bailout

A bailout is the rescue of an entity that is in financial trouble through the injection of capital . Although the resources for a bailout may come from a business, individual or government (the 1907 bailout of the financial sector by the individual J.P. Morgan and other Wall Street Bankers being a good example), the establishment of a central bank by the Federal Reserve Act in 1913 means that bailouts often refer to government bailouts specifically.

The bailout enables the survival of the company. The government’s decision to bailout an entity is often supported by a finding that the failure of the entity would lead to systemic risk. This can lead to problems as banks grow so large and interconnected that their failure would cause serious systemic failure, and government bailouts in times of financial distress become more of a guarantee. These entities are known as being “ too big to fail ” (“TBTF”). Often, in conjunction with a bailout, the government also sets higher regulation and oversight of the company, requiring them to restructure the company or cap salaries of executives for a time period. Governments provide bailouts in order to maintain regulation of the overall market and economy, and to avoid further collapse of the financial system.

Bailouts in the U.S. have occurred many times, and are often linked to financial crises or national emergencies, for example:

  1. The Savings & Loan Crisis led to the Financial Institutions Reform Recovery and Enforcement Act in 1989 which included a $293.3 billion bailout of the savings and loan industry.
  2. After the terrorist attacks on 9/11 , the airline industry was especially hard-hit and received an 18.6-billion-dollar bailout . The bailout support can come in the form of cash that does not have to be paid back, loans with favorable terms for the entities receiving the funds, bonds , and stock purchases .
  3. The mortgage financiers Fannie Mae and Freddie Mac were bailed out during the 2008 financial crisis. The bailout was the largest taxpayer-funded bailout in history.

In Chicago Unbound, Eric A. Posner writes about bailout regulation in his journal article, A Framework for Bailout Regulation . He defines a bailout as follows: “A bailout occurs when the government makes payments (including loans, loan guarantees, cash, and other types of consideration) to a liquidity-constrained private agent in order to enable that agent to pay its creditors and counterparties, when the agent is not entitled to those payments under a statutory scheme.” His last comment means that the agent (or recipient receiving the bailout) is not entitled by law to receive those payments, yet does anyway. This makes some people uncomfortable because they see it as encouraging risky or irresponsible behavior. Businesses that operate on the private market are expected to manage their debts to make sure they can pay the debts they acquire. That is why Congress wanted to end bailouts in the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act. The Act states that emergency lending should be done only to provide liquidity when there is enough security for the loan to protect taxpayers and not to aid a failing financial company.

[Last reviewed in February of 2025 by the Wex Definitions Team ]

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