Bailout

A bailout is said to happen when a business, an individual, or the government provide a failing company or government with capital or resources (capital injection). This usually happens when a company faces threats of a financial downturn or bankruptcy, a bailout helps such companies avert such financial situations. When businesses or governments are provided financial or resources support in form of cash infusions, bonds, or stocks as a form of loan by other governmental organizations or private organizations, it is expected that such businesses or governments reimburse the support upon an agreement or fulfill other obligations as repayment upon agreement. Bailouts are not particular to businesses or governments alone but financial institutions like banks can also partake in bailouts. For example, the 2008 $700 billion bank bailout was signed by George Bush to buy mortgage-backed securities that were in the way of defaulting.

What is a Bailout?

A bailout is a financial term used to provide support (finance or resources) to a business or government/country facing possible threats of bankruptcy. It can be given as a form of loan in cash, stocks, or bonds, and may or may not require reimbursement depending on the kind of agreement that was signed.

How do bailouts work?

When a business (especially one with a large international influence) or a government with great international borders influence is on the verge of bankruptcy as a result of prolonged financial crisis, a stronger business, organization, or government steps in to redeem such business or government from bankruptcy.

There are no general rules governing bailouts as there are different bailout policies come in different types such as direct loans or third-party guarantees loans (private loans) offered to the failing organization. The bailout bodies also have the leverage of making necessary adjustments to the failing company or government such as change of management/leadership, no shareholder dividend payment, cap the salaries of executives for a while, and restructuring the organization.

Importance of Bailouts

Bailouts do not only benefit the rescued company or government but it also benefits the society at large especially when a business has grown so large that its crash can greatly affect the economy—that is when a company’s influence in a particular region or country is so great that anything that goes wrong with its operations can affect the economy of that region. However, it is not always so. Bailouts also serve as a good opportunity for failing companies to take a shot at survival and avoid a complete collapse.

Note: A bailout may seem like a great escape route for bankruptcy threatened companies, however, it holds several disadvantages one of which encourages certain companies to take risks that may be detrimental to their business operations. This happens when a company counts on a bailout if the risk turns out negative.