What is a Bailout?
A bailout refers to when a failing business entity receives financial aid (i.e. ‘capital injection’) from a business, individual, or government.
An outside entity, especially a nation’s central bank, would typically bailout a company when it’s perceived as ‘too big to fail.’ That essentially means the company has grown to such a size that, if it actually collapses, the fallout could destabilize and damage the whole economy.
Bailouts often aren’t free, no-strings-attached cash injections. They can come in different forms, under different terms: loans, stock or bond purchases, cash infusions. The failing entity may have to not only reimburse the support in full but also pay interest on it.
We at the Zero Theft Movement are working to eliminate the rigged parts of the U.S. economy in order to let the ethical and healthy parts thrive. In this article, we’ll take a deep dive into financial bailouts, so you can decide where you stand on the matter.
Do you know that high-frequency trading firms could be accessing dark pools to make millions of unregulated financial transactions in a millisecond?
Don’t believe us? See what your fellow citizens are saying on Zero Theft…
The Bailout Debate
Business-to-business bailouts typically don’t spark controversy or debate. A company will typically choose to save another company in order to, perhaps, more affordably enter into a market or acquire infrastructure at fire-sale prices.
For example, a successful fashion brand might be looking to expand, so it buys a failing rival’s stock for cheap in order to take over the business, and acquire their materials, workforce, distribution network, etc.
But bailouts more commonly refer to when a government decides to save a company by serving as a lender of last resort. These cases can be quite controversial, so we’ll go over general arguments made by proponents. and critics. Understand, of course, that important and case-specific details and considerations matter when the government decides whether to bailout a failing company.
Proponents
Proponents of bailouts typically argue that the catastrophic consequences to employees and the economy justify government intervention.
If the failing business collapses, then its employees will lose their employment and the money they’ve saved for retirement. A government can bailout businesses, so they can retain their employees and eventually dig themselves out of the proverbial hole.
The other major benefit of bailouts is that the financial system as a whole will avoid a huge, potentially disastrous blow. The failure of a single megacorporation will damage all the businesses to which its tied (e.g. manufacturing partners, distributors, etc.). Depending on the case, proponents (and even critics) might argue that a bailout is necessary to prevent total economic collapse.
As mentioned earlier, governments tend to only intervene when the business is deemed too big to fail. Otherwise, the nation would have an even bigger debt than it already does.
Critics
Critics of bailouts argue that the practice creates moral hazards, wherein massive corporations have an incentive to take massive risks knowing that they’ll likely get saved by the government (with taxpayer money).
Depending on the case, critics want the government to let failing companies collapse from free-market forces. Especially if they acted recklessly and took on much more risk than they could actually handle.
Examples of Bailouts in the U.S.
The U.S. government has bailed out its fair share of companies dating all the way back to the bank runs in the Panic of 1792. We’ll take a second to look at some of the high-profile cases you might have heard about and/or lived through yourself:
Savings and Loan crisis
Savings and loan associations refer to financial institutions that specialize in helping individuals get residential mortgages. Nearly a third (1000 of 3,234 savings and loans associations) failed between 1986-1995.
In the 1980s, the Stagflation (stagnation + inflation) of years past pushed the government to reinvigorate the economy. These efforts not only failed to take into account the market conditions and speculation but also opened up opportunities for corruption and fraud. In essence, lending standards had loosened so much so that the amount of actual available capital was nowhere near equivalent to the accumulated leverage.
The 1989 Savings and Loan crisis resulted in a government bailout of $500 billion (in 1990 money). Furthermore, the Congressional Budget Office published a study, claiming “The cumulative loss in GNP in 1990 dollars for the years 1981 through 1990 could be as large as a whopping $200 billion. An additional loss approaching $300 billion of forgone GNP is likely to occur during the years 1991 through 200 as a consequence of the S&L breakdown.”
The ZT community has investigated the S&L bailouts and reported on whether financial foul play took place. See what they uncovered…
2008 Subprime Mortgage Crisis Bailouts
After the housing bubble burst, Bear Stearns and Lehman Brothers were the first to go.
Subprime mortgages (i.e. mortgages with a high risk of default and junk bond status) got packaged in a financial product called collateralized debt obligations (CDOs). The problem was, credit ratings gave these CDOs high credit ratings, meaning that they supposedly carried little risk of default. Financial institutions heavily invested in CDOs through the shadow banking system, which brought great returns while the housing market exploded. Of course, it eventually crashed when countless people started defaulting on their subprime mortgages.
To mitigate what had already caused catastrophic damages, the government intervened with the Troubled Asset Relief Program (TARP). A $700 billion bailout fund went to multinational banks, the automotive industry, as well as the insurance giant American International Group (AIG).
AIG wrote $78 billion in credit default swaps (i.e. insurance for collateralized debt obligations) for the real estate market alone. When mass defaults occurred, AIG could not pay back all the investors who had purchased the insurance.
Should AIG have been bailed out? See what the ZT community discovered…
Coronavirus Bailout
With the Coronavirus pandemic came lockdowns. Many small and medium-sized businesses (especially restaurants and other brick-and-mortar retail stores) could not legally operate, so they had to furlough or permanently lay off countless people.
Congress and the Senate passed the first stimulus package (a.k.a. the CARES Act) worth $2 trillion. Trump signed the relief package into law on March 27, 2020.
While the stimulus checks have sowed much discord between government officials, the public has also been concerned with how the Paycheck Protection Program (PPP) failed to support the actual businesses in need.
According to the U.S., Small Business Administration website, “The Paycheck Protection Program (PPP) is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.”
The Washington Post reported that “more than half of the small-business emergency funds went to larger businesses.” NBC reported similar findings based on a Morgan Stanley study.
Largest Public Companies that Took PPP Loans
From the NBC article linked above
Many in the public have expressed outrage over the handling of the PPP loans, accusing companies of taking ‘corporate welfare.’ Owners of small businesses have come out and detailed how they could not get the loans supposedly created for them.
What do YOU think about Bailouts?
As you’ve probably realized, bailouts can prove necessary at times. Many businesses need aid during the Coronavirus pandemic, to no fault of their own. And sometimes, a financial problem can get so massive that leaving it would truly collapse the global economy.
But we should ask ourselves a few questions so as to mitigate damage in the future:
- Is the failing company really too big to fail?
- Have we established the proper supervision and/or regulations to deter dangerous behavior in the future?
- If the government must bail out a company, are the terms correctly and clearly laid out, and being enforced?
You might be wondering, though. Asking those questions has absolutely no use, as you do not hold a position of authority. Perhaps that was true, but it isn’t anymore.
We at the Zero Theft Movement, along with our growing community, strive to eradicate the rigged parts of the U.S. economy and protect the ethical parts.
On our voting app, citizens author theft proposals, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
The ZTM community knows that many businesses, including some corporations, act ethically. We are trying to hold the bad actors accountable. The corrupt corporations, lobbyists, and government officials. That way, good people and businesses can properly thrive and enjoy the piece of the pie we’re all due.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.