The economic fallout of the 2020 crisis prompted Congress to pass a stimulus bill that included payments for everyday people. It also provided enormous bailouts for multinational, multi-billion-dollar companies.
However, is providing these companies with bailout money a good economic move? We took a look at several large companies that seem to require bailouts quite often. These businesses seem to be the opposite of those who actually thrive during recessions. Then we discussed whether or not they actually deserve said bailout money. Dive into the debate below.
30. Bailouts Aren’t Necessarily Grants
A grant is money the government or other organization gives and does not need to be repaid. Grants are usually reserved for nonprofit organizations and research-based work, such as work done at hospitals.
A bailout is essentially a loan the government offers to a company struggling to survive. The leadership of the company has to approach the government and explain why a bailout is necessary for the company and public well-being. The government may choose to allow the company to fail or offer a bailout.
Bailouts are cash infusions that can keep companies afloat financially, but they have to be repaid. Nevertheless, there are reasons why companies can fail that do not begin with problems with cash reserves. Companies can fail because of weak or corrupt leadership, bad business practices, and/or a toxic corporate culture.
The Enron company, which failed in 2000, collapsed because of a high level of corporate fraud. Infusing more money into Enron would not have saved it. Large companies can fail for other reasons as well.
Imagine a company on the verge of collapse employs 20,000 people. Those 20,000 people will all lose their jobs, and could very likely have to rely on unemployment or welfare to meet their day-to-day needs.
The government may find a bailout for a company is necessary to save those people’s jobs. If all of those people can remain employed, the government has saved money because 20,000 people will not be receiving welfare payments.
When Enron (2000) and Bear Stearns (2008) failed, people across the country lost their retirement and other savings. The collapse of these institutions was disastrous, not only for individual people’s financial well-being but for the welfare of the entire economic system.
The domino effect means that when those people lost their investments, the entire economy took a hit. The government may determine that offering a bailout to an institution is necessary to prevent thousands of people from losing their money and having to rely on the government for income.
As previously mentioned, plenty of companies fail for reasons not directly connected to cash reserves. No matter how much money a company has, poor leadership can take an entire organization down. If the government offers a bailout to a company with poor leadership, that company can still fail.
If the company fails regardless, what happens to the loan? There’s no one to pay it back, so the burden unfortunately falls on taxpayers. The bailout loan was provided by the government with taxpayer money, so if the company fails and the loan cannot get repaid, then the overall burden falls on the rest of Americans whose money funded the bailout.
In a bailout, the government provides the money for a corporate rescue package. That money comes from taxpayers who may or may not have consented to the bailout program. Those taxpayers also bear the responsibility if the company fails.
A bail-in is different. In a bail-in, shareholders who have a financial stake in a company provide the cash infusion that will bring the company back from the verge of bankruptcy. In this case, the financial burden falls only on those who stand to benefit if the company succeeds.
The government considers transportation to be of vital importance to the American economy. As such, public transportation networks, such as Amtrak receive federal funds to make sure they remain solvent and continue transporting people.
Also included in the category are airlines. Though air transportation may be a luxury for many, the government considers it to be a critical aspect of the country’s infrastructure and vital to the economy. Airlines are towards the front of the line in terms of receiving bailouts.
One purpose of bailouts is to avoid a financial contagion from infecting an entire industry or even crossing industries and infecting the economy as a whole. A financial contagion may look like toxic assets that a bank or other financial institution holds. When the institution collapses as a result, it can take down the entire industry.
Financial institutions, such as banks, mortgage-lending companies, and insurance companies are also prime targets to receive government bailouts. The problem is that when a financial institution needs cash, the reason is almost always because of a toxic corporate culture and mismanagement of funds. So do these companies really deserve more money to mismanage, especially public funds?
Companies don’t usually tell investors upfront they are struggling. With the Enron crisis in 2000, fraudulent accounting was used to make the company look like it was doing well financially and turning a profit. The company seemed to collapse overnight, but its collapse was a long time in the making.
A company’s financial distress may not come to light until the situation is so dire that the company may collapse within days or even hours. Government bailouts often come in emergencies such as these, but these emergencies can often be avoided by being forthcoming about a company’s finances.
Taxpayers who have no financial stake in a company are often against bailouts, especially when the money is loaned to an institution with no strings attached. The money is given to companies that have been mismanaging money all along. Taxpayers are forced to bear the burden for problems that they did not cause.
Yet some economists see bailouts as a necessary evil. Even though companies need them because of mismanagement and sometimes because of fraud, a failure of one major company can lead to the collapse of an entire industry. Furthermore, all who have jobs and investments with the company can lose everything.
The 2008 financial crisis was the worst in history since Black Friday of 1929 when the stock market collapsed and began the Great Depression. Banks had been writing subprime mortgages to people who could not afford them but wanted to own homes.
The new homeowners found that their initial mortgage payments doubled, tripled, and even quadrupled months after buying their homes When they could not keep up with their payments, they lost their homes. These toxic mortgage assets flooded the market and threatened to take down the entire financial industry, not only in the United States but across the world.
Bear Stearns was a multinational bank that held many of the toxic mortgages given to people who could not afford them. When the real estate market began to collapse in 2007, Bear Stearns was hit particularly hard.
In March 2008, Bear Stearns received emergency bailout money to try to prevent a complete collapse of the bank. However, its mismanagement of funds and poor leadership, especially toxic mortgage assets, caused it to fail anyway. The money the government had loaned them was lost.
Lehman Brothers was the next domino to fall in the financial crisis of 2008. When it requested bailout money in September 2008, the government declined the request, at least in part because of the failure of Bear Stearns.
Lehman Brothers collapsed within days. Thousands of employees across the country lost their jobs, and even more people lost their savings. The question remains, should the government have bailed out Lehman Brothers? Or was it right to deny a bailout that could have staved off the collapse of the bank?
With the failure of Bear Stearns and Lehman Brothers, the entire financial industry in the United States, and throughout the world, was in danger of collapsing altogether. Economists warned that the world was heading for another Great Depression that would take decades to recover.
The American government granted a massive bailout to struggling banks, the same banks that had caused the crisis by writing subprime mortgages to people who could not afford them. The alternative was to allow the country’s banks to collapse and destroy the economy.
The money the government loaned to the banks came with no strings attached. There was no stipulation on how it should be spent, though legislators expected the banks would use the money to increase liquidity and become solvent.
Yet the first thing that the CEOs of the banks did was award themselves large bonuses. That money came from the government, by way of taxpayers. Instead of helping the banks regain their footing, ensuring employees kept their jobs and preserving people’s savings, the money went to buying yachts and vacations.
In 2020 when the world economy ground to a halt to try to prevent the spread, companies immediately began bleeding money. Air travel dropped precipitously, with many planes taking off with only a few passengers aboard. Each flight cost the airline money.
Restaurants and non-essential retail stores had to close to the general public except for take-out and online options. Millions of workers became furloughed or laid off as companies could not make payroll. It became clear bailouts were inevitable.
In 2008, the companies that received bailout money from the government were the same companies that had caused the financial crisis in the first place. But the companies that took a hit with the 2020 crisis had nothing to do with the current situation.
The extent to which they could have been involved is simply the workers that got sick, possibly because of exposure at work. Many of the companies that needed bailout money are small businesses with a low-profit margin and could close without help.
Plenty of people argue that billion-dollar companies that received bailout money should have enough in cash reserves to continue paying employees while they were furloughed.
The situation becomes even more questionable when one considers the salaries of the CEOs. Many CEOs have salaries in the millions of dollars while employees furloughed are making less than $10 an hour. One of the upper-level wages could pay hundreds of employee salaries.
Keeping in mind that in 2008, the CEOs of companies that received bailout money used it to give themselves bonuses, the 2020 bailout money becomes even more offensive. Moreover, in the original bill proposed in Congress, there was no oversight for the bailout money.
There were no qualifications for how the money should be spent, meaning CEOs could once again use the bailout money to award themselves bonuses. They didn’t have to use the money to pay employees who had been furloughed or keep the company afloat while operations were temporarily frozen.
Democrats who opposed the original bailout called it a slush fund for the president, whose real estate empire could have received a significant amount of bailout funds. They saw it as taking funds from taxpayers who are suffering from a new financial crisis to fund more corporate bonuses.
The bailout package that passed through Congress provided for someone to oversee how the bailout money was spent. It also provided for loans to small businesses, not just multinational, billion-dollar corporations, so that they could weather the crisis. Small companies that bring back employees after the crisis ends do not have to repay the loans, so they essentially become grants.
The airline industry is one of the most opportunistic in the world. It has been raising fares for travelers, making refunds or flight changes increasingly harder so airlines can keep more of the travelers’ money, charging for amenities such as meals and luggage that used to be free and squeezing travelers into smaller and smaller seats.
If airlines have been using business practices to line CEO pockets while providing fewer services for travelers all while paying flight attendants and other workers low wages, should they receive $50 billion, even if it is a loan that must be repaid?
9. Cruise Lines Took A Huge Share Of Bailout Money
With social distancing measures to avoid the spread of the illness, cruises have ground to a halt. Some cruise ships that had people on board when the crisis began found that by the time they were aware of a sick passenger, the outbreak had spread to infect many passengers.
With cruises at a complete standstill, cruise lines took a substantial financial hit. Unsurprisingly, cruise companies requested bailout money from Congress to help them weather the crisis. However, like airlines, cruise lines have been raising rates while offering fewer services and not raising employee pay. Why were they not prepared for an emergency?
The travel industry was one of the most immediately affected, outside of healthcare, due to the current crisis. Stay-at-home orders meant very few people are traveling, work events are being canceled, and no one is booking hotels.
The result is hotel staff getting furloughed as the industry struggles to survive. Like airlines and cruise lines, hotels took home a massive share of the bailout money. Nevertheless, the question remains: Do they deserve it? Would better financial practices have helped them be prepared for the crisis?
Responsible management of finances means that when there is a period of prosperity, individuals, families, and companies will save some of that money for a rainy day. The rainy day is here now, so if airlines, hotels, and other industries have been experiencing so much prosperity over the past decade, why are they not prepared?
Because they’ve been using their cash influxes to buy back company shares and increase payments to upper-level management. They haven’t been using it to repay loans or build up a reserve fund to carry them through a difficult period.
With the economic stimulus package, small businesses could apply for loans that would also keep them afloat as they weather the current crisis. Individuals who have a social security number and an income below a specific limit also received cash payments. Some economists argue the only good use for the bailout money is for these small businesses and individuals.
Why? For one reason, individuals and small businesses have to practice financial responsibility regularly because they know they cannot rely on bailout money in a crisis. They can’t be using extra money to fund corporate bonuses, and are the ones hurting the most right now from the disaster.
The question needs to be about the long-term health of the economy, but right now, no one knows what the future holds. The current crisis is so unprecedented that there is no telling what will happen. However, many can agree on the fact there are significant changes underway.
So what will be the long-term impact of the bailout money that Congress gave to billion-dollar companies that have not been financially responsible? The answer depends on the systemic changes that happen as we weather the current crisis.
4. Poorly Managed Companies May Keep Looking For Bailouts
With a history of the government providing bailout money now well-established, there’s a fair chance that the large companies with poor financial practices may continue looking to the Federal Reserve as their corporate slush fund.
But will the government continue giving bailouts? Many indicators now show that the country’s current economic practices, which provide tax breaks to the wealthy and encourage financial irresponsibility among major companies, are on their way out.
Without going in the direction of communism, many people can agree that the foundation of the American economy is the workers who go to their jobs every day, often for low wages, and are now unemployed. Those that are not unemployed are on the front lines of the crisis, like grocery store workers who stock shelves so people can get food for their families.
They are doing so at the risk of their health because they stand a higher chance of contracting it. When a large share of these workers is no longer able to go to their jobs, the entire economy takes a big hit. Now that we recognize the significance of these workers, public policy will hopefully shift in their direction.
2. Enriching Large Companies/CEOs Is Bad For The Economy
These essential workers that support the entire economy so families can buy groceries have been working for low wages that haven’t been rising even to keep pace with inflation.
Meanwhile, CEO and upper-level management salaries have been going up. To come out of the crisis with a healthy economy, or one that is at least becoming healthy, we will need to appreciate the jobs that low-wage workers do and enact policies to benefit them and their families.
While CEOs of major restaurant chains have been enriching themselves through a decade of low taxes and high profits, workers have been operating in an environment where they don’t even get paid sick leave. What does that mean when a deadly illness takes over the world?
It means that people who prepare your food cannot afford to stay home even if they feel ill, meaning that they stand a higher chance of spreading the disease, and can’t go to the doctor. So really, the current financial practices of the country have been contributing to the present crisis. Therefore, we can’t expect those same financial practices to bring us out of it.