Corporate & Securities Law

I. Introduction

In the past few weeks, the media has been bombarded with news about the events on Wall Street.  The failure of such large entities as Washington Mutual, Bear Stearns, and IndyMac has left many people bewildered and afraid.[1]  Naturally unsettled by deepening concerns over the financial markets, many people are worried about both their financial assets and the future of the economy.  While these events are unexpected, the government seems fully preparing to take charge and protect the financial market.  In addition to the consumer protections now in place, the government has also planned a $700 billion dollar bail-out plan to bolster the financial market.[2]  This article looks at the guarantees government agencies provide to consumers, some of the effects this crisis is having, and finally at the intervention measures that government is currently planning.

II. Guarantees

The foremost protection the American public has within the financial market is the FDIC.  The FDIC was brought into existence during the Great Depression in 1933 in a climate similar to the one we now face.[3]  During the 1920s and 1930s, thousands of banks failed, leaving many depositors without recourse.[4]  The FDIC was created to restore consumer confidence in the banking system, and since its inception it has not lost a single penny of insured deposits.[5]  The FDIC is responsible for directly examining and supervising about 5, 250 banks and savings banks, which is more than half of the institutions within the banking system.[6] 

The vast majority of banks are now FDIC insured.  The FDIC guarantees among other things, up to $100,000 per person per insured institution for bank deposits.[7]  The FDIC also insures up to $250,000 per account holder for deposit retirement accounts.[8]  The FDIC has reported that of the nation?s $6.8 trillion dollars in bank deposits, about $2.6 trillion is not covered by FDIC guarantee.[9]  Money-market mutual funds are not FDIC insured.[10]

Brokerage accounts are protected by a different agency, the Securities Investor Protection Corp.[11]  The SIPC insures brokerage accounts for up to $500,000 ($100,000 in cash) in the event the broker has to be liquidated and securities are missing.[12]  While institutions such as Lehman Brothers and Merrill Lynch have had serious problems, neither of those firms has failed and accounts are still in place through Barclay?s and Bank of America.[13]  While mutual funds are not protected by the SIPC, the Investment Company Act of 1940 covers them and provides some protection.[14]

Although the FDIC is not funded by the federal government, it is ?backed by the full faith and credit of the U.S. Government?.[15]  It is not likely that an FDIC insured account would not be guaranteed, regardless of how many more financial institutions may become unstable in the future.

III. More Government Intervention

It has been said that without some sort of government intervention, that the market is sure to collapse upon itself, even possibly resulting in a second Great Depression.  As a preventative measure, the government has proposed a $700 billion dollar bail-out plan to restore market confidence.[16]  The government plans to use this money in order to buy up bad-debt that has been plaguing many financial institutions.[17]  The money will be funneled into a government-run hedge fund that would essentially free financial institutions to start moving money through the system.[18]  The hope is that this will result in a restoration of confidence in these financial institutions.[19]

While there is not complete agreement on how government should intervene in this crisis, there is a general agreement that the financial market needs to be restructured. The government has bailed out Wall Street before, through the Resolution Trust Corp. in 1989.[20]  The government established the Corp. to deal with hundreds of insolvent thrifts that were not covered by the FDIC.[21]  The Corp. eventually helped to dispose of many of those thrifts while protecting many depositors.[22]  If the Corp. is used as the model for oversight in this situation, there will be a strong emphasis on aggressively pursuing professionals who may have been responsible for the current crisis.[23]  In the past, some of those professionals also included lawyers and law firms whose negligence had allegedly contributed to the financial failures.[24]

If the $700 billion dollar plan is implemented, it will most likely be managed by the Treasury.[25]  The Treasury Department would be required to establish rules preventing executives of companies that might benefit from the plan from receiving excessive compensation.[26]  The government will also establish an oversight board with the broad authority to monitor, audit, or even halt the program.[27]  While details may be currently hazy, there will clearly need to be substantial control over the implementation of the plan as well as increased transparency in the financial market.

IV. The Future Impact

Consumers are already looking for safer options in which to invest their money.[28]  Some areas of the financial market that seem to be positively affected by the Wall Street crisis include ?savings accounts at community banks, mutual funds that invest in bonds, and money market mutual funds that own government debt.?[29]   Many people no longer feel comfortable investing in areas that have the potential of losing equity.[30]  Confidence in the financial market and the banking system is decreasing.[31]  This is not a one-sided loss.  Financial institutions are equally leery of high risk.  Having been burned by the sub-prime mortgage crisis, loan applications will be more strictly monitored and it will become more difficult to obtain credit.[32] 

The proposed $700 billion dollar bail-out is not popular with the entire population, as some feel that this might be giving Wall Street a free pass that will only negatively impact taxpayers.[33]  There is no question that there will be a hefty bill for American tax-payers, although no one knows how much that might be.[34]  The government could be responsible for more than $300 billion dollars in guarantees and loans.[35]

These troubles began with the housing boom and bad loans that were given out in that time.[36]  The biggest question is whether this new government program will be enough to stem the problem without resolving the underlying problems.  Experts warn that even if this bailout plan were to succeed, that there will not be a quick return to ?normal economic conditions?.[37]  While mortgage rates have dropped, job loss is increasing and home values are still decreasing.[38]

In the end, it is still much too early to accurately determine how these events will shape our future.  However, it may be certain that the government?s response to this crisis will  shape the financial market and government policy for years to come.

Endnotes:

[1]Government Seizes WaMu, Sells Some Assets, MSNBC, September 25, 2008 http://www.msnbc.msn.com/id/26893612/.
[2]Key Details of the Tentative Bailout Agreement, MSNBC, September 25, 2008 http://www.msnbc.msn.com/id/26893272/. (hereinafter ?Key Details?)
[3]FDIC, http://www.fdic.gov/about/learn/symbol/index.html (About FDIC, Who is the FDIC?).
[4]Id.
[5]FDIC Rolls Out Deposit Insurance Awareness Campaign; Personal Finance Expert Suze Orman Featured in PSAs, Business Wire, September 22, 2008. (hereinforth ?FDIC Rolls Out?).
[6]FDIC, supra note 3.
[7]Id.
[8]FDIC Rolls Out, supra note 5.
[9]Brian Brus, As Financial Institutions Fail, Investors Seek Savings Haven, Journal Record, September 19, 2008.
[10]Jane Bryant Quinn, Surviving the Storm:  What?s Safe, What?s Not, Newsweek, September 29, 2008.
[11]Id.
[12]Id.
[13]Id.
[14]Id.
[15]Liz Pulliam Weston, What If Your Bank Is Seized?, MSN, September 19, 2008, http://articles.moneycentral.msn.com/Banking/BetterBanking/what-if-your-bank-is-seized.aspx?page=1.
[16]Rick Newman, A New Direction On Wall Street, U.S. News & World Report, September 29, 2008.
[17]John W. Schoen, Bailout Deal Nears, But Will It Work?, MSNBC, September 25, 2008, http://www.msnbc.msn.com/id/26888415/.
[18]Id.
[19]Id.
[20]Anthony Lin, New Player May Emerge In Wall Street Crisis, The Recorder Vol. 132, No. 185.  September 23, 2008.
[21]Id.
[22]Id.
[23]Id.
[24]Id.
[25]Schoen, supra note 17.
[26]Key Details, supra note 2.
[27]Id.
[28]Ross Kerber, Credit Crisis Triggers ?Flight to Safety? Consumers Moving Their Money Into CDs, US Treasuries, The Boston Globe, September 24, 2008.
[29]Id.
[30]Id.
[31]Brus, supra note 9.
[32]Schoen, supra note 17.
[33]Lin, supra note 20.
[34]Id.
[35]Newman, supra note 16.
[36]Id.
[37]Id.
[38]Id.