A Framework for Bailout Regulation

Anthony J. Casey & Eric A. Posner*

During the height of the financial crisis in 2008 and 2009, the government bailed out numerous corporations, including banks, investment banks, and automobile manufacturers. While the bailouts helped end the financial crisis, they were intensely controversial at the time, and were marred by the ad hoc, politicized quality of the government intervention. We examine the bailouts from the financial crisis as well as earlier bailouts to determine what policy considerations best justify them, and how they are best designed. The major considerations in bailing out and structuring the bailout of a firm are the macroeconomic impact of failure; the moral hazard effect of the bailout; the discriminatory effect of the bailout; and procedural fairness. Future bailouts should be guided by principles that ensure that the decisionmaker properly takes into account these factors.

Continue reading in the print edition . . .

© 2016 Anthony J. Casey & Eric A. Posner. Individuals and nonprofit institutions may reproduce and distribute copies of this Article in any format at or below cost, for educational purposes, so long as each copy identifies the author, provides a citation to the Notre Dame Law Review, and includes this provision in the copyright notice.

*University of Chicago Law School. We thank Stephen Choi, Kate Judge, William Hubbard, Richard McAdams, Eric Rasmusen, Michael Simkovic, David Yermack, and participants in workshops at NYU Stern School of Business and the University of Chicago Law School and at the Canadian Law and Economics Association Annual Meeting for comments, and Paul Rogerson and Paulina Wu for research assistance. The Weil Faculty Research Fund provided generous support. Although we do not take a position on AIG’s claims in its bailout-related litigation, we should disclose that one of us (Posner) has done work in that litigation for the plaintiff. He is grateful to the late Robert Silver for illuminating discussions about bailout law and policy in the context of that litigation.