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Analysis Of Credit Crunch In Corporate America Finance Essay

Credit crunch, also known as a credit squeeze, finance crunch or credit crisis, is a reduction in the general availability of loans, or credit or a sudden tightening of the conditions required to obtain a loan from the banks, leading to various linked crash phenomenon [1] . A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability. Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments (often at the expense of small to medium size enterprises) [2] .

Financial crisis of 2007–2009

Many economists have claimed that we are suffering from the worst global financial crisis since the great depression in the 30s. Many phenomenons of the crisis actually could be seen in 2007. After the crisis of housing mortgage had been reported, even though the United State government has started some financial intervention approaches, the outburst of credit crisis occurred in September, 2008. Credit crunch is a field of the crisis, and we can attribute it to three main factors, the growth of the housing bubble, easy credit conditions, and the subprime lending.

Since 1997, the price of American house had boosted in a ridiculous speed. In 2006, the ratio of the national median home price to median household income rose to 4.6 [3] , reaching its peak. However, at that time, people still believed that the prices of American houses would keep rising in the future so the new houses kept being built and people believed that buying houses was a excellent way of investment, which resulted in that many house buyers had to turn to their second loans or to find other ways to refinance against their new properties, and created a strong demand for mortgage. Because the mortgage in the housing market in the United States has already been securitized, Wall Street investment banks then had the chance to respond to this demand with the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which was claimed safe by the credit rating agencies. Wall Street connected this pool of money to the mortgage market, with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. Besides, the strong demand for MBS and CDO lowered the lending standards, and enabled more people to be qualified to turn to mortgage.

In September 2008, average U.S. housing price had declined by over 20% from its peak in 2006 [4] . Borrowers with adjustable-rate mortgages (ARM) found that the money they had borrowed exceeded the market value of their houses, and they could not refinance to avoid the higher payments associated with rising interest rates and began to default.

Next, the lower interest rate policy was supposed to soothe effect in the United States caused by the dot-com bubble and the 911 events in 2001. At the same time, people considered that buying houses a stable investment pattern. The lover interest rate encouraged more people to borrow money to buy houses. However, the Fed funds rate was raised significantly between July 2004 and July 2006, resulting in an increase in 1-year and 5-year ARM rates. Besides, in 2008, the outburst of the housing bubble happened, making ARM interest rate resets more expensive for homeowners [5] .

Subprime lending targets those particular borrowers having weakened credit histories and a greater risk of loan default than prime borrowers. With the high expectation on the housing market and attraction of the amazing tagline of the mortgage advertisement, more poor people who were not qualified for prime mortgage had the chance to start turning to subprime mortgage. However, the nature of subprime policy was risky and the housing bubble occurred, the prices of American houses started to decrease after 2006, also made more mortgage defaults happened.

Figure 1. Sumprime lending expansion from 1997 to 2007 [6] .

These factors are closely related; the falling of the house price led a series of problems. People who turned to mortgage found that the value of the houses was no longer consistent with the mortgage, and they could not refinance with their houses. The subprime mortgage rate did not go down with the houses price accordingly, and it caused the borrowers to have difficulty to afford the payments, and ended up with having default. From then on, people lost their faith in these derivatives and financial products, and the sudden drop in the market affected those investment banks holding these derivatives. Furthermore, the providers of these derivatives, the investment banks and the agencies were also taken down by the loss. The financial network is tightly connected, and the housing bubble served as a trigger that destroyed the mortgage supply chain, causing a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world.

Literature Review

From the facts presented above, we learned the background and the causes about credit crunch that happened from 2007 to 2009. However, the financial industry is complicated and there were more other causes of the credit crunch. We have got more ideas from other resources. Other causes proposed from economists include speculation, risky mortgage products, and securitization practices.

Due to the high expectation on house price, speculative borrowing in residential real estate became more common. More people bought houses for investment purposes or as vacation home uses. Also, a record level of nearly 40% of homes purchases were not intended as primary residences. Later, this made the supply for house exceed the demand, and the speculators pulled out the market when the price started sliding down in 2006, which made the price dropped faster [7] .

During the years of housing boom, several high risk mortgages appeared. At first, the stated income, verified assets (SIVA) loans came out. Borrowers just needed to show their money in the bank and required no proof of income. Then, the no income, verified assets (NIVA) loans came out. Even people without proof of employment can be qualified for this loan. The qualification standards were getting lower in order to produce more mortgages and more securities. A product called NINA, standing for No Income No Assets, came out later. Basically, NINA loans are official loan products and let you borrow money without having to prove or even state any owned assets. To be qualified for this mortgage, all people needed were the credit scores [8] . Besides, adjustable-rate mortgage (ARM), an interest rate-based product containing high risk, allowed the homeowner to pay just the interest during an initial period. Later on, risky loans and risky borrowers were prevailing in the market [9] .

Why did the mortgage problem hurt the Wall Street more than those commercial banks holding the mortgage? It’s because the mortgage in the house market in the Unite State has been securitized. Unlike the traditional mortgage, which involved a bank originating a loan to the borrower and retaining the credit risk, securitization meant that those issuing mortgages were no longer required to hold them to maturity. By selling the mortgages to investors, the originating banks replenished their funds, enabling them to issue more loans and generating transaction fees. In addition, the subprime mortgage has also been securitized, which worsened the situation to Wall Street when the housing bubble happened. The securitization of the mortgage might have some benefits, such as leveraging gathering a giant pool of money. On the other hand, connecting this pool of money to the mortgage market in the U.S could simply drag the entire supply chain down quickly.

Figure 2. Borrowing Under a Securitization Structure. [10] 

Statement of Problems

The Subprime Mortgage Crisis in September 2008 was mainly created by the improper lending practices of financial institutions. Back then, banks were very aggressive in acquiring market shares in the mortgage loan market. They were not as worried about the credit-worthiness of borrowers because they could sell the mortgages on the secondary market. A lot of people found it easy to obtain loans and become homeowners. Ridiculously, most of these homeowners did not even need to provide proof of income on their stated-income applications. Also, there was a false impression on affording mortgage easily by paying interest only. In fact, countless of people overextended their budgets and took out adjustable rate mortgage. They paid interest only to minimize their monthly payments. There were assumptions of interest rate would continue to stay low and demand of real estate would as well remain high. Most people also believed that lending is always available for home purchasing or refinancing.

The low interest rate and easy approval of mortgage attracted spectaculars to join in the housing market. These spectaculars took advantage of the market condition by fixing and flipping houses to resale for quick profit. The sudden increase in the demand in real estate had further pushed up the housing price. As a result, housing bubble was developing behind the scene quietly. Home values increased until 2006, reaching a peak of 20% year-over-year growth in 2004. In 2007, however, the national average home value was down 9.8% - which hadn't happened since the Great Depression [11] .

Following Federal Reserve interest rate hikes, demand for real estate began to weaken in 2005. Spectaculars began to cash out and withdrew from the real estate market. As a result, inventory began to grow. Eventually, increasing inventory led to decreasing sale prices. As home prices declined, they dragged down the valuation of surrounding homes. Soon, this led to sector-wide distress, with many Americans finding themselves responsible for paying off mortgages that were now underwater. Unfortunately, as home prices declined and mortgage rates reset at a higher level, these homeowners could neither pay the mortgage nor sell their homes for a profit, and so they defaulted [12] . The number of foreclosures skyrocketed.

As mentioned above, credit crunch was mostly created by banks’ mismanagement in mortgage loans. Before the crisis, banks tend to package loans as collaterals in exchange for securing additional mortgage loans. These collaterals were seen as secured investment for long run. Banks were having good time in making quick and easy profit. Thus, the sudden decline in the value of these collaterals had created an undesirable chain reaction in financial market. In fact, most of these so-called mortgage-backed-securities were fated to become the junk bonds. Losses at related mutual fund sparked extensive withdrawals by fund managers and further lower the value of such assets. .All the sudden, the market for mortgage-backed securities became very limited. Banks were caught off guard and were unable to sustain profit.

The credit crunch had further led to various restructure among financial institutions. On September 15, 2008, Lehman Brothers Holdings Inc. ("LBHI") filed a petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under chapter 11 of the United States Bankruptcy Code [13] . The abrupt collapse of Lehman Brothers created fear in Walls Street. On October 6, 2008, DOW Jones dropped 700+ points. It fell below 10,000 for the first time in four years. Investors lost confidence and started doubting the fundamental structure of the U.S. financial system. The once mighty Fannie Mae ("FNM") and Freddie Mac ("FRM") piled with bad loans and were eventually taken over by the federal government. Well-recognized multi-national financial behemoths such as American International Group ("AIG"), Bank of America ("BAC"), Citibank ("C") became fragile. For example, AIG were at the edge of collapse before federal government decided to inject funds into the company. In return, the U.S government received major ownership in the board. To some extent, the acquisition of major ownership installed investors’ confidence back to the company. Other sectors followed and were in line seeking for the U.S government’s bailout, especially the local big 3 automakers. It is obvious that this credit crisis affected all aspect of business credit lending and led to tightening on credit lending to general public.

The failure of financial institutions erased incalculable number of investors’ lifetime savings. The event of credit crisis made retirees lost life savings due to massive shrink in their pension and 401(k). In 2009, distributions to injured investors have been made in 31 cases brought by the Commission, involving illegal conduct ranging from accounting fraud to pump-and-dump schemes to mutual fund market timing. Among the distributions this year were more than $840 million to approximately 257,000 injured AIG investors, more than $320 million to approximately two million injured investors in Alliance Capital mutual funds, and more than $240 million to approximately 700,000 injured Bear Stearns investors [14] .

The worsen economy in the United States has created an unfavorable effect to the other parts of the world. In Ireland, easy money inflated home values before the credit crunch crisis. Homeowners found it easy to get funding with the low mortgage rate at 4% to 5% between the years of 2003 to 2008. Residential construction has reached 16% of the country’s GDP which was almost three times the figure in the U.S [15] . The collapse of Leman Brother sped fear that Ireland’s big leaders would fail as well. Suddenly, lending dried up and housing prices have fallen by 20%. Most construction projects were on hold indefinitely which created default in construction loans. As expected, the weaken economy in Ireland pushed foreign investors away from the country which further accelerate business closeouts and increase in unemployment. The lost of investment and immigration from foreign countries took away the competing advantage of Ireland. The Irish government predicts that GDP will tumble 7.7% this year and unemployment will hit 15% next year [16] .

Investigating the underlying problems

Here, we first compare debt ratio before and after crisis among different financial institutions. Leverage ratio, which is the ratio of total debt to total equity, is the best instrument in helping us to investigate the underlying problems. A higher ratio indicates more risk as banks have less equity to cover for the outstanding debt. From fiscal years 2003-2007, most major financial firms significantly increased their leverage ratios. Typically, a ratio of 10-15 is for a conservative bank. These firms, however, had ratios closer to 30 (figure 3). Indeed, they had put themselves in dangerous position should there is a sharp drop in stock prices. Decline in stock prices have lower equity of firms, which affected the leverage ratio. The fates of these companies were determined in large part by the way they were managed back before the credit crunch happened.

Figure 3 Leverage Ratios for Major Investment Banks [17] .

The investment banks shown below all had high leverage ratio (figure 4). Unsurprisingly, most of these banks were not able to survive the credit crunch. Lehman Brothers was the first large corporation went under. Then, the winner of 2005-7 Most Admired securities firm, Bear Stearns, followed as it had insufficient equity in supporting large amount of debt. Bear Stearns was carrying more than $28 billion in 'level 3' assets on its books at the end of fiscal 2007 versus a net equity position of only $11.1 billion. This $11.1 billion supported $395 billion in assets [18] , which means a leverage ratio of 35.5 to 1. This highly leveraged balance sheet, consisting of many illiquid and worthless mortgage debt collateral, led to the rapid dwindling of investor and lender confidence. At last, Bear Stearns was forced to call the New York Federal Reserve for assistance. In March 2008, the Federal Reserve Bank of New York granted an emergency loan to try to avoid a sudden collapse of the company. The company could not be saved, however, and was sold to JPMorgan Chase.

Figure 4 Investment Bank Leverage Ratios Before Credit Crunch [19] .

Other bank such as Washingtion Mutual found itself in similar situation. WaMu was fine until August 2007, when the secondary market for mortgage-backed securities disappeared. WaMu could not resell these mortgages during the housing decline which prevented it from selling new mortgages and taking in new cash [20] . It became cash strapped tightly. At the same time, the collapse of Lehman Brother did not make the situation better. Depositors were afraid of WAMU’s inability in finding fund for its operations. As a result, a run started and $16.7 billion were withdrawn within 10 days. The bank was then shut down and taken over by FDIC. At the end, WAMU was sold to J.P. Morgan for $1.9 billion.

Another example was Citibank. Citibank were facing sharp turn in securing profit starting late 2006. It was largely fueled by high leverage ratio. Its’ asset-to-liability ratio hit record low since the year of 2000 (figure 5).

Figure 5. Citibank’s Asset to Liability Ratio [21] 

Yet, federal government believed Citibank was too big to be failed and a rescue was needed. On November 23, 2008, in addition to initial aid of $25 billion, a further $25 billion was invested in the Citibank by federal government together with guarantees for risky assets amounting to $306 billion. The large injection of fund had created heated debate in whether the taxpayers’ money would come to a waste should the bank failed. Citibank, however, claimed it has make profit in the first quarter of 2009. Should this is true, Citibank’s current situation has been improved significantly comparing to last year (figure 6).

Figure 6. Citibank’s Net Income [22] 

Another method to obtain insight of the credit crunch is to study the historical LIBOR between banks. This is the interest rate banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for "London Inter-Bank Offered Rate" and is the rate charged by London banks. This rate is widely used as the benchmark for bank rates around the world. In general, higher the LIBOR rate is correlated to greater the stress on credit markets. The sterling three-month Libor rate influences the level at which lenders set rates on loans. It also impacts on the amounts they will lend. The rule of thumb is that the three-month Libor rate should be just 10 or 20 basis points higher than the bank rate in normal condition. However, the worsening of the crisis sent LIBRO up to 6.3% on 30 September which was a 130-point gap with the bank rate. A wider gap reflects banks are less willing to lend [23] .

The change in LIBRO influences the level at which lenders set rates on loans, especially mortgages, to consumers and to businesses. It also impacts on the amounts they will lend. It is the rate at which banks lend to each other and is therefore a measure of how much they trust each other and a measure of the credit crunch.

Barron's Confidence Index is another index worth us to take a look. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. The theory is that if investors are optimistic they are more likely to invest in the more speculative grade of bonds, driving yields downwards and the confidence index upwards. During the credit crisis, the index, most investors had retreated from stock market and invested in low risk Treasury’s bonds. As we can see, the index had hit low point between the end of 2008 and the early 2009 (figure 7).

Figure 7 Barron’s Confidence Index [24] 

Another important index is Consumer Confidence Index (CCI). It is reasonable to assume that consumers are optimistic and tend to purchase more goods and services in a good economy. They do not need to put aside extra for saving as employment is secured. This increase in spending stimulates the whole economy and lead to further prosperity. The index conducts surveys with 5000 households. It asks consumers to rate their confidence in regard of current business conditions, business conditions for the next six months, current employment conditions, employment conditions for the next six months, and total family income for the next six months. It is easy to expect the confidence index did not score well during the credit crunch period (figure 8).

Figure 8. Consumer Confidence Average

Last but not least is the Michigan Consumer Sentiment Index (MCSI). It is a telephone survey conducted by the University of Michigan. The purpose of the survey is to collect information about consumer expectations regarding the overall economy. They survey asks consumer to rate the financial conditions for the coming months. Although the survey did not score well last year, it is expected to improve as consumers are more willing to spend. In recent, the unemployment rate has reached 10% benchmark, more companies saying they are more willingly to hire new employees later this year and in next year.

Alternative courses of actions/ areas of improvement

In 2007, when the Subprime Mortgage Crisis triggered, the global financial crisis has exploded worldwide. This unexpected financial crisis, like a snowball, has rolled over and became a monster destroying the financial markets. On October 6, 2008, after the Dow Jones Industrial quotes dropped 777 points and broke the history record, the foreign stock markets, like German, UK, France, and Russia were also affected and dropped with tremendous points. For this reason, in order to solve the crisis, the U.S. government came out several proposals, such as the Emergency Economic Stabilization Act of 2008, and the American Recovery and Reinvestment Act of 2009.

Emergency Economic Stabilization Act of 2008

In September, 2008, the Subprime crisis had reached a dangerous level. Although the U.S. government raised bailout programs to help some giant financial institutions, such as AIG, Fannie Mae and Freddie Mac, the whole economy environment did not get better. It forced the U.S. government to propose another solution. For that matter, the U.S. Treasury Secretary, Henry Paulson stated a proposal which would acquire $700 billion mortgage bad debt, with a purpose of stabilizing the economy, improving liquidity, and increasing investors’ confidence [25] . At the same time, President Bush announced his agreement of supporting this plan. After several debates, this plan was passed by the Congress and called the Emergency Economic Stabilization Act. Following are some important points of the legislation:

Interest on bank deposits held by the Federal Reserve: the FED stated that it would start to raise the interest rate for both reserve and excess reserve balances on October 6, 2008. Under this niche opportunity, many banks substantially increased their deposits to the FED while the total balance rocketed from $10 billion to $880 billion. So this strategy did help improve the liquidity of the money market [26] . According to a statement of the U.S. Treasury Department, it said, “The Federal Reserve will continue to take a leadership role with respect to liquidity in our markets [27] .”

Management of the Troubled Asset Relief Program: with the authorization from the legislation, the program can purchase the bad debt from financial institutions. However, due to the huge amount of funds, approximately $700 billion, and considering of the fairness of funds management, the Secretary Department must have discussion with the “Board of Governors of the Federal Reserve System”, the “Federal Deposit Insurance Corporation”, the “Comptroller of the Currency”, the “Director of the Office of Thrift Supervision”, and the “Secretary of Housing and Urban Development” before making any decision [28] .

The limitation of executive’s salary: If the government possessed with a significant amount of equity or debt position of one company, then that company is prohibited by law to issue any incentive bonus to its superior executives (the top five). This legislation can protect the rights of the general public [29] .

Tax reduction policies: the bill also provides new tax reduction policies. For example, the mortgage debt forgiveness provision is extended to three years, which means it would accept debts forgiven through the year 2012 [30] .

Potential influence

After running this law, generally the reaction of financial markets is positive. That definitely recalls investors’ confidence which leads the Stock Market quotes rise and get back to 10,000, so as the returning of the Consumer Confidence Index (CCI). It looks like this plan will provide a good shape to the U.S. economy. However, there is a big potential influence hidden behind. If we divided the $700 billion bailout money by every American, each person would have to pay a $2,295 bill. So this would definitely put more pressure on how to wisely use the funds since the U.S. budget deficit is incredibly high already [31] .

American Recovery and Reinvestment Act of 2009

After the Emergency Economic Stabilization Act of 2008, the new government released an Economy Stimulus Plan in February, 2009, signed by President Obama. The purpose of this plan is to stimulate the U.S. downturn economy. The total amount of funds is $787 billion, and basically includes federal tax cuts, unemployment benefits, and several domestic spending in education, health care, and infrastructure [32] .

Figure 9. Components of ARRA [33] .

Taxes cut: the new tax reduction policies provide more benefits on individual taxpayers. For example, the first-time homebuyers can apply a refund up to $8,000, and $6,500 for the non-first-time homebuyers. This could essentially stimulate the housing market. Moreover, the program offer tax credits for energy efficiency. For instance, the tax credits will apply to certain energy efficient improvements for home, such as widows, roofs, water heaters, and solar systems. In addition, for fuel efficiency of cars, the tax credits can be apply to buyers who possesses hybrid gasoline-electric, diesel, or battery-electric vehicles. The tax deduction rate is a calculated by a formula including the car’s weight and year model. Besides, the manufacturers of efficient cars may also get tax reduction by the numbers of cars they sold [34] .

Health insurance: the program gives those unemployed people a chance to continue their health insurance. Even though they don’t have job right now, they can still be under the coverage for 18 months. Besides, the government will pay for 65% of total costs o the first nine months [35] .

Infrastructure: this section will focus on road constructions, bridge construction, and other basic development, and of course, it may generate more working positions11.

Education: the major task of the education funds is to help local schools reduce layoffs and furloughs. According to a research recently released by the University of Washington, that around 600,000 jobs in elementary and junior high schools would be eliminated because of the state budget cuts over the next three years. In order to prevent this serious situation, the program will spend up to $90 billion to maintain the average educating quality [36] .

Additional funding for many government agencies in hiring: the government persuaded Congress to put $100 billion in additional funding for many government agencies in hiring. Agencies which benefits are transportation, veteran affairs, defense, agriculture, housing development, and department of state ...etc11.

Conclusion: Although these two Acts seemingly could be solutions of the financial crisis, there are still many factors witch have to be aware of, like how to use the funds efficiently, the necessary of supplementary budgets, and the implement of funds supervision...etc. Therefore, the government should keep monitoring every changing of this global crisis and make the best decision to help people get through it.

Possible outcome

At this moment, we still do not know about the net outcome of the $700 bailout plan. $700bn US bank bailout failed to move Libor in the UK and it actually rose, heading above 6%. However, the UK's £40bn cash injection into banks on 13 October, 2008 appeared to have had a positive but moderate effect with rates easing [37] . The supporters of government bailout plan advocate that the injection of fund by federal government is necessary to stabilize the economy by injecting confidence into the market. The spending will stimulate the economy in which encourage consumers to spend more. Thus, economy will be recovered at a faster pace.

On the other hand, opposites claim that excessive national debt will take down U.S economy; weaken U.S dollars in international market. Indeed, we should be cautious of and consider the aftermath of sharp increase in government spending and debt. High volume of nation debt can easily fuel the next financial crisis. In 2009, the U.S. will post a deficit of 1.8 trillion which is 13.1% of GDP, according to the nonpartisan Congressional Budget Office [38] . As said by Fortune magazine, within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt. The growing debt will burden Americans not just with heavier taxes but also with higher interest rates and slower economic growth.

Moreover, another crisis is seems developing. This time is in the commercial lending arena. First, recent bankruptcy of biggest factoring lender Cit will further push small business and middle market out of businesses. Clients for CIT's factoring business are in a particular bind when it comes to finding alternative financing since CIT is by far the biggest company in the sector, where lenders buy unpaid customer bills from companies [39] . Closed out businesses will lead to more unemployment.

Second, potential next shock to the bank system is commercial real estate defaults. Rents and property values fall as projects financed during the bubble become more likely to default. Construction projects hold up will delay borrowers to receive fund in paying back the banks. Thus, lead to default in construction loans.

Community banks such as Fidelity Southern and United Commercial bank which went aggressive in originating commercial real estate loans are some good examples. United Commercial bank has been shut down by federal and was then acquired by East West Bank.

Third, foreign countries started feeling the hit from U.S’s credit crunch. For instance, Dubai's investment arm, Dubai World, could default on $60 billion in debt due to largely cancellation in construction projects. It is now asking for assistance from neighbor Middle East countries. Jeff Mortimer, chief investment officer at Charles Schwab Investment Management said the latest Dubai crisis is “a wake-up call" that the economic recovery is going to be choppy and uneven [40] .

The future outcome of recovery will take a longer period of time to heal the economy. There is still a lot of uncertainty floating in economy and investors are still very conservative.

Recommendations/ Conclusions

It is unrealistic to expect a V-shaped recovery in the housing market. The housing recovery is expected to be gradual. Banks are still tight in lending out moneys. Thus, only limited funding is available for businesses to function smoothly or restructuring during this economy downturn. Also, many investors are still cashing out of the stock, bond, and real estate markets in order to purchase precious metals like gold and silver. Gold price may increase to $2000 per ounce in near future.

There are a lot obstacle the Obama administration will need to overcome in order to make the U.S get our from this credit crunch mess. In order for banks to restore profitability, it will require paying bonus to the high performing employees. Although TARP funds provide banks temporary fund to stay afloat during the economy downturn, TARP may have adverse effect on helping to recover economy. The program limits banks from paying bonus to executives and high performers. Thus, banks have hard time in retaining or hiring superior human capital. As a result, TARP has slowed the recovery pace of the TARP recipients. According to compensation consultant Alan Johnson, financial institutions who are not TARP recipients are giddy that they can now steal people like they never could before [41] .

It seems that there is a long way to go before the recovery. There are still a lot of works will need to be done in order to restore confidence back to the lending businesses. Once investors start providing fund to banks for initiating mortgage loans, the stimulation of consumer spending will follow. The recovery will arrive eventually. However, this time may take a longer time before we can reach there.

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