What Is a Bailout?
A bailout occurs when a company, individual, or government provides money and/or resources (also known as a capital injection) to a failing company. These measures will help prevent the consequences of a possible demise of this company, which may include bankruptcy and default on its financial obligations.
Businesses and governments can receive a bailout, which can take the form of a loan, bond purchases, stock purchases, or cash injections, and depending on the terms, require the rejected party to return the support.
Understanding Of Bailout
A bailout could come for profit reasons, such as when a new investor revitalizes a faltering company by buying its stock at clearance prices, or for social reasons, such as when a wealthy philanthropist hypothetically reinvents an unprofitable fast-food company into a nonprofit food distribution network.
However, common usage of the phrase occurs when government funds are used to support a failing enterprise, typically to prevent a larger problem or financial contagion to other parts of the economy. For example, the US government believes that transportation is critical to the country’s overall economic prosperity.
Thus, it has sometimes been the policy of the US government to protect large US corporations responsible for transportation (aircraft manufacturers, railroad companies, automobile companies, etc.) from failure through subsidies and soft loans.
Such companies are considered too big to fail, among other things, because their goods and services are viewed by the government as ongoing universal necessities for maintaining the nation’s well-being and often indirectly its security.
Emergency government bailouts can be controversial. In 2008 debates raged over whether and how the failing auto industry in the United States could be saved. Those opposed, such as pro-free market radio personality Hugh Hewitt, viewed the bailout as unacceptable.
He argued that companies should be organically dismantled by free-market forces so that entrepreneurs can rise from the ashes; that the bailout signals lower business standards for giant corporations, inciting risk and creating moral hazard by ensuring safety nets that shouldn’t be but unfortunately factored into business equations; and that a bailout encourages a centralized bureaucracy by allowing the governmental powers to choose the terms of the bailout. In addition, government bailouts are criticized as corporate welfare, which encourages corporate irresponsibility.
Others, such as economist Jeffrey Sachs, have called the bailout a necessary evil, arguing in 2008 that the likely incompetence of the auto companies’ management is not a sufficient reason to let it fail outright and risk disrupting the delicate economic climate in the United States as it is up to three million jobs depend on the solvency of the Big Three and things were grim enough as it was.
Randall D. Guynn made similar arguments for the 2008 financial bailout, stating that most policymakers viewed bailouts as the lesser of two evils given the lack of effective solutions at the time.
During the 2007–2008 financial crisis, large amounts of government support were used to protect the financial system, and many of these measures were attacked as bailouts. Over $1 trillion in government assistance was provided during that time and “voters were furious.”
The US Troubled Asset Relief Program approved up to $700 billion in government assistance, of which $426 billion was invested in banks, American International Group, automakers, and other assets. TARP recovered a total of $441.7 billion in funds from $426.4 billion invested and made $15.3 billion in profit.
In the UK, the bank bailout package was even larger at around £500bn.
Controversial bailouts also took place in other countries, such as Germany (SoFFin rescue fund), Switzerland (UBS rescue), Ireland (the “blanket guarantee” issued by Irish domestic banks in September 2008), and several other countries in Europe.