CIAO DATE: 05/2009
April 2009
A financial-institution bailout involves government intervention through a transaction or forbearance targeted to a financial institution or group of financial institutions. The action is preemptive as the financial institution does not fail and go out of business, but remains a going concern, benefiting creditors, shareholders, or counterparties. In the absence of a bailout, the financial institution would either be forced to go through receivership or bankruptcy in the prescribed legal form, or have its role in financial intermediation disrupted. Financial-institution bailout policy in the United States is implemented through three agencies: the Federal Deposit Insurance Corporation, the Federal Reserve, and the Treasury Department. The need for orderly financial dealings, particularly in times of crisis, would dictate a consistent approach by these agencies based on cumulative experience, ensuring that officials devote public resources only where there is a well-defined, transparent, and verifiable policy justification for a bailout. Yet the bailouts over the past year do not reflect a well-defined, transparent, and verifiable policy justification. Even in the cases where a standard has been articulated, the agencies have not demonstrated that they can successfully implement that standard in practice.
Resource link: Bright Lines and Bailouts: To Bail or Not To Bail, That Is the Question [PDF] - 587K