What is a ‘Bailout’

A bailout is a situation in which a business, an individual or a government offers money to a failing business to prevent the consequences that arise from the business’s downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may require reimbursement. Bailouts have traditionally occurred in industries or businesses that are perceived as no longer being viable or are sustaining huge losses.

Explaining ‘Bailout’

Typically, companies in need of bailout employ a large number of people, leading some people to believe that the economy would be unable to sustain such a huge jump in unemployment if the business folded. Bailouts are normally only considered for companies or industries whose bankruptcies could cause a severely adverse impact to the economy as a whole, and not just to the industry.

Financial Industry Bailout

One of the biggest bailouts in history was the one offered by the U.S. government in 2008 to many of the largest financial institutions in the world that experienced severe losses resulting from the collapse in the subprime mortgage market and resulting credit crisis. Banks, which had been providing an increasing number of mortgages to borrowers with low credit scores, experienced massive loan losses as many of these mortgages went into default.

Auto Industry Bailout

During the 2008 financial crisis, automakers such as Chrysler and General Motors needed a taxpayer bailout of their own to stay solvent. High gas prices at the time resulted in plummeting sales of these companies’ SUVs and larger vehicles. The difficulty in obtaining auto loans during the financial crisis further hampered auto sales. While intended for financial companies, the two automakers ended up drawing roughly $17 billion from TARP to stay afloat. In June 2009, both Chrysler and GM emerged from bankruptcy, and they remain among the larger auto producers today.

Further Reading