

Looting: The Economic Underworld of Bankruptcy for Profit - cjdrake
http://papers.ssrn.com/sol3/papers.cfm?abstract-id=227162

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patdennis
This is very interesting.

I think it's also worth pointing out that the data tends to show that the use
of _personal bankruptcy_ to game the system is actually very low.

I find that when the subject is brought up in a political context, this
distinction is often not made.

Here is a great lecture from Elizabeth Warren on the subject:
<http://www.youtube.com/watch?v=akVL7QY0S8A>

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Retric
I think it's also worth noting that Risk of bankruptcy enables similar
accounting games even for healthy company's. Basically a bank that's leveraged
10x might as well leverage 50x because the upside keeps increasing linearly
with more debt but the downside is practically fixed.

~~~
refurb
The upside would not keep increasing linearly. When leveraging, the current
debt burden of the company would be used to determine the level of risk and
thus the interest rate.

The level is risk is associated with the level of assets of the company (thus
the ability to recover in case of default).

I would agree that a bailout creates a floor to loss, but then again a natural
floor exists anyways (the net assets of the company).

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zallarak
Another interesting thing to note about profit coming from bankruptcy is the
Legal and Banking/Restructuring fees. The restructuring advisors both on the
legal and financial side get massive fees from bankruptcy advising
(negotiating debt settlements and post-bankruptcy cap structure, and other
things like that) and these fees are prioritized over even the most senior
liens of debt. These fees can literally be 1-15% of the total debt of the
distressed company.

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cjdrake
I probably should have posted the link to Tim O'Reilly's Google+ post:
[https://plus.google.com/107033731246200681024/posts/YCFhTbmf...](https://plus.google.com/107033731246200681024/posts/YCFhTbmfXC9)

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dfragnito
I live in Rochester NY, home of Eastman Kodak which is going through a
bankruptcy, and looks like it may be coming out of it (probably will go back
in it or get sold in my opinion).

I an not suggesting that Kodak's downfalls was due to management looting the
company but we do see evidence of upper management grabbing all they can get.
Just recently upper management asked for millions of dollars of bonuses
(earmarked for upper management only) if Kodak successfully pays off its
creditors. Bonuses use to be rewarded for turning a profit, apparently now you
get rewarded for just paying your bills.

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refurb
Bonuses aren't just rewarded for making a profit.

Let's say a company like RIM is losing $500M/yr. If they hire a new CEO who
comes in and reduces that to a lose of $10M/yr, should he get a bonus?

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grey-area
Not till they turn a profit. He still gets a more than adequate salary for his
work. A bonus not linked to performance is no longer a bonus, but rather
another way of paying wages.

~~~
hipsterelitist
Then how would you properly incentivize someone to come in to take a company
out of such dire circumstances?

Someone with the talent to take a 500M loss and reduce it to 10M certainly
would command the same salary with more upside at a solvent company.

~~~
chiph
It's a case of: "Well, the operation was a success, even if the patient died."

A turnaround isn't a success until the company is in the black. If the new CEO
just ends up producing a smaller crater (no such thing as a "soft landing" in
bankruptcy court), he still failed.

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debacle
It's not really an underworld if it happens completely out in the open, is it?

~~~
wpietri
How out in the open is it?

For years before the banking blowup that preceded the Great Recession, people
knew that there was a lot of risk _somewhere_. It's just that nobody knew
where. It turns out that too-big-to-fail banks and fears of systemic collapse
meant that the risk was with taxpayers.

Or you can look at private equity's privatization of gains and socialization
of losses:

[http://www.bloomberg.com/news/2012-07-15/romney-s-bain-
yield...](http://www.bloomberg.com/news/2012-07-15/romney-s-bain-yielded-
private-gains-socialized-losses.html)

The finances were out in the open, but what was hidden was that the companies
were no longer being run in good faith.

