Posted in Finance, Accounting and Economics Terms, Total Reads: 744
Bailout refers to the offering of financial help by an individual/ institution/ government- to a business in financial distress, to maintain its operations and prevent the consequences of bankruptcy. This capital infusion can take the form of loans, bonds, stocks or cash and may or may not have the expectation of reimbursement. Bailouts typically occurs in situations where a faltering business can badly affect the economy OR employment of the country. There are two major reasons for an investor to bail out a company-
(1) To make profits in the future- An investor might buy the shares of a floundering company at lower prices and sell it at higher prices later when the company puts up a good performance
In 2009, Bank of America was bailed out my Merrill Lynch
(2) Necessity to prevent greater economic failures- The industry in which the company is operating is considered crucial in maintaining the nation’s economy and security.
In 2008, the Federal Reserve bailed out the insurance conglomerate AIG (which was affected by the US economic downturn) by offering $182 billion in credit.