Bailout Beneficiaries

A bailout is a financial aid or help given to a company to save itself from facing critical failures like bankruptcy, cash crunch, or total liquidation. Usually,when a corporation is about to file for Chapter-11 Bankruptcy protection or its performance is signaling the same,bailout packages are expected from the government in order to protect the interests of the economy and the general public.

With the rise of sub-prime crisis,the firms filing for bankruptcy grew. In the United States,a large number of mergers and acquisitions took place in which the largest investment banks were acquired such as Merrill Lynch was acquired by Bank of America,Bear Stearns was acquired by JP Morgan Chase, Countrywide Financial was also taken over by Bank of America. One of the largest investment banks, Lehman Brothers filed for bankruptcy protection under Chapter 11.When the govt. saw that things were going out of control,they started designing a recovery mechanism. This had led the government to make a rescue plan and come up with bailout packages.

Who all are the bailout beneficiaries?

The federal government committed an amount of $1.1 trillion as bailout package for financial institutions and automakers. A new act called Economic Recovery Act, 2008 was passed as a prompt step to arrange for funds forbailout beneficiaries. Of the total amount committed, around 35% has actually been loaned to or invested in over 600 private companies as of June 12, 2009.The top 8 who have been the bailout beneficiaries are AIG,Bank of America,Wells Fargo,Citi group,Chrystler,General Motors,etc. The key bailout beneficiaries were previously deemed too-big-to-fail by the federal government.

Why many people are against bailouts?

When companies know that they will get the bailout package,they tend to take even that level of risk which will make them fail miserably.
Bailouts create moral hazards by building safety nets.
Grants freedom to the federal government to decide who will be the bailout beneficiaries.
Many a times,it can create fear and consciousness in the minds of business housessincce it is an indicator of socialistic pattern.
Central banks have to provide loans to enable the firms to cope with liquidity issues,even when they are unwilling to do so.
Ensures that reporting about losses and quality of assets is done frequently and fairly.

 

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Last Updated on : 10th July 2013

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