Bailout

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Financial assistance given to an insured bank or savings institution suffering a loss of earnings resulting from loan losses, deteriorating market conditions, or a sudden outflow of deposits in a depositor Run. When the infusion of funds is from a federal agency such as the Bank Insurance Fund which insures commercial bank deposits, it is the depositors who are bailed out. The insurance agency may arrange open bank assistance to a troubled bank, or arrange an acquisition by a healthy financial institution. In either case, the deposit insurance fund gives enough assistance, usually in the form of promissory notes, to cover the difference between the estimated market value of the bank's assets and its liabilities (the bank's negative net worth), thereby recapitalizing the institution. See also Bridge Bank; Insured Deposit; Modified Payoff; Purchase and Assumption; Resolution Trust Corporation.

Bailout

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Home > Library > Business & Finance > Investment Dictionary

A situation in which a business, individual or government offers money to a failing business in order to prevent the consequences that arise from a business's downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement.

Investopedia Says:
Bailouts have traditionally occurred in industries or businesses that may be perceived as no longer being viable, or are just sustaining huge losses. Typically, these companies 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.

For example, Chrysler, a large U.S. automaker was in need of a bailout in the early 1980s. The U.S. government stepped in and offered roughly $1.2 billion to the failing company. Chrysler was able to pay the entire bailout back, and is currently a profitable firm.

One of the biggest bailouts is the one proposed by the U.S. government in 2008 that will see $700 billion put toward bailing out various financial organizations and those affected by the credit crisis.

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