Unit 8 Banking: Bailout

What is it? Literally, it means trying to save a sinking boat by throwing bucketfuls of water over the side. ‘Baile’ was an old English word meaning ‘bucket’. In business, it means rescuing a failing company, and is typically used when the government provides money to a strategically important company to avoid a messy collapse. There is also a noun, a bailout (or a bail-out), to refer to this attempted rescue. Why is the term in the news? The US government  recently bailed out AIG, a huge insurance company. The bailout was considered necessary because the collapse of AIG would have had severe consequences for the US and global economy. This bailout in 2008, came only a week after the US bailed out Fannie Mae and Freddie Mac, two mortgage lenders considered to be at the heart of the US real estate market. The issue of bailing out struggling companies raises all sorts of interesting questions connected with the limits of the free market and the degree to which government intervention is necessary or desirable. Governments are in the undesirable position of being criticised if they bail a company out (i.e. for wasting taxpayers’ money and rewarding bad management) and criticised if they stand back (i.e. for allowing key firms to collapse and wreck people’s lives and businesses). Which companies have been bailed out in your country and around the world? What are the short-term advantages and disadvantages of bailing out struggling companies? Think about the bailed-out companies, the government, the taxpayer, the companies’ customers, the companies’ competitors, other countries’ governments, etc. What about the long-term advantages and disadvantages? Do you think governments should bail out more struggling companies? Adapted from CUP resources