Misuse of Bailout Funds and Ways to Prevent the Inappropriate Use of Assistance Funds - Developing Ethical and Transparent Aid Policies to Maintain Investor Confidence - Term Paper Example

Misuse of bailout funds Bailout funds refer to monetary advances to the financial industry to boost performance or solve a financial crisis. This paper seeks to explore misuse of bailout funds. The paper will discuss reported cases of misuse of bailout funds and possible solutions to the cases. Fear of misuse of bailout funds Misuse of bailout funds entails application of the funds for alternative purposes other than the intended. The year 2008 presented an example of a threat to misuse of bailout funds.

Almost immediately after federal legislation for rescuing banks, politicians cited possibility of misuse. While the bailout, according to the then “chairman of the house financial services,” was meant to boost bank’s lending capacity, there were fears that the advances would be used for different purposes including paying shareholders’ returns and expansion of the banks. The situation was however blamed on flaws in the legislations that provided for the bailout (Noguchi, p. 1). One of the possible ways to preventing misuse of bailout funds is development of ethical and transparent policies in granting bailouts because the advances has an effect on investors’ confidence.

Another possible solution to predicted misuse of bailout funds is restraint from conflict of interest in formulation and implementation of bailout policies. Developing transparent and ethical policies has the advantage of facilitating confidence in investors for availability of supplementary funds for the institutions. As a result, funds from bailout would be limited to their intended purpose. This measure however lacks legal authority to regulate banks’ use of the availed funds. Absence of conflict of interest in either the banks or the government on the other hand has the advantage of minimizing misappropriation though it also lacks authoritative control of misuse of the bailed funds (Painter, p. 132). The available measures to preventing possible misuse of bailout funds, transparency, and ethics, and lack of conflicting interest, are inadequate because they lack authority over application of such funds.

Actual instance of misuse of bailout funds An actual misuse of bailout funds was however realized in the year 2009 following federal government’s initiative in the previous year to aid the then crippled financial industry. While the government granted bailout funds to increase banks’ lending, the banks reportedly used part of the funds to “make investments, repay debts, or buy other banks” (Appelbaum, p. 1). Investigative report indicated that more than 75 percent of banks misused their receipt of bailout funds and recommended close supervision of the financial institutions following advancements, a move that the treasury was not keen to adopt (Appelbaum, p. 1). Possible solutions to controlling running misuse include treasury’s call for regular submission of statements by the recipient banks and congress’ sensitivity to predictabilities.

While the treasury, in its supervisory role, can monitor and control the misuse, its strict authority over financial institutions may be illegal. Similarly, the congress can provide legislations to control such misuse but such legislations normally have flaws (Appelbaum, p. 1; Commoncause, p. 1). Misuse of bailout funds are predictable occurrences that possibly controllable or preventable by either the congress or the treasury. The systems are however, weak to take comprehensive effect the control measures.

Works cited Appelbaum, Binyamin. “Financial rescue I.G. says banks funneled TARP aid to various expences.” The Washington Post. 20 July 2009. Web. 02 June 2012. . Commoncause. (2009). “The financial bailout; Your tax dollars cone missing.” Common Cause. 9 February 2009. Web. 02 June 2012. . Noguchi, Yuki. “Frank warns banks against misuse of bailout funds.” National Public Radio. 31 October 2008. Web. 02 June 2012. . Painter, Richard. “Bailouts: An essay on conflicts of interest and ethics when government pays the tab.

” McGeorge School of Law. N.d. Web. 02 June 2012. .