Government bailouts for corporate failures

The recent financial crisis has furthered the debate on the necessity, structure and effects of public bailouts for failing organizations. Despite the presence of regulatory institutions that are charged with safeguarding investors and depositors interests in many economies, the 2008/ 09 banking crisis demystifies the role that these institutions play. In the wake of the recent financial crisis, for instance, many corporations have had to be resuscitated from the public coffers. The U.S exemplifies these scenarios where a congress proposed $700 billion bailout plan for failing entities still draws in much criticism (Weiss & Larson, 2008). With the diverse views on need for and outcomes of the public bailouts, this paper aims to assess whether public bailouts are important for struggling entities and where so the best ways to structure such plans. In arriving at the conclusions, the paper will evaluate the antecedents of failure in organizations, the reasons advanced for government intervention and possible economic outcomes of government bail outs of failing organizations.

Assessing the need for public bailouts of failing corporations

The ideal situation for evaluating whether an organization should be bailed out would be establishing the causes of failure. In such aspects most reasons advanced for failure would not qualify for public resuscitation. The collapse of many organizations has for instance been attributed to their inability or failure to align to changing competitive environment (Cohan, 2009, May 31). Due to the rising competition, organizations that have not adapted to changing consumer tastes, introduced efficient models of business, and instituted astute managerial practices are faced with a bleak future.  The struggle to maintain a competitive edge and report favorable performance despite the competitive market may however result into imprudent practices. The recent financial crisis has for instance been attributed to the banks’ reckless risk-taking behavior that destabilized the existing equilibrium between reasonable saving culture and speculative lending (Larson, 2007). In cases of reckless practices then public bailouts might be a difficult sell out point. Antecedents of failure such as moral hazards, risk appetites, and greed among organizations make it hard for public bailouts to be a famed solution (Albuquerque, 2010). Such behavior however does not arise independently but the existing motivator factors and absence of strong preventative regulatory policies are core mediators.

A number of factors have been advanced to  have encouraged imprudence in organizations. In the banking industry for instance, the mere presence of deposit insurances is argued to de-motivate stakeholders from close scrutiny of the institutions’ transactions (Perotti & Suarez, 2002). This is despite the observation that existing loopholes can allow the portrayal of false performance through non-disclosed off balance sheet events (Aghion, Bolton, & Fries 1999). Effective monitoring of an organization transactions would enable stakeholders learn of possible failures in good time to salvage the organization. Loopholes, in legislation and practices, that allow for the publishing of strong performance reports for ailing institutions however make such monitoring difficult a factor that has been advanced to have contributed to poor regulatory measures leading to the recent banking crisis (Drawbaugh, 2010). Go to part 2 here.

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