Bailout

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.

BREAKING DOWN '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.

As well-known financial institutions such as Countrywide, Lehman Brothers and Bear Stearns began failing, the government responded with the Troubled Asset Relief Program (TARP). The program authorized the government purchase of up to $700 billion in toxic assets from the balance sheets of dozens of financial institutions. In the end, TARP ended up disbursing more than $426 billion to financial institutions.

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.

In the early 1980s, Chrysler was also in need of a bailout. The U.S. government stepped in and offered roughly $1.2 billion to the failing company. By 1983, Chrysler was able to pay back the entire loan. The company operates today as Fiat Chrysler Automobiles.