Bailout (Company) - Explained
What is a Financial Bailout?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is a Bailout?
A bailout refers to the act of a business, person, or a government giving money, as well as, resources to a company that's failing. These actions assist to prevent the impact of the potential downfall of that business which might include bankruptcy and also default on its financial obligations.
Businesses, as well as, governments might get a bailout which may be in the form of a loan, buying bonds, cash infusions or stocks, and may need the recused party to reimburse the support, depending on the terms. Bailouts initially happened in businesses or industries that are not viable anymore or that have experienced huge losses. However, even sectors that seem stable like banks are likely to fail, as seen during the financial sector bailout of 2008.
A bailout refers to money injection into an organization or business which would eventually experience collapse. Bailouts can take the form of bonds, cash, loans, or stocks. Some loans need reimbursement, either with or without interest payments. Bailouts usually go to industries or companies that directly affect the company's overall health, as against just one sector or industry.
How does a Financial Bailout Work?
Bailouts are usually only for industries or companies whose bankruptcies might have a severe adverse effect on the economy, not just a specific market sector. For instance, a company having a considerable workforce might get a bailout because the economy couldn't sustain the major jump in unemployment which would happen supposing the business failed.
Often, other companies would intervene, acquiring the failing business, referred to as a bailout takeover. The United States government has a long history of bailouts dating back to 1792 panic. Since then, the government has helped financial institutions during the savings and loan bailout of 1989, rescued insurance giant American International Group (AIG), funded Freddie Mac and Fannie Mae, the government-sponsored home lenders, and stabilized banks during the "too big to fail" bailout of 2008, officially referred to as the Emergency Economic Stabilization Act of 2008 (EESA).