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Fri Nov 16, 2012, 02:01 PM

 

Looting: The Underworld of Bankruptcy for Profit

A timely reminder in light of the Hostess "bankruptcy".

Abstract:

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...

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.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162


See also: Control Fraud






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Arrow 9 replies Author Time Post
Reply Looting: The Underworld of Bankruptcy for Profit (Original post)
HiPointDem Nov 2012 OP
HiPointDem Nov 2012 #1
notadmblnd Nov 2012 #2
closeupready Nov 2012 #3
notadmblnd Nov 2012 #4
HiPointDem Nov 2012 #6
HiPointDem Nov 2012 #5
Starry Messenger Nov 2012 #7
Spike89 Nov 2012 #8
HiPointDem Nov 2012 #9

Response to HiPointDem (Original post)

Fri Nov 16, 2012, 02:44 PM

1. kick

 

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Response to HiPointDem (Original post)

Fri Nov 16, 2012, 03:44 PM

2. aka Vulture Capitalism

no?

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Response to notadmblnd (Reply #2)

Fri Nov 16, 2012, 03:50 PM

3. Worse - taking viable companies into insolvency,

not necessarily deliberately, but with an eye towards reaping maximum material benefit with absolutely no regard whatsoever for the survival of the company, i.e., a strategy in which even Chapter 11 is an acceptable outcome.

Very, very analogous to parasitism.

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Response to closeupready (Reply #3)

Fri Nov 16, 2012, 04:29 PM

4. It sounds like what Mitt Romney referred to as "harvesting"

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Response to closeupready (Reply #3)

Fri Nov 16, 2012, 04:36 PM

6. pretty much deliberately. hostess made $23 million in profits in 2003. In 2004

 

they took the corp into bankruptcy, loaded it up with debt, and its been bleeding massively ever since, even though management got raises, workers got the shaft and the product got degraded.

yep, deliberately.

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Response to notadmblnd (Reply #2)

Fri Nov 16, 2012, 04:34 PM

5. a tactic of same. but capitalism always uses vulture tactics where appropriate.

 

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Response to HiPointDem (Original post)

Fri Nov 16, 2012, 04:47 PM

7. k&r

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Response to HiPointDem (Original post)

Fri Nov 16, 2012, 05:39 PM

8. The investment resale spiral

Here's my story, I went through this over a 20-year rise and fall of a corporate entity...

I started at a mid-sized privately owned magazine publishing company that was less than 10 years old. The company made money from the start and had been growing/expanding steadily. The owner was a magazine publisher, i.e., he was in business to make money from the successful operation of the publishing business. It was a pretty good and very stable job.

One day, the owner decided to sell the business and retire (actually he started a winery/resort in New Zealand). In quick order, he brought in a "corporate packager" who replaced our IT infrastructure with a shiny new generic system that wasn't better, but it would fit into whatever company ended up buying us. He also laid off about 20% of the workforce. Not because they weren't needed, but because their absence wouldn't affect revenues in the short term. This is key--he let people go knowing it would hurt business, but it wouldn't show up for 3-6 months, and he planned to have us sold by then (part of the pitch would be "Look at how low payroll is compared to revenue!"). Maybe a good plan, but horrible, sleazy business.

Goldman Sachs essentially bought us. They had a client just coming out of a major bankruptcy, so in the bizarro world of corporate finance, this failed publishing company, controlled by an investment banker, went out and bought up a handful of mid-size independent publishing companies. Overnight, I went from working for a guy I saw every day along with ~100 other employees to working for a corporation run by a committee with ~1500 employees.

No one cared about magazines any more (well, those of us actually producing them cared) but there was absolutely no feedback (good or bad) from headquarters on our products. All they wanted to know about or cared about was short term profit and loss. Within a year we were told that GS was actively marketing us...they'd closed down dozens of "borderline" magazines. The thing about almost all those magazines was the fact that they "protected" many of the highly profitable titles (we published trade magazines). So, in essence, they knew they were hurting the business, but it sure looked better on paper!

We sold to an investment retirement fund (I hadn't even known that investment funds could "own" companies). They really didn't care about publishing--they only cared that we return 10% profit every year that they could pay to their customers. Of course, we were now deeply indebted, and our business had been failing for a couple years now because of the cutbacks. My original boss got a fair price for his business, plus some extra from the magic of corporate packaging. Goldmann Sachs took millions for their trouble. The retirement fund quickly discovered we weren't the bargain they thought. They sold off a couple magazine groups, then quickly sold the remaining shell of a corporation--they ended up making their goals, but only by further destroying the actual profit center.

Through this, we'd have periods where the copiers and printers couldn't be used because there was no toner. Editors weren't allowed to travel and acquisition budgets were slashed so we were always scrambling for stories and the ad sales guys were desperate to remind customers that we still existed. The company sold again a few years later, but pieces were being auctioned off regularly. The entire company that remains isn't as profitable as the small publishing company I'd started at. That was actually true after less than 10 years.

During that first 10 years, millions, maybe even as much as $1 billion in profits had been pulled out of the business, but virtually none of that "profit" actually came from the actual business. It was like they took a very good, late model car that was generating a modest profit as a taxicab, but then rather than run a taxi business, they stripped off the chrome, sold it, ran the gas tank almost dry then found somebody to buy it who only read the balance sheet (wow, lots of profits and it barely uses gas!). Vulture capitalism in a nutshell.

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Response to Spike89 (Reply #8)

Fri Nov 16, 2012, 06:17 PM

9. thank you for that. "as much as $1 billion in profits had been pulled out of the business"

 

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