Monday, October 6, 2008

What is meant by Bailout?

With the current US Financial Crisis Looming at large, we are frequently hearing the term Bail Out. A Bail out is a form of corporate action that happens between two companies or institutions.

The term bail out in financial terms is almost similar to the term out on bail as per legal law. If someone has committed a crime and is jailed they need a bail to come out of jail. Until a Bail is issued the convict has to serve his term in Jail.

Similarly if a company is in a financial crisis and is about to go bankrupt they would be looking out prospective buyers or people who can help them manage the crisis. At such a situation, some other company may opt to help them out of the crisis by either buying a stake in the company or by taking that company over. This process would require the approval of all the share holders of both the companies and would take a lot of time to materialize. Once it is approved by the share holders and also by the law makers the buying company would infuse fresh capital into the bought company and help stabilize the financial position of that company.

In some cases like AIG which is a very famous Insurance company in the US, the country’s government may opt to help it out.

Such a scenario would be termed as bailing out.

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