Looting: Bankruptcy for Profit

Posted on December 19, 2008  Comments (7)

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 Responses to “Looting: Bankruptcy for Profit”

  1. Credit Crisis the Result of Planned Looting of the World Economy at Curious Cat Economics Blog
    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.”

  2. CuriousCat: A Banker Who Avoided Toxic Debt Bubble
    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…

  3. Curious Cat Management Blog » Why Congress Won’t Investigate Wall Street
    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…

  4. Anonymous
    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!

  5. Mobius Says Derivatives, Stimulus to Spark New Crisis at Curious Cat Investing and Economics Blog
    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 – […]

  6. Curious Cat Management Improvement Blog » Bill George on Leadership
    March 15th, 2010 @ 10:20 am

    His board membership at Goldman Sachs certainly leaves him with something to answer for (which I don’t think he does in this webcast). With the damage that company has done to the USA economy you certainly can’t excuse a board member of responsibility for the actions that company has taken…

  7. Withdrawing Huge Amounts of Cash From Companies You Saddle with Debt is Despicable Behavior at Curious Cat Investing and Economics Blog
    October 16th, 2012 @ 12:30 am

    I abhor the subsidies provided to those that saddle corporations (that build up value through decades of hard work by employees) with huge debt. The actions of leveraged by out firms are atrocious…

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