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A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...
. A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global
systemically important financial institution A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. They are colloquially referred to as "too big to fail". As the financial crisis o ...
s (G-SIFIs) are forced to participate in the recapitalization process, but taxpayers are not. Some governments also have the power to participate in the insolvency process: for instance, the U.S. government intervened in the General Motors bailout of 2009–2013. A bailout can, but does not necessarily, avoid an insolvency process. The term ''bailout'' is
maritime Maritime may refer to: Geography * Maritime Alps, a mountain range in the southwestern part of the Alps * Maritime Region, a region in Togo * Maritime Southeast Asia * The Maritimes, the Canadian provinces of Nova Scotia, New Brunswick, and Pri ...
in origin and describes the act of removing water from a sinking vessel using a bucket.


Overview

A bailout could be done for profit motives, such as when a new investor resurrects a floundering company by buying its shares at firesale prices, or for social objectives, such as when, hypothetically speaking, a wealthy philanthropist reinvents an unprofitable
fast food Fast food is a type of mass-produced food designed for commercial resale, with a strong priority placed on speed of service. It is a commercial term, limited to food sold in a restaurant or store with frozen, preheated or precooked ingredien ...
company into a non-profit food distribution network. However, the common use of the phrase occurs where government resources are used to support a failing company typically to prevent a greater problem or
financial contagion Financial contagion refers to "the spread of market disturbances mostly on the downside from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows". Financial contag ...
to other parts of the economy. For example, the US government assumes transportation to be critical to the country's general economic prosperity. As such, it has sometimes been the policy of the US government to protect major US companies responsible for transportation (aircraft manufacturers, train companies, automobile companies, etc.) from failure by subsidies and low-interest loans. Such companies, among others, are deemed " too big to fail" because their goods and services are considered by the government to be constant universal necessities in maintaining the nation's welfare and often, indirectly, its security. Emergency-type government bailouts can be controversial. Debates raged in 2008 over if and how to bail out the failing auto industry in the United States. Those against it, like pro-
free market In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ...
radio personality A radio personality (American English) or radio presenter (British English) is a person who has an on-air position in radio broadcasting. A radio personality who hosts a radio show is also known as a radio host, and in India and Pakistan as a radi ...
Hugh Hewitt, saw the bailout as unacceptable. He argued that the companies should be dismantled organically by the free-market forces so that entrepreneurs may arise from the ashes; that the bailout signals lower business standards for giant companies by incentivizing risk, creating
moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher ri ...
through the assurance of safety nets that ought not be but unfortunately are considered in business equations; and that a bailout promotes centralized bureaucracy by allowing government powers to choose the terms of the bailout. Furthermore, government bailouts are criticized as
corporate welfare Corporate welfare is a phrase used to describe a government's bestowal of money grants, tax breaks, or other special favorable treatment for corporations. The definition of corporate welfare is sometimes restricted to direct government subsidi ...
, which encourages corporate irresponsibility. Others, such as economist Jeffrey Sachs, have characterized the particular bailout as a necessary evil and have argued in 2008 that the probable incompetence in management of the car companies is an insufficient reason to let them fail completely and to risk disturbing the delicate economic state of the United States, as up to three million jobs rested on the solvency of the Big Three and things were bleak enough as they were.
Randall D. Guynn Randall David Guynn (born October 13, 1957) is an American bank regulatory and bank mergers and acquisitions lawyer. Biography In 1981, Guynn was graduated from Brigham Young University, and in 1984 from the University of Virginia School of Law ...
noted similar arguments for the financial bailouts of 2008, explaining that most policymakers considered bailouts to be the lesser of two evils, given the lack of effective resolution options at the time. In the
financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
, large amounts of government support were used to protect the financial system, and many of those actions were attacked as bailouts. Over $1 trillion of government support was deployed in this period and "voters were furious." The US Troubled Asset Relief Program authorized up to $700bn of government support of which $426bn was invested in banks,
American International Group American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...
, automakers, and other assets. TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit. In the United Kingdom, the bank rescue package was even larger, totaling some £500bn. Controversial bailouts occurred in other countries as well, such as Germany (the SoFFin rescue fund), Switzerland (the rescue of UBS), Ireland (the "blanket guarantee" of Irish domestic banks issued in September 2008), and several other countries in Europe.


Bailout vs. bail-in

A bail-in is the opposite of a bail-out because it does not rely on external parties, especially government capital support. A bail-in creates new capital to rescue a failing firm through an internal recapitalization and forces the borrower's creditors to bear the burden by having part of the debt they are owed written off or converted into equity. (For example, in the case of the Cyprus banks in 2013, the creditors in question were bondholders, and the bail-in was of depositors with more than €100,000 in their accounts.)


Theory

The bail-in was first proposed publicly in an Economist Op-Ed "From Bail-out to Bail-in" in January 2010, by Paul Calello and Wilson Ervin. It was described as a new alternative between "taxpayer bail-outs (bad) and systemic financial collapse (probably worse)." It envisioned a high-speed recapitalization financed by "bailing-in" (converting) bondholder debt into fresh equity. The new capital would absorb losses and provide new capital to support critical activities, thereby avoiding a sudden disorderly collapse or fire sale, as seen in the Lehman failure. Management would be fired and shareholders would displaced by the bailed-in bondholders, but the franchise, employees and core services could continue, supported by the newly converted capital. Around the same time, the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government o ...
was developing similar architecture, given the pressing need for a better tool to handle failing banks in the wake of the financial crisis. The first official discussion of bail-in was set out in a speech by Paul Tucker, who chaired the Financial Stability Board (FSB) Working Group on Cross Border Crisis Management and was also deputy governor for Financial Stability at the Bank of England. In March 2010, Tucker began to outline the properties of a new "bail-in" strategy to handle the failure of a large bank: By October 2011, the FSB Working Group had developed this thinking considerably and published the "Key Attributes of Effective Resolution Regimes for Financial Institutions." The document set out core principles to be adopted by all participating jurisdictions, including the legal and operational capability for such a super special resolution regime (now known as "bail-in"). The scope of the planned resolution regime was not limited to large domestic banks. In addition to "systemically significant or critical" financial institutions, the scope also applies to two further categories of institutions Global SIFIs (banks incorporated domestically in a country that is implementing the bail-in regime) and "Financial Market Infrastructures (FMIs)" like clearing houses. The inclusion of FMIs in potential bail-ins is in itself a major departure. The FSB defines those market infrastructures to include multilateral securities and derivatives clearing and settlement systems and a whole host of exchange and transaction systems, such as payment systems, central securities depositories, and trade depositories. That would mean that an unsecured creditor claim to, for example, a clearing house institution or a stock exchange could in theory be affected if such an institution needed to be bailed in. The cross-border elements of the resolution of globally significant banking institutions (G-SIFIs) were a topic of a joint paper by the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
and the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government o ...
in 2012. Outgoing Deputy Director of the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government o ...
Paul Tucker chose to open his academic career at Harvard with an October 2013 address in Washington to the
Institute of International Finance An institute is an organisational body created for a certain purpose. They are often research organisations (research institutes) created to do research on specific topics, or can also be a professional body. In some countries, institutes can ...
in which he argued that resolution had advanced enough in several countries that bailouts would not be required and so would be bailed-in, notably the US G-SIBs. Although they were still large, they were no longer too big to fail because of the improvements in resolution technology. In a similar vein, a GAO report in 2014 determined that the market expectation of bailouts for the largest "too big to fail" banks had been largely eliminated by the reforms. That was determined by various methods, especially by comparing the funding cost of the biggest banks with smaller banks that are subject to ordinary FDIC resolution. That differential, which had been large in the crisis, had been reduced to roughly zero by the advance of reform, but the GAO also cautioned that the results should be interpreted with caution. In Europe, the EU financial community symposium on the "Future of Banking in Europe" (December 2013) was attended by Irish Finance Minister Michael Noonan, who proposed a bail-in scheme in light of the banking union that was under discussion at the event. Deputy BoE Director
Jon Cunliffe Sir Jonathan Stephen Cunliffe, CB (born 2 June 1953) is a senior British civil servant, currently serving as Deputy Governor of the Bank of England for Financial Stability. Biography Cunliffe studied at Manchester University. He lectured at ...
suggested in a March 2014 speech at
Chatham House Chatham House, also known as the Royal Institute of International Affairs, is an independent policy institute headquartered in London. Its stated mission is to provide commentary on world events and offer solutions to global challenges. It is ...
that the domestic banks were too big to fail, but instead of the
nationalisation Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to pri ...
process used in the case of HBOS, RBS and threatened for
Barclays Barclays () is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services. Barclays traces ...
(all in late 2008), those banks could henceforth be bailed in.telegraph.co.uk: "BoE has 'no confidence' a failing big bank could be saved" (Wilson) 17 Mar 2014
/ref> A form of bail-in was used in small Danish institutions (such as Amagerbanken) as early as 2011, as well as the later conversion of junior debt at the Dutch Bank SNS REALL. However, the process did not receive extensive global attention until the bail-in of the main banks of Cyprus during 2013, discussed below. The restructuring of the Co-op bank in the UK (2013) has been described as a voluntary or negotiated bail-in.


Legislative and executive efforts

The Dodd–Frank Act legislates bank resolution procedures for the United States under Title I and Title II. Title I refers to the preferred route, which is to resolve a bank under bankruptcy procedures aided by extensive pre-planning (a "living will"). Title II establishes additional powers that can be used if bankruptcy is seen to pose "serious and adverse effects on financial stability in the United States", as determined by the Secretary of the Treasury, together with two thirds Federal Reserve Board and two thirds of the FDIC board. Like Title I, it would force shareholders and creditors to bear the losses of the failed financial company, "removing management that was responsible for the financial condition of the company." The procedures also establish certain protections for creditors, such as by setting a requirement for the payout to claimants to ve at least as much as the claimants would have received under a bankruptcy liquidation. The FDIC has drawn attention to the problem of post-resolution governance and suggested that a new
CEO A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especially ...
and
Board of Directors A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
should be installed under FDIC receivership guidance. Claims are paid in the following order, and any deficit to the government must be recouped by assessments on the financial industry:cornell.edu: "Dodd–Frank: Title II - Orderly Liquidation Authority"
/ref> # Administrative costs # The government # Wages, salaries, or commissions of employees # Contributions to employee benefit plans # Any other general or senior liability of the company # Any junior obligation # Salaries of executives and directors of the company # Obligations to shareholders, members, general partners, and other equity holders A number of strategies were explored early on to determine how Title I and Title II powers could be best used to resolve a large failing bank, including "Purchase and Assumption" and "Loss Sharing". Over time, the preferred approach evolved to a bail-in strategy, which is more direct, as it does not require an acquisition party. That approach was developed under the FDIC Office of Complex Financial Institutions group led by James R. Wigand. The approach is described in a slide deck from January 2012 as well as in Congressional testimony. The specific strategy for implementing a bail-in under the Dodd–Frank Act requirements has been described as the "Single Point of Entry mechanism". The innovative FDIC strategy was described by Federal Reserve Governor Jerome Powell as a "classic simplifier, making theoretically possible something that seemed impossibly complex." It created a relatively simple path by which bail-in could be implemented under the existing Dodd–Frank powers. Powell explained: A comprehensive overview of this strategy is available in the
Bipartisan Policy Center The Bipartisan Policy Center (BPC) is a Washington, D.C.–based think tank that promotes bipartisanship. The organization aims to combine ideas from both the Republican and Democratic parties to address challenges in the U.S. BPC focuses on iss ...
report "Too Big to Fail: The Path to a Solution". The
Canadian government The government of Canada (french: gouvernement du Canada) is the body responsible for the federal administration of Canada. A constitutional monarchy, the Crown is the corporation sole, assuming distinct roles: the executive, as the ''Crown-i ...
clarified its rules for bail-ins in the "Economic Action Plan 2013", at pages 144-145 "to reduce the risk for taxpayers." The Eurogroup proposed on 27 June 2013 that after 2018, bank shareholders would be first in line to assume the losses of a failed bank before bondholders and certain large depositors. Insured deposits under £85,000 (€100,000) would be exempt and, with specific exemptions, uninsured deposits of individuals and small companies would be given preferred status in the bail-in pecking order for taking losses. That agreement formalised the practice seen earlier in Cyprus. Under the proposal, all unsecured bondholders would be hit for losses before a bank was allowed to receive capital injections directly from the
European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It ...
. A tool known as the
Single Resolution Mechanism The Single Resolution Mechanism (SRM) is one of the pillars of the European Union's European Union banking union, banking union. The Single Resolution Mechanism entered into force on 19 August 2014 and is directly responsible for the resolution ...
, which was agreed by Eurogroup members on 20 March 2014, was part of an EU effort to prevent future financial crises by pooling responsibility for eurozone banks, known as a banking union. In a first step, the European Central Bank will fully assume supervision of the 18-nation currency bloc's lenders in November 2014. The deal needed formal approval by the European Parliament and by national governments. The resolution fund would be paid for by the banks themselves and will gradually merge national resolution funds into a common European one until it hits the €55 billion target of funding. See the EC FAQ on the SRM. The legislative item was split into three initiatives by Internal Market and Services Commissioner
Michel Barnier Michel Barnier (born 9 January 1951) is a French politician who served as the European Commission's Head of Task Force for Relations with the United Kingdom (UK Task Force/UKTF) from 2019 to 2021. He previously served as Chief Negotiator, Tas ...
: Bank Recovery and Resolution Directive, DGS and SRM.


Practice

A form of bail-in was used in small Danish institutions (such as Amagerbanken) as early as 2011. The Dutch authorities converted the junior debt of SNS REAAL in 2013, as part of a privately funded recapitalization. During the 2012–2013 Cypriot financial crisis, the Cypriot economy came to near-collapse as the
Greek financial crisis Greece faced a sovereign debt crisis in the aftermath of the financial crisis of 2007–2008. Widely known in the country as The Crisis (Greek: Η Κρίση), it reached the populace as a series of sudden reforms and austerity measures that le ...
(to which Cypriot banks were heavily exposed) threatened Cyprus's banks, causing a financial panic,
bank run A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...
s, and a downgrade of government bonds to "junk" status.Holly Ellyatt
That was quick! Cyprus exits bailout with cash to spare
CNBC (March 8, 2016).
In March 2013, a €10 billion bailout was announced by the
European troika The troika is a term used to refer to the single decision group created by three entities, the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF). It was formed in the aftermath of the European de ...
, a loose coalition of the European Union, the European Central Bank and the International Monetary Fund, in return for Cyprus agreeing to close its second largest bank, the
Cyprus Popular Bank Cyprus Popular Bank (from 2006 to 2011 known as Marfin Popular Bank) was the second-largest banking group in Cyprus behind the Bank of Cyprus until it was 'shuttered' in March 2013 and split into two parts. The 'good' Cypriot part was merged i ...
, also known as Laiki Bank. The Cypriots had to agree to levy all uninsured deposits there and possibly around 40% of uninsured deposits in the
Bank of Cyprus The Bank of Cyprus (BoC) ( el, Τράπεζα Κύπρου, tr, Kıbrıs Bankası) is a Cypriot financial services company established in 1899 with its headquarters in Strovolos. Current operations The Bank of Cyprus currently operates 108 bra ...
, the island's largest commercial bank. After an initial proposal was replaced with the final proposal, no insured deposit of €100,000 or less was to be affected. The levy of deposits that exceeded €100,000 was termed a "bail-in" to differentiate it from a government-backed bailout.telegraph.co.uk: "Bank of Cyprus executes depositor bail-in" 28 Apr 2013
/ref> The Bank of Cyprus executed the bail-in on 28 April 2013. There were some controversial elements, especially with respect to the initial plan, which included a contribution from insured depositors, which was described as "not smart" by ECB President
Mario Draghi Mario Draghi (; born 3 September 1947) is an Italian economist, academic, banker and civil servant who served as prime minister of Italy from February 2021 to October 2022. Prior to his appointment as prime minister, he served as President of ...
. The proposal was amended the following day to affect only uninsured depositors and creditors. In a broader review of the events of Cyprus, Draghi addressed some of the criticism of this event in a press conference: In 2016, Cyprus completed its bailout program, which was successfully implemented. About 30 percent of the country's overall bailout funds were never tapped. In recent years, considerable effort has been made to ensure that a large supply of bail-inable liabilities is in place for the largest banks. The rules for "Total Loss Absorption Capacity" (TLAC) in the US have led the eight US G-SIFIs to issue approximately $1.0 trillion of long-term holding company liabilities, which could be used for this purpose. Combined with equity and other capital securities, that establishes an aggregate TLAC of roughly $2 trillion for the eight U.S. G-SIFIs. In the UK, the Bank of England has set out the TLAC requirements for its largest banks, described as MREL, at between 25.2% and 29.3% of risk-weighted assets. Switzerland has imposed requirements on its two G-SIFIs of 28.6% of risk-weighted assets. The EU is currently debating how best to implement the FSB requirements across its banking system and what the appropriate size of that requirement should be.


Themes

From the many bailouts over the course of the 20th century, certain principles and lessons have emerged that are consistent: * Central banks should provide loans to help the system cope with liquidity concerns if banks are unable or unwilling to provide loans to businesses or individuals. Lending into illiquidity but not insolvency was articulated at least as early as 1873 in '' Lombard Street, A Description of the Money Market'', by
Walter Bagehot Walter Bagehot ( ; 3 February 1826 – 24 March 1877) was an English journalist, businessman, and essayist, who wrote extensively about government, economics, literature and race. He is known for co-founding the '' National Review'' in 185 ...
. * Insolvent institutions (those with insufficient funds to pay their short-term obligations or those with more debt than assets) should be allowed to fail in an orderly way. * The true financial position of key financial institutions should be clearly understood by
audits An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
or other means. The extent of losses and quality of assets should be known and reported by the institutions. * Banks that are deemed healthy enough or important enough to survive but require recapitalization from the government providing funds should be done in exchange for ownership rights such as preferred stock, which receives a cash dividend over time. * Government should take an ownership (equity or stock) interest to the extent that taxpayer assistance is provided so that taxpayers can benefit later. In other words, the government becomes the owner and can later obtain funds by issuing new
common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Co ...
shares to the public when the nationalized institution is later privatized. * A special government entity can be useful to administer the program, such as the Resolution Trust Corporation. * Dividend payments may be restricted to ensure taxpayer money are used for loans and strengthening the bank, rather than payments to investors. * Interest rate cuts lower lending rates and thus stimulate the economy.


Criticism

*
Moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher ri ...
is created, potentially lowering business standards, by the assurance of safety nets. * A centralized
bureaucracy The term bureaucracy () refers to a body of non-elected governing officials as well as to an administrative policy-making group. Historically, a bureaucracy was a government administration managed by departments staffed with non-elected offi ...
is promoted by allowing government powers to choose winners and losers in the economy.
Paul Volcker Paul Adolph Volcker Jr. (September 5, 1927 – December 8, 2019) was an American economist who served as the 12th chairman of the Federal Reserve from 1979 to 1987. During his tenure as chairman, Volcker was widely credited with having ended th ...
, chairman of
Barack Obama Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
's White House Economic Recovery Advisory Board, said that bailouts create moral hazard. They signal to the firms that they can take reckless risks, and if the risks are realized, taxpayers will pay the losses: "The danger is the spread of moral hazard could make the next crisis much bigger." On November 24, 2008, American Republican Representative Ron Paul (R–TX) wrote, "In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me. ... It won't work. It can't work. ... It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians." * Significant costs on governments and taxpayers can be caused. In extreme cases, the country's borrowing costs can be raised, or the country can even be bankrupted, as in the Ireland bailout of 2008. The IMF said that "the failure to bail-in unsecured creditors to a bank rescue that cost Irish taxpayers €64 bn and bankrupted the country was based on the view that doing so would have serious adverse 'spillover' effects in other eurozone countries, even though such risks were 'not obvious. In the 2012 eurozone crisis, other countries such as Italy were affected by a so-called " doom loop", which increased the cost of government borrowing because bailouts can "torpedo state finances if banks need to be bailed out."


Costs

In 2000, the World Bank reported that banking bailouts cost an average of 12.8% of GDP per event:


Examples

*1970 Penn Central Railroad *1971 Lockheed Corporation *1980
Chrysler Corporation Stellantis North America (officially FCA US and formerly Chrysler ()) is one of the " Big Three" automobile manufacturers in the United States, headquartered in Auburn Hills, Michigan. It is the American subsidiary of the multinational automotiv ...
*1984
Continental Illinois The Continental Illinois National Bank and Trust Company was at one time the seventh-largest commercial bank in the United States as measured by deposits, with approximately $40 billion in assets. In 1984, Continental Illinois became the largest ...
*1991 Executive Life Insurance Company by states assessing other insurers *1995 Mexico Bailout *1997 South Korea Bailout *19
Indonesia Bailout
*1998 Long-Term Capital Management by banks and investment houses, not government (see the link). *19
Brazil Bailout
*20
Argentina Bailout
*20
Brazil Bailout
*20
Brazil Bailout
*2003 Parmalat *2008 The Bear Stearns Companies, Inc. *2008 Fannie Mae and Freddie Mac *2008
The Goldman Sachs Group, Inc. Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, Hong ...
by the US federal government and
Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from which it invests the float (the retained premiums ...
*2008 Morgan Stanley bailed out by
The Bank of Tokyo-Mitsubishi UFJ is the largest bank in Japan. It was established on January 1, 2006, following the merger of the Bank of Tokyo-Mitsubishi, Ltd. and UFJ Bank Ltd. MUFG is one of the three so-called Japanese "megabanks" (along with SMBC and Mizuho). As such, ...
*2008–2009 American International Group, Inc. multiple times *2008 Emergency Economic Stabilization Act of 2008 *2008
2008 United Kingdom bank rescue package In the period September 2007 to December 2009, during the events now widely known as the Global Financial Crisis, the UK government enacted a number of financial interventions in support of the UK banking sector and four UK banks in particular. ...
*2008 Citigroup Inc. *2008 Royal Bank of Scotland *2008
Halifax Bank of Scotland HBOS plc was a banking and insurance company in the United Kingdom, a wholly owned subsidiary of the Lloyds Banking Group, having been taken over in January 2009. It was the holding company for Bank of Scotland plc, which operated the Bank ...
*2008 General Motors Corporation and
Chrysler LLC Stellantis North America (officially FCA US and formerly Chrysler ()) is one of the " Big Three" automobile manufacturers in the United States, headquartered in Auburn Hills, Michigan. It is the American subsidiary of the multinational automotiv ...
: though technically not a bailout, a
bridge loan A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. It is usually called a bridging loan in the United Kingdom, also known as a "caveat loan, ...
was given to the auto manufacturers by the US government; it is referred to by most as a bailout. *2009 Bank of America to help it absorb known losses that were much greater than revealed to shareholders incurred by its buyout of Merrill Lynch *2009
CIT Group CIT Group (CIT), a subsidiary of First Citizens BancShares, is an American financial services company. It provides financing, including factoring, cash management, treasury management, mortgage loans, Small Business Administration loans, l ...
$3 billion by its bondholders in an attempt to avoid a bankruptcy, which was only delayed *2009
Dubai Dubai (, ; ar, دبي, translit=Dubayy, , ) is the most populous city in the United Arab Emirates (UAE) and the capital of the Emirate of Dubai, the most populated of the 7 emirates of the United Arab Emirates.The Government and Politics o ...
and
Dubai World Dubai World ( ar, دبي العالمية) is an investment company that manages and supervises a portfolio of businesses and projects for the Government of Dubai across a wide range of industry segments and projects that promote Dubai as a hub ...
bailed out by
Abu Dhabi Abu Dhabi (, ; ar, أَبُو ظَبْيٍ ' ) is the Capital city, capital and List of cities in the United Arab Emirates, second-most populous city (after Dubai) of the United Arab Emirates. It is also the capital of the Emirate of Abu Dha ...


Irish banking rescue

The Irish banking crisis of 2008 has similarities to other banking crisis, but it was unique in that it was the first banking crisis in a country that was a member of the eurozone. That made the Irish government and central bank have unique constraints when the crisis struck. The post-2008 Irish economic downturn was also unusually steep. The impact on Irish government credit was so severe that it was forced to seek assistance from the European Union and the IMF.


Swedish banking rescue

In 1991 and 1992, a housing bubble in Sweden deflated, resulting in a severe
credit crunch A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...
and widespread bank insolvency. The causes were similar to those of the subprime mortgage crisis of 2007–2008. In response, the government took the following actions: *Sweden's government assumed bad bank debts, but banks had to write down losses and issue an ownership interest (
common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Co ...
) to the government. Shareholders were typically wiped out, but
bondholder In finance, a bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as i ...
s were protected. *When distressed assets were later sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies in public offerings. *The government announced that it would guarantee all
bank deposit A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below. ...
s and creditors of the nation's 114 banks. *Sweden formed a new agency to supervise institutions that needed recapitalization and another to sell off the assets, mainly real estate, which the banks held as collateral. The bailout initially cost about 4% of Sweden's GDP, later lowered to 0–2% of GDP, depending on the various assumptions if the value of stock that was sold when the nationalized banks were privatized.


US savings and loan crisis

In the late 1980s and the early 1990s, over 1000 thrift institutions failed as part of the savings and loan crisis. In response, the US established the Resolution Trust Corporation (RTC) in 1989. The cost of this bailout was estimated at $132.1bn to taxpayers.


TARP and related programs in US

In 2008 and 2009 the US Treasury and the Federal Reserve System bailed out numerous huge banks and insurance companies as well as General Motors and
Chrysler Stellantis North America (officially FCA US and formerly Chrysler ()) is one of the " Big Three" automobile manufacturers in the United States, headquartered in Auburn Hills, Michigan. It is the American subsidiary of the multinational automotiv ...
. Congress, at the urgent request of US President
George W. Bush George Walker Bush (born July 6, 1946) is an American politician who served as the 43rd president of the United States from 2001 to 2009. A member of the Republican Party, Bush family, and son of the 41st president George H. W. Bush, he ...
, passed the Troubled Asset Relief Program (TARP), authorized at $700 billion. The bank sectors repaid the money by December 2009, and TARP actually returned a profit to taxpayers. The separate bailout of Fannie Mae and Freddie Mac, which insure mortgages, totaled $135 billion by October 2010. The issue of federal bailouts of the banks and big corporations has become a major issue in elections, with the Tea Party movement in particular focusing its attack on bailouts.


Bailout Capitalism

Bailout capitalism is a form of
capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private pr ...
in which the economy is so far out of equilibrium that the only way to stabilize the system is through government support to businesses and households. Bailout capitalism occurs when the economy is so far out of equilibrium that the only way to stabilize the system is through government support to businesses and households. By keeping the economy afloat through such artificial means the
Schumpeterian Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at Ha ...
creative destruction Creative destruction (German: ''schöpferische Zerstörung'') is a concept in economics which since the 1950s is the most readily identified with the Austrian-born economist Joseph Schumpeter who derived it from the work of Karl Marx and po ...
is circumvented and inefficient firms taking excessive risks remain in operation, thereby denying one of the main elements of normal capitalist development. The support can come in form of purchase of toxic assets as in 2008 and through money creation as in the quantitative easing program of the Federal Reserve and other central banks. This program increased the assets held by the Federal reserve from $0.8 trillion in September 2008 to $9 trillion by May 2022 or by a factor of eleven. The bailouts were repeated in 2020 with the difference that this time smaller business and households also received financial support.


See also

Specific: * Automotive industry crisis of 2008–2009 *
Brown Bailout Brown is a color. It can be considered a composite color, but it is mainly a darker shade of orange. In the CMYK color model used in printing or painting, brown is usually made by combining the colors orange and black. In the RGB color model used ...
*
Crédit Lyonnais The Crédit Lyonnais (, "Lyon Credit ompany) was a major French bank, created in 1863 and absorbed by former rival Crédit Agricole in 2003. Its head office was initially in Lyon but moved to Paris in 1882. In the early years of the 20th cent ...
*
Debtor-in-possession financing Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress, typically during restructuring under corporate bankruptcy law (such as Chapter 11 bankruptcy in the US or CCAA in Canada). ...
* Emergency Economic Stabilization Act of 2008 *
Late 2000s recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At t ...
* Subprime mortgage crisis *
Lemon socialism Lemon socialism is a pejorative term for a form of government intervention in which government subsidies go to weak or failing firms (''lemons''; see Lemon law), with the effective result that the government (and thus the taxpayer) absorbs part ...
General: *
Bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...
*
Bubble (economics) An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...
*
Cash flow A cash flow is a real or virtual movement of money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
* Lender of last resort *
Financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
* Nationalization *
Recapitalization Recapitalization is a type of corporate reorganization involving substantial change in a company's capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa. ...
*
Stock market crash A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often f ...


References


Further reading


"Financial crisis : Carping about the TARP: Congress wrangles over how best to avoid financial Armageddon"
'' The Economist'', September 23, 2008
"Behind the Bailout" – ''NOW'' on PBS
09/26/2008 * Lanchester, John, "The Invention of Money: How the heresies of two bankers became the basis of our modern economy", '' The New Yorker'', 5 & 12 August 2019, pp. 28–31. *
IMF Study Laevan and Valencia September 2008
*Wright, Robert E. ed. ''Bailouts: Public Money, Private Profit'' (New York: Columbia University Press, 2009). *Wright, Robert E. ''Fubarnomics: A Lighthearted, Serious Look at America's Economic Ills'' (Buffalo, NY: Prometheus, 2010).
Estimating government support for Canadian banks during the financial crisis by the Canadian Centre for Policy Alternatives


External links


The Bailout Reader
– A resource against bailouts from a libertarian perspective * – Video
satire Satire is a genre of the visual, literary, and performing arts, usually in the form of fiction and less frequently non-fiction, in which vices, follies, abuses, and shortcomings are held up to ridicule, often with the intent of shaming or e ...
about bailouts and the economic impact on everyday citizens


United States


US bailout total – 29.616 trillion dollarsNew Deal in the 21st Century
{{Authority control Debt it:Bail-in