A bailout is when the government gives financial support to rescue a company that is in financial trouble and possibly at risk for bankruptcy. The bailout enables the survival of the company. The need for a bailout often arises out of a financial crisis or national emergencies that particularly effects certain industries. For example, after the terrorist attack 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 entity receiving the funds, bonds, and stock purchases. Typically, 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.
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 updated in May of 2020 by the Wex Definitions Team]