The Impact of Foreign Investors Coming to the Rescue and or Bailing the United States Out of Financial DisasterIntroduction When viewed from the retrospect of history, among the major topics that shaped American history in 2007 and 2008, and maybe beyond will certainly be the near fatal condition of major financial organizations and corporations such as AIG, Lehman Brothers, Fannie Mae, Freddie Mac and like. Also, the focus will certainly be on the governmental bailouts of these firms and others as well as foreign involvement in the faltering American economy.
This research will focus not only on the stories of these companies and bailouts, but also on the impact of foreign investors bailing out the United States in these trying economic times.Foreign Organizations-Bailout of/Investment in American Firms Economics in the late 20th and early 21st centuries are complicated to say the least; in the United States alone, there have been countless cases of huge business and financial firms coming to the brink of destruction if not total destruction through a combination of poor management decisions, tough economic climate and in some cases, intentional corruption on the part of the company’s leaders. With all of this taking place, it became apparent rather quickly that in some cases, companies would be able to be revived if a bailout were to come from some source.
The obvious source of massive amounts of money would first be the US government itself, not only because the government has the financial resources to enact such help, but also because the government has a vested interest in helping those companies that many feel are too big to fail. Of course, if those companies failed, the average person would likewise be harmed in the form of job losses and so forth. There are cases, however, when the government is either unwilling or unable to assist companies. In these instances, there are times when private American concerns will bailout another organization by acquiring it and injecting it with badly needed capital; an example of this which stands out in recent memory is the acquisition of failing Bear-Stearns by Merrill Lynch which saved a significant Wall Street firm from collapse and the ensuing side effects that would cause major damage to many other firms with which Bear-Stearns did business (Morgenson, 2008). Foreign investors likewise play a pivotal role in the issue of American financial disaster and the potential preservation of the economy in the midst of such disasters. Like many other economies, the American economy does in fact rely heavily on investors from abroad, who not only do business with American firms, but also are invested heavily in American banks, own large amounts of American debt and actually own physical pieces of America in the form of real estate holdings.
When the American economy starts to falter, as any economy does from time to time due to the cyclical nature of economic activity, foreign firms that are doing business with the US are inevitably affected. If the economy slows to the point where the firms are being damaged, they could theoretically pull their money from American investments, recall debt and so forth, which would be even worse for the overall economy. Therefore, in some cases, foreign firms have rescued American companies through investment or outright acquisition. Initially, this of course is a great thing, because financial disaster is averted. However, the financial disaster is replaced with obligations to foreign interests which may, over the long term, not have America’s best interests in mind. Their currency is certainly needed when the American economy reaches trying times, but in exchange for that help, the economy becomes basically owned by other nations. What happens when the domestic economies of those foreign concerns is an impact to likewise be considered.
It is entirely possible that the foreign concerns would pull their money from America if it were more urgently needed in their home countries, leaving the US much worse off than it was before the bailouts came. The best plan will be for American firms, and the domestic government to be the key contributors to the American bailout. In this scenario, foreign concerns do not have total control over the American economy. Another impact that must be discussed when foreigners rescue the US economy is that which exists due to the instability of the international peace situation. In the 21st century, nations seemingly change loyalty to other nations overnight, and wars/terrorism erupts without warning. This must be taken into account when foreign investors are allowed into American business. If American suddenly goes to war with a given nation, and that nation has large investments in the American economy, the enemy becomes the landlord in a manner of speaking.
As such, diplomatic as well as economic factors must come into play. The issues of bailout, whether the bailout comes from American sources or abroad, brings about the question of when it is in the best interest of the American economy and the average tax payer for mega companies to be revived or to let the organizations die a natural, albeit painful and premature death? There are two schools of thought in regard to this issue- certainly, if investment firms are allowed to essentially crash and burn, the financial losses that average investors would encounter could lead to their personal bankruptcy, putting a further strain on the economy due to a drop in tax revenues and the need for bankrupt individuals to most likely rely on government funded assistance programs in order to be able to survive (Morgensen, 2008). On the other hand, the question remains of where to stop in terms of bailing out every organization that reaches condition critical. Obviously, there would need to be a point when the assistance would stop, and some organizations would receive assistance and some unfortunately would not. This is quite the slippery financial/ethical slope and also entails the question of the responsibility that the government has to protect the people by promoting strong commerce and consumer confidence.Enron and the Birth of Sarbanes-Oxley The point was made earlier in the research that much of the financial illness in American business is caused by intentional misdeeds. Many consider the pivotal example of this illegal behavior to be found in the case of Enron, the Texas-based energy giant whose demise several years ago is not only the reflection of corruption at its worst, but also the originator of the widest sweeping anti-corruption legislation in recent times.
Staffed by some of the most ruthless, and intelligent businessmen in America, Enron conspired to fix prices in American energy markets, misrepresent revenue to falsely inflate stock prices, and unwittingly entice ordinary employees to invest their entire retirement savings in Enron stock that would ultimately prove to be worthless, leading some of these employees to suicide and all of them to various stages of financial ruin. Because of this scandal, the federal government passed into law the Sarbanes-Oxley Act as a means of more closely regulating accounting and financial reporting practices, hopefully protecting others in the future and preventing another Enron from ever taking place.AIG, Lehman Brothers, Fannie Mae, Freddie Mac and Federal Bailouts On the domestic front, the American government has been involved of late in potential and actual bailouts of many of the major financial institutions in the US. As was discussed earlier, Lehman Brothers, the Wall Street powerhouse, pursued American governmental bailout in 2007. Upon closer examination of Lehman’s weaknesses, it was found that Lehman was in large part failing due to mismanagement at best and criminality at worst.
Poor investments were coupled with such wrongdoing as the backdating of stock options to take advantage of market changes, spelling disaster for Lehman Brothers, leading to the need for a private firm to bail out Lehman Brothers (Herman, 2007). Bailouts from the government have been given to other companies, however. Mismanagement seems to be the common denominator in the cases of Fannie Mae and Freddie Mac, the organizations dedicated to helping Americans to realize the dream of home ownership. In pursuit of the achievement of this dream, it now appears that Fannie Mae and Freddie Mac both made poor decisions in issuing home mortgages that were too large for the borrowers to realistically afford them. When widespread defaults on these mortgages occurred, Fannie and Freddie were holding loans that were essentially useless, forcing the organizations to seek government bailout in order to be able to survive (Hagerty, 2008). With these bailouts came many questions, such as when the bailouts would end, who was worthy and unworthy of such help, and who would decide these items. As of the time of this research, October 2008, the US House of Representatives and Congress are wrestling with the establishment of a bailout plan that would fairly and effectively help the US overcome its current financial disaster.
Conclusion Financial disasters, whether accidental or intentional, certainly require intervention to minimize the damage and restore economic health. With this in mind, both the American government and foreign interests have stepped up of late to give the US economy a needed boost. As has been seen in this research, however, the extent of the assistance, and the long term implications of that assistance are of key importance. In closing, it would seem that the challenge going forward will be to strike a balance between domestic and foreign assistance, and determining who is worthy of that assistance. Only time will tell what the right path will be.Works CitedCoustan, H., Leinicke, L. M.
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