bailout

A bailout refers to the rescue of a financially distressed entity through the injection of capital or other financial assistance. Resources for bailouts may come from private individuals, businesses, or governments. For example, during the Panic of 1907, J.P. Morgan and other bankers organized private rescues of financial institutions. Since the establishment of the Federal Reserve under the Federal Reserve Act of 1913, the term “bailout” most often refers to government interventions.

Government bailouts are typically justified on the grounds of systemic risk, meaning that the failure of a large or interconnected entity could destabilize the broader economy. Companies considered “too big to fail” often receive bailout assistance in times of crisis. Such bailouts may be accompanied by regulatory conditions, such as restructuring requirements, limits on executive compensation, or increased oversight. Support can take various forms, including cash infusions, loans on favorable terms, loan guarantees, bond purchases, or equity stakes.

Examples in U.S. history include:

The Savings and Loan Crisis led to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which committed approximately $293 billion to resolve failing institutions.
Following the September 11, 2001 terrorist attacks, Congress passed the Air Transportation Safety and System Stabilization Act (ATSSSA) on September 21, 2001, authorizing $15 billion in support, consisting of $5 billion in direct grants and $10 billion in loans with favorable terms for the entities receiving the funds, bonds, and stock purchases.
In the 2008 financial crisis, Fannie Mae and Freddie Mac were placed into conservatorship and supported with hundreds of billions in taxpayer funds, the largest bailout in U.S. history.
During the height of the COVID-19 pandemic (2020–2021), the federal government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent legislation, providing over $2 trillion in assistance. Programs included the Paycheck Protection Program (PPP) for small businesses, airline industry aid, and direct loans and guarantees to major corporations. While often described as a stimulus, many of these programs operated as bailouts by preventing mass bankruptcies and stabilizing critical sectors.

Some scholars have analyzed bailouts as exceptional government measures. Eric A. Posner defines a bailout in the journal article, A Framework for Bailout Regulation, as government payments (including loans, guarantees, or other consideration) made to a liquidity-constrained private actor to enable it to meet obligations, even though that actor has no legal entitlement to such support. This definition highlights a central criticism of bailouts: they may encourage moral hazard, allowing private firms to take excessive risks under the expectation of public rescue.

Congress addressed bailout concerns in the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, which restricted the Federal Reserve’s emergency lending authority. The Act permits emergency lending only when loans are secured to protect taxpayers and not as direct aid to failing companies. Debate continues about whether new financial innovations and systemic risks require further reform.

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

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