Looting: Bankruptcy for Profit
Posted on December 19, 2008 Comments (6)
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:
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 Coffers – Obscene CEO Pay – Why Pay Taxes or be Honest – Tilting at Ludicrous CEO Pay 2008 – Excessive Executive Pay
Categories: Deming, Economics, Management, Systems thinking
Tags: Economics, ethics, executive pay, overpaid executives
6 Responses to “Looting: Bankruptcy for Profit”
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March 23rd, 2009 @ 9:47 am
Jmaes Jubak: “What we’re now living through, though, is the result of a conscious, planned looting of the world economy. Its roots stretch back decades. And it wouldn’t have been possible without the contrivances of the bought-and-paid-for folks who sit in Congress.”
April 4th, 2009 @ 3:47 pm
Obviously they were just practicing bankruptcy for profit (which worked out incredibly well for them) and still we seem to think the only solution is to support these moral bankrupt (and now commercially bankrupt) organizations and individuals…
April 30th, 2009 @ 11:23 pm
The incredibly dire current economic results should encourage some thought about choices we have made. The failures of the political leaders (putting their donors interests above the public interest) is something that should be investigated seriously…
May 25th, 2009 @ 2:15 am
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!
July 17th, 2009 @ 9:46 am
[...] favors. Those paying our politicians like very much paying themselves extremely well and then being bailed out by the taxpayers when their business fails. They are going to try to retain the system they have in place. And they are likely to win – [...]
March 15th, 2010 @ 10:20 am
[...] Management Ideas by Peter Scholtes (webcast) – Eric Schmidt on Management at Google – Looting: Bankruptcy for Profit by John Hunter Tags: Management Comments (0) Permalink to: Bill George on [...]