A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy.
A bailout differs from the term bail-in (coined in 2010) under which the bondholders or depositors of global systemically important financial institutions (G-SIFIs) are forced to participate in the recapitalization process, but taxpayers are not. Some governments also have the power to participate in the insolvency process: for instance, the U.S. government intervened in the General Motors bailout of 2009–2013. A bailout can, but does not necessarily, avoid an insolvency process. The term bailout is maritime in origin and describes the act of removing water from a sinking vessel using a bucket.
Overview
A bailout could be done for profit motives, such as when a new investor resurrects a floundering company by buying its shares at firesale prices, or for social objectives, such as when, hypothetically speaking, a wealthy philanthropist reinvents an unprofitable fast food company into a non-profit food distribution network. However, the common use of the phrase occurs where government resources are used to support a failing company typically to prevent a greater problem or financial contagion to other parts of the economy. For example, the US government assumes transportation to be critical to the country's general economic prosperity. As such, it has sometimes been the policy of the US government to protect major US companies responsible for transportation (aircraft manufacturers, train companies, automobile companies, etc.) from failure by subsidies and low-interest loans. Such companies, among others, are deemed "too big to fail" because their goods and services are considered by the government to be constant universal necessities in maintaining the nation's welfare and often, indirectly, its security.
Emergency-type government bailouts can be controversial. Debates raged in 2008 over if and how to bail out the failing auto industry in the United States. Those against it, like pro-free market radio personality Hugh Hewitt, saw the bailout as unacceptable. He argued that the companies should be dismantled organically by the free-market forces so that entrepreneurs may arise from the ashes; that the bailout signals lower business standards for giant companies by incentivizing risk, creating moral hazard through the assurance of safety nets that ought not be but unfortunately are considered in business equations; and that a bailout promotes centralized bureaucracy by allowing government powers to choose the terms of the bailout. Furthermore, government bailouts are criticized as corporate welfare, which encourages corporate irresponsibility.
Others, such as economist Jeffrey Sachs, have characterized the particular bailout as a necessary evil and have argued in 2008 that the probable incompetence in management of the car companies is an insufficient reason to let them fail completely and to risk disturbing the delicate economic state of the United States, as up to three million jobs rested on the solvency of the Big Three and things were bleak enough as they were.
Randall D. Guynn noted similar arguments for the financial bailouts of 2008, explaining that most policymakers considered bailouts to be the lesser of two evils, given the lack of effective resolution options at the time.
In the financial crisis of 2007–2008, large amounts of government support were used to protect the financial system, and many of those actions were attacked as bailouts. Over $1 trillion of government support was deployed in this period and "voters were furious." The US Troubled Asset Relief Program authorized up to $700bn of government support of which $426bn was invested in banks, American International Group, automakers, and other assets. TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit.
In the United Kingdom, the bank rescue package was even larger, totaling some £500bn.
Controversial bailouts occurred in other countries as well, such as Germany (the SoFFin rescue fund), Switzerland (the rescue of UBS), Ireland (the "blanket guarantee" of Irish domestic banks issued in September 2008), and several other countries in Europe.