A bailout involves an injection of liquidity into a failing company to keep it from going under. The sources of this liquidity can vary, as can the form which the liquidity takes. Generally, a bailout is undertaken when authorities believe that allowing a business to collapse could have dire consequences. For example, if a major investment firm went under, it might cause a ripple effect in the trading of stocks and securities which could cause economic problems. Therefore, the bailout is believed to be justified, because it prevents a larger calamity.
In some cases, a government may fund a bailout, typically in the form of loans which the company is expected to repay when it becomes solvent again. In other instances, a group of investors may gather and offer a bailout. In these situations, the investors often gain control of the struggling firm by offering a bailout; since the alternative is bankruptcy, the firm generally agrees to the terms of the bailout, hoping that some staff will be able to stay on.
Loans are the common currency of a bailout, although sometimes cash will be offered, as in the instance of a buyout by investors. In other instances, a bailout may involve trades of stocks and bonds. Because large amounts of money are involved, a bailout must generally be approved by government agencies which work to prevent monopolies and which monitor the market in general, especially if the bailout funds come from the government.
There are a variety of reasons for a firm to find itself in a situation where it might need a bailout. In some instances, the firm clearly has potential to thrive, despite a short term problem with cash flow, and a bailout simply makes good economic sense. Several car manufacturers, for example, have been assisted with government bailouts, using the funds to satisfy creditors and retool their product offerings to meet market demands. In other instances, a bailout may be needed because a firm has failed to invest wisely, or has failed to note the signs of problems before it is too late.
Bailouts are not without controversy. Some people believe that struggling firms should simply be allowed to go bankrupt, as their financial problems clearly illustrate a lack of ability to cope with the market. Government bailouts can be especially acrimonious, with some people feeling that a government bailout crosses a line into interfering with the free market. Proponents of bailouts argue that they can keep markets stable during troubled times, and they can preserve valuable national resources; for example, a bailout of a national auto maker can be advantageous, because it keeps some production of cars within that country. This can be useful from a national security standpoint, because it ensures that useful skills and facilities are maintained.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.