Bailout

A bailout is defined as a provision or mechanism of financial assistance to either a corporation or country in a bid to avert bankruptcy.

The term became popularized during the global financial crisis in the United States following the passage of massive stimulus packages.

A common example for many involved the bailout given the to the US automotive sector in 2009 to help avert its collapse, given the importance it held in the US economy.

For example, the automotive company General Motors was given approximately $11.2 billion, at a cost to US taxpayers, which was later paid off.

Not all bailouts are repaid however, making them controversial in free-market economies and amongst taxpayers who must shoulder the bill.

Other examples include 2020, in which the US Congress passed a sweeping stimulus bill amid the Coronavirus pandemic to help keep businesses afloat during lockdowns.

Why Are Companies Bailed Out?

Many speculate why companies are bailed out at all or why some are, while others are left to declare bankruptcy.

There is no one answer as bailouts are done for profit or sometimes political motives.

Bailouts are helpful in stabilizing the market, namely when there is a greater risk of contagion.

Some companies are quite literally ‘too big to fail’, the result being the systematic destabilization of their respective industry.

This term can also refer to companies who provide essential goods to the public and therefore any disruption in their operations can wreak havoc.

A good example of this are large investment institutions or banks, whom the public relies on for day-to-day cash or access to personal savings.

By extension, a bailout differs from a bail-in, which involves bondholders and other depositors being forced to participate in the recapitalization process, notably without the assistance of taxpayers.