Looting: Bankruptcy for Profit

Looting: The Economic Underworld of Bankruptcy for Profit by George Akerlof, University of California, Berkeley; National Bureau of Economic Research (NBER) and Paul Romer, Stanford Graduate School of Business; National Bureau of Economic Research (NBER). George Akerlof was awarded the 2001 Nobel prize for economics. This is the abstract to their 1994 paper:

During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent – and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust.

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds.

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

That is exactly what has been happening. People that are not honorable and are given huge incentives to risk the future of all the other stakeholders for immense personal gain will do so.

via: New York Times Pulls Punches On Wall Street Bubble Era Pay

Related: CEOs Plundering Corporate CoffersObscene CEO PayWhy Pay Taxes or be HonestTilting at Ludicrous CEO Pay 2008Excessive Executive Pay

7 thoughts on “Looting: Bankruptcy for Profit

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  4. I agree… personal responsibility has a lot to do with everything that is wrong these days… health care… money… real estate… etc… Unfortunately if an opportunity exists for a better life many americans will jump right in before really understanding what’s going on or what it is they are commiting to.

    Personal gain will always win out… especially when opportunity is slapping you in the face daily!

    Reply
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