Domestic Affairs

The Financial Bailout of 2008: Corruption and Finance Industry to Blame

REUTERS/Joshua Roberts

The financial recession of 2008 is widely remembered as a turbulent time with rising unemployment and countless foreclosures yet behind all this some people exploited the system and made millions. It is evident with some investigation that there was corruption in the financial bailout of 2008, yet the extent remains staggering to this day. Hank Paulsen, secretary of treasury and previous CEO of Goldman Sachs, was Secretary of the Treasury during the crash. He pushed for a government bailout in the wake of failing banks which spread a frenzied panic over the potential collapse of the entire US economy. With support from George W. Bush, the $700 billion Troubled Assets Relief Program (TARP) was approved by Congress . Several programs under TARP were continued by the Obama administration, spearheaded by Obama’s economic advisor Tim Geithner. Throughout this chaotic response, there were blatant conflicts of interest, suspicious activities including Goldman Sachs employees receiving an average bonus of $600,000, and a lack of transparency by the FED and recipient banks. While the financial bailout likely prevented the recession from becoming a depression, the $700+ billion bailout fund could have been allocated more equitably. As it happened, the bank bailout was, socialism for the rich (Stockman) while the struggling working class did not receive nearly enough relief. 

With TARP funding, banks that received a bailout were given funds from the government with no contingencies, allowing them to use those funds however they saw fit. As one would imagine, large sums ended up in the pockets of CEOs. The bailout was supposed to prevent bank failure, increase trust in banking institutions, catalyze spending, and ultimately prevent large banks and insurance companies, such as Goldman Sachs and AIG, from going bankrupt. The premise here was that the closure of these large institutions would cripple the economy; these banks were “too big to fail,” a term popularized by the Bush administration. However, these hefty checks to private institutions proved more disastrous than helpful. 

Without any government bailout, the large banks that made bad bets by buying risky collateral debt obligations (CDOs) and credit default swaps (CDS), and the insurance companies who carelessly insured these banks, would have become insolvent and closed since they owed more than they could pay when the impossible happened and the real estate market crashed. With the bailout, these banks effectively stayed in business and their employees received large bonuses. Upper management made millions. The bailout allowed large players in the finance industry not only to get away with bad practice but rewarded them for it. Meanwhile, with the economy tanking, poorer citizens defaulted on their mortgages, lost their homes, and received no financial compensation. These effects were especially felt among low-income and BIPOC communities. 

While it is not desirable for these large banks to close, these banks’ employees’ savings would be insured up to $250,000 through the Federal Deposit Insurance Corporation (FDIC) so there would have been some cushion but it is important to remember bank employees are typically financially well off compared to many other industries. The bottom line is that if there are free-market rules in place, these rules should apply to everyone equally. Companies and people who made bad bets, in this case, CDOs and CDSs, ultimately should be held responsible for their decisions and losses in the market. 

Without any government intervention, homeowners would still have lost their homes, and the bank failures would have caused even more job losses propelling an even worse recession and while this is a main point to argue in favor of the bailout, there are other options that would have been less corrupt and more equitable. One potential course of action might have been to finance the mortgage debt with the government helping to pay off homeowners’ loans to the banks. This would have taken the burden off individuals who were given predatory loans and it would have helped the banks by giving them money through financing the mortgages. This would not have saved all the large banks, but in the wake of their closing, other banks could step in, or if necessary, the government could even take over large failing banks. Another course of action could have been a writedown, which would lessen the amount of the mortgage payments individuals were required to pay. Writing a check to large banks was a panicked response that wasn’t the best course of action. Further, it was pushed by former Goldman Sachs CEO Hank Paulson. We can contrast the millions of dollars that went into banks’ CEO and upper management’s pockets with the total number of foreclosures between 2007 and 2016 which was 7,783,000. There is an average of 2.6 people in every household so the number of people affected by foreclosure from the 2008 recession was 20,235,800 people or close to the entire population of Texas in 2010—the second largest state by population. 

Even with some more regulation in the aftermath, this event set a dangerous precedent in the finance industry that is having lasting consequences. By saving the wealthy at the expense of everyone else, the bailout made minorities and the working class painfully aware of where they stand. Conversely, it conveyed that wealth and power often give immunity in the finance industry and in government. Learning from the past we must be more critical of conflicts of interest, as was the case with Hank Paulson. We must be able to place blame where it is due, in this case, greed in the finance industry, the lack of government oversight, and corrupt policy. We must use this as a cautionary tale for future economic recessions: governments should watch for conflicts of interest and low regulation, individuals should be aware that the wealthy and powerful in the FIRE industry are often corrupt and predatory, and the FIRE industry should realize their decisions are more far-reaching than they could imagine.


Stockman, David Alan, 1946-. (2013). The great deformation: the corruption of capitalism in america. New York: PublicAffairs

Hudson, Michael, Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy

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