Iain's blog: US Economy paper

First, this paper will briefly summarize the events that led to the financial crisis. Second, this paper will answer how subprime mortgages factor into the crisis. Third, this paper will explain how HSBC Holdings PLC contributed to the financial crisis. Fourth, this paper will explain the decisions companies made that led to the crisis. Fifth, this paper will explain the future impacts will this crisis will have on the market. Sixth, this paper will explain the future impact this crisis will have on buyers. Finally, this paper will explain the future impact this crisis will have on corporations.

A main event that led to the financial crisis is that Wall Street, in the late 1980s realized that it could create “bond-like” financial products from other debt-based income streams like credit cards, student loans and home mortgages. The “mortgage bond” was born, and became another financial product bought and sold by Wall Street investment banks, such as Goldman Sachs, Merrill Lynch, Bear Sterns, JP Morgan and Morgan Stanley. There was a lack of incite by the financial industry over competitive financial risk taking. The Sarbanes-Oxley Act was way too regulating. There were increased auditing costs of the Sarbanes-Oxley Act. There was also a international competitive disadvantage of the Sarbanes-Oxley act. The European Union, Japan and Canada just set corporate regulations due to the Sarbanes-Oxley Act. The Sarbanes-Oxley Act allows federal intrusion into corporate law traditionally regulated by the state. There is federal law enforcement as the new authority to scrutinize business finance. The Sarbanes-Oxley Act failed to prevent a recession. The Sarbanes-Oxley Act was unnecessary since the exchanges of stock had already implemented most of the Sarbanes-Oxley Act changes in the rules of corporate governance via the new listing standards. The costs of implementing Section 404 of the Act have been very high to extremely high. There are large incentives to avoid the stock exchange to avoid Sarbanes-Oxley Act, because a lot of small businesses delisted. The price-earnings ratios the S&P 500-stock index has been decreasing since 2002. (Owen, K., 2012) (CATO, 2012)

Wall Street banks at the center of it just kept on growing, along with the money that Wal-street elite gave to twenty-six-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture wasn't on the scale it was supposed to be. This paper believes twenty-six year olds wouldn't overturn their parents' world, because he/she can buy it and sell off the pieces. (CATO, 2012)

The subprime mortgages factored into the crisis beginning in the 1990s when Wall Street firms began to create mortgage bonds from “subprime” mortgages. These mortgages are much higher risk. These mortgages were paying much higher interest rates, made to borrowers with lower levels of credit. The structural “tranches” of the mortgage bonds built from subprime mortgages, at this point, represented not only pre-payment, but also outright default. (Bryant, C.W., 2012)

With escalating demand increasing numbers of Wall Street to buy subprime mortgages, lenders became motivated to place ever further subprime loans (since the government assumed the risk, there were no longer at risk, should the loans fail), and began to push messages like, “refinance your home, unlock all that equity, go on vacation and pay off your credit card debt. (Bryant, C.W., 2012)

In 2006, there was a spectacular rise of subprime mortgage closures. By 2008, the overall losses from subprime mortgages reached about $250 billion. Many mortgage brokers turned their clients toward loans they couldn't pay for. Once the introductory period on the subprime loans ran out, the new payments were higher than many could afford. The underlying mortgages became of lower quality. As a result, Wall Street’s mortgage bonds became inherently riskier, which should have made them more difficult to sell to investors. (howstuffworks, 2012)

Over the past three years housing prices had increased far more rapidly than the prices had over the previous thirty years. The housing prices had not yet fallen. yet they weren't going to rise anymore. The loans against the housing were now going sour in their first year from 1% to 4%. Many Americans who borrowed money to buy a house then defaulted less than a year. Since 2000, Americans whose homes between 1% and 5% had risen in value were nearly four times more likely to default on their home loans than Americans whose homes had risen more than 10% in value. This way millions of Americans ceased to have ability to repay their mortgages. These Americans houses never rose dramatically in value so they couldn't borrow more. (Bryant, C.W., 2012)

HSBC Holdings PLC contributed to the financial crisis, because it is a global banking company and financial service that gave out bad subprime mortgages to people with bad credit rating who couldn't pay the subprime mortgage back. In 2007, HSBC used $3.4 billion to cover bad loans. HSBC set aside $1.4 billion more than anticipated. In 2007, HSBC closed their subprime division. HSBC closed more than 250 locations in the United States worth $55 million. HSBC is a London company who bought 800 offices of Beneficial and Household Financial, and closed all 800 locations in 2007. HSBC was the first European bank to get hit by household subprime mortgage defaults. Beneficial and Household Financial was the largest US Financial business in 2002. HSBC Holding Public Liability Company is actually deindustrializing the United States by moving manufacturing jobs to Asia like China, Vietnam, South Korea, Japan, and Taiwan. It's cheaper to manufacture in these countries, because of lower wages and lower taxes. However, I do not believe that this is a crisis at all. The United States has many machines doing the manufacturing instead of people and we cannot get rid of these machines ever again. The US has to realize that its specialty is high-tech, high quality products made by machines and not tons of employees doing manufacturing. The US has been deindustrializing, because of the machines that create a lot of quality that a human can never do by hand. This paper believes it is too late to return to the industrial revolution days. (McLaughlin, T., 2007)(BBC, 2008)(Griffiths, K, 2008)(Goodway, N, 2007) (Werdigier, J., 2007)

The future impacts the crisis has on the market is the United States is figuring out that it cannot return to the old manufacturing human world ever again. That environment is forever lost. The labor costs in the United States are unsustainable. Labor Unions get legacy benefits that will be impossible to pay for. The machines such as robotics that are in place are the country's specialty. The US economy is going to be a service based one with a huge capitalist information technology sector to market various products and services. To improve the economy, the United States has to get labor benefits within sustainable margins and reduce government regulations to become more internationally competitive. (McLaughlin, T., 2007)

The impact of this crisis having on buyers is that the middle class is not going to spend money on the economy. The middle class buyers are going to buy what they need on sales and then stay home. The middle class Americans find something cost effective like DirecTV or videogames and watch or play. The buyers are going to conserve as much money as possible until after the 2012 presidential election; therefore they will not be buying at former levels. (McLaughlin, T., 2007)

The financial crisis has caused corporations to downsize in order for them to make a profit. The companies were moving towards improving information technology sector to save costs in all departments. Corporations are moving onto Facebook, Internet social networking, and ecommerce for cost-effective ways to make it profitable and advertise the company. The corporations are allowing employees to work at home so that they can save money on benefits. For example, company gas and illness costs are reduced. In 2007, the service sector contributed almost 78.5% and the industrial sector contributed 20.5% towards USA’s gross domestic product. (McLaughlin, T., 2007)

The corporations are afraid of hiring, because effective they want to see how the healthcare law will play out. The healthcare law is the single most job destroyer in the United States. The mandate may be unconstitutional and under consideration by the Supreme Court. The government is over-regulating in many other ways. The corporate taxes are highest in the world right now in early 2012. There isn't much commerce certainly without extending the Bush tax cuts for at least another year up toward five years. (McLaughlin, T., 2007)

First, this paper briefly summarized the events that led to the financial crisis. Second, this paper answered how subprime mortgages factored into the crisis. Third, this paper explained how HSBC Holdings PLC contributed to the financial crisis. Fourth, this paper explained the decisions the companies made that led to the crisis. Fifth, this paper explained the future impacts this crisis will have on the market. Sixth, this paper explained the future impact this crisis will have on buyers. Finally, this paper will explain the future impact this crisis will have on corporations.

References

Anonymous. (2011, March 03). The Big Short — A brief summary of the 2008 financial collapse.

Retrieved June 9, 2012, from Thisux website

http://www.thisux.com/2011/03/07/the-big-short-a-brief-summary-of-the-2008-financial-collapse/

Owen, K. (2012). Sarbanes-Oxley Act Disadvantages

Retrieved June 9, 2012, from Ehow website

http://www.ehow.com/info_8016570_sarbanesoxley-act-disadvantages.html

Niskanen, C. (2012). Congress Should Repeal the Sarbanes-Oxley Act

Retrieved June 9, 2012, from CATO website

http://www.cato.org/publications/commentary/congress-should-repeal-sarbanesoxley-act

Bryant, C.W. (2012). How Subprime Mortgages Work

Retrieved June 9, 2012, from howstuffworks website