US Financial Crisis: Would the Bailout Work?



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Code : ECC0014

Year :
2008

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Abstract: This case is written primarily to debate and destill the merits and demerits of $700 billion bailout package. The sudden seizure of the US financial sector following the domino effect of the fall of Lehman Brothers in mid-September 2008 has not only sent shockwaves throughout the US economy but rippled across almost all the financial centres of the world. The case probes into various causes both proximate and remote that have brought about the mess of distressed financial assets, frozen the credit market and choked the real sector through its impact on both consumption and production. The massive bailout package that was quickly put in place by the US government to rescue the economy is analysed with regard to its efficacies and shortcomings. In the process, the aspects such as role of interest rate in the housing bubble and burst, securitisation of mortgages, subprime lending, complex financial derivatives, blurring of the operational distinctiveness between commercial banks and investment banks, debt delinquencies, foreclosures, credit crunch, link between the financial sector and the real sector, moral hazard, claw-back policy, relevance of Keynesianism vs neo-classical liberalism vs statist Marxism have all been brought into discussion. As the case unfolds, one would tend to switch from rooting for the bailout, to dumping it to reformulating it. Whether the bailout would work or not will get its discussants new perspectives as the case progresses with facts and logic from various angles.

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Pedagogical Objectives:

  • To analyse the causes of US financial crisis
  • To explore the relationship between financial sector and real sector
  • To debate on the pros and cons of the bailout package.

    Keywords : Financial Crisis, Subprime Mortgages, Housing Bubble, Toxic Assets, Bailout Plan, TARP, Bear Sterns, AIG, Fannie Mae, Freddie Mac, CDSs, Financial Derivatives, Moral Hazard, Liquidity Crunch, Claw-Back Policy

    Contents :
    How the Bailout Plan Came into Being?
    The Cause of the Crisis
    The Price and Provisions of the Bailout
    Pros & Cons of the Bailout


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