As I talked about in an earlier post on the Moral Hazards of Bankruptcy, here are two relevant links to articles about how the ownership of the Chicago based pizza chain of Giordano’s has been accused of looting the company of cash and assets before its impending bankruptcy.
As a business owner with numerous customers that have gone bankrupt in the last few years, there is one particular striking element that keeps me questioning the structure of our bankruptcy laws. Recently I received a “Summary of Trustee’s Final Report and Applications for Compensation” from a former customer. At one time this customer operated six retail stores before some bad business decisions and failure to pivot and adapt to customer demand ultimately caused his business to fail. What is striking about the Trustees Summary is the amount of money owed to creditors $ 1,754,000. The receipts from the debtor are $20,587.87. Of course the bankruptcy attorney and trustee are receiving their fees paid in full. After these fees totaling 11,217.64 are paid, this leaves $9,370.23 to be split among the creditors that are owed over $1.7 million. Just as an example, the mall owner where these stores were located is owed $350,000 and will be paid $1,800. I am owed $1,400 and will receive $1.36.
This begs the question many of have asked regarding the financial meltdown and this situation I describe. At what point did the principal know he was going to fail and he made a conscious decision to extract as much cash from the entity knowing that there would never be re-payment. In the case of AIG, Fanny Mae and Freddy Mac there is an inherent moral hazard with the full faith and backing of the federal government. If profits are declining, increasing risk is a possibility to gain higher returns since a government bailout can be counted on. I would pose a similar question to my former customer–at what point did he know bankruptcy was imminent yet he continued to spend other people’s money?
As my father taught me many years ago, life is not fair and the sooner you get over this notion is when you can be proactive and address some of life’s inequalities. So if I walk into Walgreen’s tomorrow and I leave without paying for a roll of toilet paper, I can be arrested and charged with a crime. However a bad or poor business decision that affects and hurts many more people will not be prosecuted. I have many more similar stories to share at a later date.
When you wake up tomorrow morning, start your day by being honest with yourself and your product or service and make sure you are providing what the market values and demands.
Until next time, be good and cultivate your community of friends.