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A bailout is when a business, an individual, or a government provides money and/or resources (also known as a capital injection) to a failing entity (a company, bank, individual, etc.). These actions help to prevent the consequences of that business’s potential downfall which may include bankruptcy and default on its financial obligations.

Businesses and governments may receive a bailout which may take the form of a loan, the purchasing of bonds, stocks, or cash infusions, and may require the recused party to reimburse the support, depending upon the terms.

Bailout Explained

Bailouts are typically only for companies or industries whose bankruptcies may have a severe adverse impact on the economy, not just a particular market sector. For example, a company that has a considerable workforce may receive a bailout because the economy could not sustain the substantial jump in unemployment that would occur if the business failed. Often, other companies will step in and acquire the failing business, known as a bailout takeover.

The U.S. government has a long history of bailouts going back to the Panic of 1792. Since that time, the government has assisted financial institutions during the 1989 savings and loan bailout, rescued insurance giant American International Group (AIG), funded the government-sponsored home lenders Freddie Mac and Fannie Mae, and stabilized banks during the 2008 “too big to fail” bailout, officially known as the Emergency Economic Stabilization Act of 2008 (EESA).