US airlines finally got something to cheer about.
Earlier this week, US senate leaders came to an agreement on a US$2 trillion (S$3 trillion) stimulus bill. A whopping US$60 billion of that will be used to bail out struggling US airlines.
Airlines, in return, must forgo layoffs until the fall (sometime in the fourth quarter of 2020), accept limits on executive compensation and dividends, and maintain certain routes. Despite the limitations, I think this is a deal the airlines will happily take to save themselves from bankruptcy.
Bailouts are nothing new though. The US has a long history of bailing out companies that were deemed too important to fail. These companies either provided essential services, accounted for a decent chunk of the economy, or employed a large number of people.
But bailouts take different shapes and forms. The ways that the government injects cash into companies (or individuals), the kind of industries the government tries to save, and the impact on shareholders differ every time.
In light of the latest bailout, I decided to take a short trip down memory lane to see the different kinds of bailouts that have occurred.
The Great Depression
Shedding Light on the Great Depression: A Quick Tour
Picture the 1930s as the biggest economic soap opera ever aired—long, deep, and affecting almost every corner of the 20th‑century globe. Nothing made it cooler than the Great Depression, stretching from 1929 all the way into the early 1940s.
Enter the New Deal Host
In 1933, Roosevelt, the new U.S. president, stepped into office and started sprinkling solutions everywhere—just like a chef adding seasoning to a bland stew.
What the Sage Did
Two of his top moves:
- Homeowner Bailout: The government rolled out the Home Owners’ Loan Corporation, a new agency that hunted down bad mortgages and turned them into sweet, low‑interest deals.
- Rent‑less Relief: Roughly a million families went from scramblering for rent to relaxing on smarter mortgages.
Why did this matter? At that time, unemployment sat around 25%. Many folks were out of jobs and struggled to keep a roof over their heads. The new loan program gave them a lifeline to stay home, reshuffling banks into a more hopeful financial future.
Not a Quick Fix—Still Not Done
Even with Roosevelt’s efforts, the economy didn’t bounce back overnight. The entire wave of depression only truly waved goodbye once WWII was over, giving way to a post‑war boom that felt like endless fireworks.
So, keep in mind: a million people stayed off the streets, a president tasted diplomacy, and history handed us a lesson on economic resilience—in a style that’s a lot more human than your standard policy report!
The Great Financial Crisis
The next most important economic crisis occurred much more recently in 2007-2008. Known as the Great Financial Crisis, the collapse of Lehman Brothers amid the bursting of the housing bubble culminated in a global financial crisis.
However, this time, the US government’s response was swifter and the bailouts introduced saved banks, restored confidence, allowed banks to lend again, and eventually led to the 12-year bull market that ended this year.
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So what did the US government do in 2008? The Emergency Economic Stabilisation Act of 2008, often called the “bank bailout,” was signed into law by then-President George W. Bush.
The new law led to the creation of the US$700 billion Troubled Asset Relief Program (TARP) to inject capital into banks. But these funds were not given as grants, rather they were used to purchase toxic assets from the banks.
A key part of the US federal government’s plan was to buy up to US$700 billion of illiquid mortgage-backed securities. These were essentially a bundle of home loans packed into one.
On top of that, the US government injected cash into banks through the purchase of preferred stock. Citibank needed a particularly big injection of capital, with the government purchasing US$45 billion in preferred and common Citigroup stock.
Selling stock when your share price is down 80 per cent is never going to be pretty and Citigroup shareholders learnt that the hard way as they were diluted almost six-fold. Till today, Citigroup’s share price is still more than 80 per cent off the high it reached in 2007.
However, what the bailout achieved was to save Citigroup from insolvency and shareholders could at least survive to fight another day.
Overall, TARP improved the balance sheet and reduced the potential losses of banks and financial institutions.
The net effect for the government was also positive as it was reported that TARP recovered US$441.7 billion of US$426.4 billion invested, earning a US$15.3 billion profit when everything was done and dusted.
Covid-19 crisis
Fast forward to today and we are once again seeing a massive bailout, this time with the aviation industry.
As mentioned earlier, struggling US airlines are getting an early Christmas present this year, to the tune of US$60 billion.
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According to a draft of the legislation, airlines will receive up to US$25 billion in direct grants. That’s practically free money for the airlines as long as they promise not to layoff workers till the fourth quarter of 2020, accept limits on executive compensation and shareholder dividends.
Additionally, the bill also grants US$25 billion in loans and loan guarantees for passenger airlines and US$4 billion for cargo air carriers. The promise of loans will help struggling airlines raise much needed new capital even if the banks won’t lend to them.
The news is, of course, great for shareholders and employees. Employees get to keep their jobs while shareholders don’t have to worry about potential bankruptcies. The injection of cash will tide airlines through this challenging period. Airline shares have been creeping up since rumours of a bailout began.
The Good Investors’ conclusion
Is a Bailout Just a Lifeline or a Red Flag?
Quick Take: Think of a bailout as a splash of dough into an empty kettle—hot, salty, and a bit frightening. Grab a cup, and things feel better, but that splash also screams “we blew through the money budget!”
The Good: Cash to Keep the Wheels Turning
- Life‑Saver Role: When a company is stalled, a quick injection of cash can keep operations humming and halt the dreaded “uh‑oh” moment for shareholders.
- Short‑Term Relief: A bailout buys time—time to untangle messy projects, shuffle priorities, or cut those runaway expenses that were blowing the account.
- Investor Confidence: Even the jittery stock tickers feel a lift, so a bailout may prevent a sharp plunge and preserve the company’s stock value.
The Bad: A Red Flag in the Wall Street Canvas
- Financial Negligence: The very need for a bailout means the company mismanaged cash—overspending, risky bets, or bad debt piled up.
- Leverage Ladder: High debt levels and sloppy investments push a firm to the tipping point, turning penny‑wise plans into horror stories.
- Share‑Buyback Blow‑out: The airline sector’s overspending on stock repurchases made balance sheets wobble like a cheap carnival ride.
When to Be Wary
Think of bailouts as a “one‑time rescue kit” rather than a regular budget strategy. Relying on them means you’re skipping the heavy lifting on finance discipline.
Bottom Line
While a bailout can indeed prevent a company’s collapse and keep the shareholders smiling, the real battle is learning to steer the ship without constantly calling for lifeboats. Remember: bailouts win the game for now, but they’re not the finish line for fiscal fitness.
Disclaimer: This piece first appeared in The Good Investors. The content serves an informational purpose and is not professional financial advice.
