Bank of America Corp was bailed out on Friday by the U.S. government with a $20 billion bailout that guaranteed potential losses on $100 billion of toxic assets and cushioned the deteriorating balance sheets of Merrill Lynch & Co that it acquired as a broker. A taxi speeds past a Bank of Americas branch in New York’s Times Square on January 11, 2008. The bailout makes Bank of American the second largest recipient of taxpayer money after Citigroup, as the government pumps money into the nation’s banks to plug holes left by poor loans. The worst housing crisis since the Great Depression and the worst recession in many years have hit US banks hard.
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In response to the 2008 financial crisis, Bank bailouts were adopted (see Troubled Asset Relief Program). Bailouts differ from the 2010 “bail-in” term in that bondholders and depositors of global systemically important financial institutions (G-SIFI) are obligated to participate in the recapitalization process, but taxpayers are not. Bailouts are financial aid for companies or countries on the verge of bankruptcy.
A bailout is when the government provides financial support to a company in financial difficulties or a danger of bankruptcy. The need for a bailout arises during a financial crisis or a national emergency that affects certain industries. For example, the aviation industry, which was hardest hit, received an $18.6 billion rescue package after the terrorist attacks of September 11.
Bailouts do not require reimbursement and are often accompanied by stronger government-supervised regulation. This is because bailouts support industries that affect millions of people and were on the verge of bankruptcy during the ongoing financial crisis.
A rescue of a company or individual is also known as an injection of capital when the government provides money or resources to a failing company. Government-funded bailouts are more complex than simply freeing up money for the state.
This should help to avoid the consequences of a possible collapse of a company, including bankruptcy or default of its financial obligations. Companies and governments that receive bailouts can use them in the form of loans, the purchase of bonds or shares, or cash injections, and require a reusing party to repay the assistance, depending on the conditions. None of the largest corporate bailouts includes conditions for companies receiving state support, such as limits on share buybacks or dividends, limits on executive compensation, or salary and maintenance requirements.
During the financial crisis, the government bailed out large financial institutions by making mortgage loans without subjecting borrowers to careful scrutiny. According to Paul Volker, the former Chairman of the Federal Reserve, the practice of lending bailouts to large companies creates a “moral hazard” because they are more likely to make risky business decisions when they expect to be rescued from possible difficulties. The oil and gas sector is particularly indebted, and in the coming crisis, companies may want to reduce their persistent debt burden and savings from the low interest rates offered by the overall corporate bond market through cheap government financing.