Financial Word of the Week: Bailout
With all of the turmoil in the financial industry, one word that keeps making the rounds is “bailout.” So here’s what you need to know.
A bailout is when the government extends a loan (or takes over) a private company because it is deemed “too large to fail.” Bailouts are nothing new, although they never happened in the U.S. to the extent that we’ve been seeing recently.
One of the most famous bailouts was that of Chrysler Corporation back in 1979. They were on the verge of bankruptcy. But instead of letting a huge job provider fail, the government extended a $1.5 billion loan. (They also bought a bunch of Chrysler’s Jeeps for military use.) This helped Chrysler get back on its feet.
AIG, the country’s largest insurer, recently received an estimated $85 billion bailout. And the bailout engineered for Fannie Mae and Freddie Mac could cost over $200 billion.
If you own stock in a company being bailed out by the government, your shares will be worth next to nothing. Selling is usually your best option. But hold your bonds. Bondholders make out like bandits, since the bailout usually ensures that their interest payments are made on time.
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