by the crisis, the homeowner
(customer) unable to pay the high rate of interest. Compared to choose whether
to continue make the payment even they were unable, the customers are mostly
refer to declare themselves for bankruptcy.
Basically,
when the customers won’t repay their financing to the bank affected from the
rising in the interest rate and they were unable since it was burdensome. By
right, the bank or the lender will take the risk in case of that. Lehman Brothers,
a great investment bank at that time was offering the customer on subprime
mortgages. The financing was given without the collateral and for the risky
customers based on their (CCRIS and CTOS).
When federal
reverse told that they were mostly, refer to save AIG compared to their bank.
Fed decided to help AIG in term of government intervention since that insurance
company is also influence affect from the crisis.
Lehman
brothers had insured their house as guarantee from AIG. When it was a lot of
non-performing financing occurs on their assets, it supposedly AIG who that
liable on the assets and they were required to pay the claim from Lehman.
However, it
seems that AIG will collapse if they were settling all the claim. Fed realizes
that, if the AIG collapse, it will give a great impact for the entire country
since it was the largest insurance institution that many individual, company
and even government is also make a contribution in the insurance. If the AIG
bankrupt it will affect many others institution other that Lehman itself.
Fed refers
to save AIG as they intervened into the company’ management and operation and
let Lehman declared them as bankrupt.
After the
bankruptcy Lehman liquidate all the assets and pay the debt, but it wasn’t
enough yet to cover all their liable. They were loss about $ 3.9 billion
dollars.
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| One of scene in Too Big To Fail |
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