Bank and Financial Institution Bailouts: A Comparative Study between the U. S. and Indonesia
Topic of Research
The primary topic of the research that will be conducted for this study focuses on the juxtaposition of bank bailouts between the United States and Indonesia. The financial and economic climate in these two nations is as vastly different as the cultures that reside within each country. In recent years, Indonesia has gained its independence and has pursued a democratic government, although significant issues with regard to corruption, concerns regarding military power ambition, and religious/state issues continue to persist, which have seriously undermined the effectiveness and efficiency of the nation’s fledgling democratic government. Importantly, despite these extreme differences, the United States and Indonesia do have one compelling element in common in that each has been faced with a number of massive financial bailouts of failing national banks through the use of public funds. This research proposal seeks to juxtapose the atmosphere and other relevant elements that led up to, caused, and followed the bailouts of these major banks in both the United States and Indonesia as doing so may provide valuable insights into establishing better financial controls and governance to ensure such situations do not occur in the future.
Central Question of Investigation
Based on the primary research topic for this study, which has been outlined above, the central question that will serve as the fundamental foundation of this research investigation will be determining whether or not the circumstances surrounding the government bailouts of major national banks were similar between these two nations. Specifically, did the actions or behaviors that perpetuated the national bank failures and subsequent bailouts differ or where they similar among the United States and Indonesia. Examining the financial concerns associated with major financial bailouts of large organizations using public funds can shed substantial light on the feasibility of this course of action, as well as what sort of benefits should be expected to be gained. Ultimately, the philosophy of business is that no company is too large to fail, and in order for the business world to remain in equilibrium, weaker, poor performing, and less efficient firms must fall by the wayside (Stiglitz, 2010). When this does not occur, inefficiency is allowed to run rampant and it is the taxpayers and consumers that will ultimately foot the bill. As a result, it is the question of whether the inherent costs and characteristics of the major bank bailouts were the same or starkly different between the United States and Indonesia that will serve as the central question for this investigation.
Significance of Study
The overall significance of this study involves the extremely damaging implications that have been identified as a result of government intervention in bailing out major corporations and financial institutions. Within this study, the focus of governmental intervention will be directed at cases that have occurred in the United States and Indonesia. Most notable of the Indonesian cases is that of Century Bank, which was seized by the government and placed under the nation’s federal insurance commission in 2008 (The Wall Street Journal, 2010). This case became prominent just as the recent global financial crisis had begun to spread throughout the world’s nations. Ultimately, the Indonesian government provided $737 million in bailout funds to save the failing Century Bank, yet shortly after the bailout, it was determined that co-founders and major bank stockholders had been engaging in extensive fraud and corruption activities, which may have helped to lead the bank to its failure (The Wall Street Journal, 2010). Another prominent bailout case in Indonesia was that of BLBI, Bank Indonesia Liquidity Support. This bailout occurred during the late 1990’s, well before the Century Bank case (Sihaloho, 2013). Ultimately, the bailout of BLBI represents one of a number of bailouts that the Indonesian government doled out during a particularly brutal Asian financial crisis. In this case, fraud and corruption where also major contributing factors to the bank’s failure, yet taxpayers were yet again held accountable by ponying up a bailout for the bank worth millions of dollars (Jong, 2013).
The United States appears to have had similar problems with regard to failing banks, particularly when it comes to the propensity of the U. S. government to swoop in and bail these banks out. Over the past few decades, the United States government has stepped in to bailout banks during the massive savings and loan collapse in 1989, as well as the collapse of Bear Stern, Freddie Mac and Fannie Mae, two mortgage lenders backed by the U. S. government, and American International Group (AIG) (Davis, 2009). Of these prominent bailouts, the case of AIG stands out the most, primarily due to the shear amount of the bailout and the fact that it is a quite recent case. Essentially, in 2008, the U. S. government seized control of the failing AIG with a bailout of $85 billion in order to save the bank from going under and causing extensive chaos in the financial industry (Karnitschnig, et al., 2008). In exchange for the bailout, the U. S. government demanded a 79.9% equity stake in the firm, as well as 8.5% interest on the bailout loan, which was set to have a two-year term (Karnitschnig, et al., 2008). Ultimately, an examination of the bailout cases of banks in the United States and Indonesia indicates that there may be similarities and differences between the manner of government interventions, as well as the events that perpetuated the bank failure in the first place. It is believed that getting to the bottom of this issue and determine whether correlative links exist between these two nations may help to save public funds in the future, which would be very significant, particularly to tax payers.
Relevant Scholarly Literature
A wealth of scholarly literature will be utilized to help explore this topic of study and provide adequate support for the conclusions and findings that are presented. Much of this literature will be used to establish the specific characteristics that each of the two countries comprising this comparative analysis have. One source to be used, for example, indicates that Indonesian government operates based on five fundamental principles, which include belief in one god, just and civilized humanity, unity of Indonesia, Indonesian democracy with deliberation among representatives, and social justice (Metera, 2012). In addition, scholarly literature will also be used to outline the specific influential factors that may have exacerbated financial problems within the banks in question. One source to be used in this regard indicates that Indonesia has continually struggled with corruption, collusion, and nepotism within the government and major industry, which has made it extremely difficult for the country to find economic prosperity (Kurniadi, 2012). Another area of concern expressed within the available scholarly literature involves the growing threat of increased power ambitions of the Indonesian armed forces (Ringgi, 2012). As this risk grows, so too does the risk of the democratic government in Indonesia. Ultimately, it is sources such as these that effectively illustrate the major characteristics and influential factors relating to both the United States and Indonesia with regard to government intervention of failing financial institutions. As a result, they will be utilized heavily throughout the development and completion of the research investigation and study.
Discipline of Future Graduate Studies
In the future, I would lie to pursue post-graduate level studies in the form of a Doctor of Philosophy in the discipline of economics or macroeconomics, with an emphasis on finance.
The rationale behind this choice of discipline involves the fact that I have found substantial inspiration by those that work and pioneer within the field. Specifically, Jusuf Anwar, the former Indonesian Minister of Finance and Head of the Indonesian Central Bank has been a particularly powerful inspirational force behind my extensive interest and enthusiasm towards the study of finance and economics. Further, and perhaps more compelling, is the inspiration I gained from Andrew Sheng, President of the Fung Global Institute and accomplished accountant. This source of inspiration can be illustrated best through his notable quote in the movie “Inside Job”.
“Why should a finance engineer be paid four to a hundred times more than a real engineer? A real engineer builds bridges. A financial engineer builds dreams, and when those dreams turn out to be nightmares, other people pay for it (Inside Job, 2010).”
This financial industry documentary opened my eyes to the world of finance on a broader international scale, making me realize the true importance of the discipline within the realm of business, as well as the opportunities that are available to achieve great things.
- Davis, M., 2009. Top 6 U. S. government financial bailouts. [Online]
Available at: http://www.investopedia.com/articles/economics/08/government-financial-bailout.asp
- Inside Job. 2010. [Film] Directed by Charles Ferguson. Belgium: Sony Pictures Classics.
- Jong, H. N., 2013. KPK warns of worsening banking corruption in 2014. [Online]
Available at: http://www.thejakartapost.com/news/2013/12/06/kpk-warns-worsening-banking-corruption-2014.html
- Karnitschnig, M., Solomon, D., Pleven, L. & Hilsentrath, J. E., 2008. U. S. to take over AIG in $85 billion bailout: Central bank injects cash as credit dries up. [Online]
Available at: http://online.wsj.com/news/articles/SB122156561931242905
- Kurniadi, D., 2012. Political Corruption in new democracies: A comparative study of Indonesia and South Korea, Evanston, IL: Northwestern University.
- Metera, G., 2012. Democratic transition and the changing pattern of state-religion relations in Indonesia: A study on international change at subnational level, Evanston, IL: Northwestern University.
- Ringgi, H. Y., 2012. The ruling ambition of the military in South Korea, Indonesia, and the Philippines during the process of Democratic consolidation, Evanston, IL: Northwestern University.
- Sihaloho, M. J., 2013. Politician lauds KPK for initiative in pursuing Bank Century and BLBI cases. [Online] Available at: http://www.thejakartaglobe.com/news/politician-lauds-kpk-for-initiative-in-pursuing-bank-century-and-blbi-cases/
- Stiglitz, J. E., 2010. Freefall: America, free markets, and the sinking of the world economy. 1st ed. New York, NY: W. W. Norton & Company.