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 of its downfall. Bailouts can take the form of loans, bonds, stocks or cash, and they may require reimbursement. Bailouts have traditionally occurred in industries or businesses that are perceived as no longer viable or sustaining huge losses.

BREAKING DOWN 'Bailout'

Bailouts are typically only considered for companies or industries whose bankruptcies are expected to have a severe adverse impact on the economy as a whole, not just a particular sector or the industry. For example, a company that has a huge workforce may receive a bailout because the economy could not sustain the substantial jump in unemployment that would occur if the business failed.

Financial Industry Bailout

One of the largest bailouts in history was offered by the U.S. government in 2008. The bailout targeted the largest financial institutions in the world that experienced severe losses from the collapse of the subprime mortgage market and the 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 people defaulted on their mortgages.

Financial institutions such as Countrywide, Lehman Brothers and Bear Stearns began to fail, and 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. Ultimately, TARP disbursed $439 billion to financial institutions, according to ProPublica, an independent nonprofit newsroom.

Auto Industry Bailout

During the 2008 financial crisis, automakers such as Chrysler and General Motors required a taxpayer bailout to stay solvent. The high gas prices that existed at the time caused sales of the manufacturers' SUVs and larger vehicles to plummet. The public found it difficult to obtain financing, including auto loans, during the financial crisis because banks tightened their lending requirements, which 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.

Financial institutions have been repaying their TARP funds. ProPublica states that as of April 2018, the Treasury has recouped $390 billion of the $439 billion it dispersed, and GM and Chrysler paid back their TARP loans years ahead of schedule. 

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