Effectiveness of Government Bailouts

Written By: Lisa Matthys

It was hardly a surprise that CIT filed for Chapter 11 bankruptcy protection on November 1st as it has been expected for months. However, mainstream media is calling the collapse “one of the largest in U.S. corporate history”, fifth after Lehman Brothers, Washington Mutual, WorldCom, and General Motors.

The 101-year-old CIT received a $2.3 billion bailout from the federal government last December. The bankruptcy of CIT marks the first failure of a government-bailed-out firm. Last year during the peak of the financial crisis, government bailouts were expected to help those banking companies near the verge of filing for bankruptcy. Out of those companies given government money, companies like Goldman Sachs Group Inc. and JPMorgan Chase & Co. have already repaid their debt and restrictions have been lifted. But companies such as Citigroup Inc. and Bank of America Corp will continue to have restrictions, on bonuses for example, until they pay back the government.

But when will enough be enough? The Obama Administration is currently contemplating whether to provide a third rescue to GMAC, which provides financing for dealers, primarily General Motors and Chrysler. GMAC is seeking as much as $5.6 billion in taxpayer money, on top of the $12.5 billion it received previously. Many say that GMAC’s failure would be devastating not only to General Motors and Chrysler, but also to consumers who often use GMAC to finance loans to buy new vehicles.

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