Economic Autopsy
by Byron King
May 11, 2004
---------------------------------------------------------------------------------------------------------------------------- "…The particular business owner, with whom I am dealing, ran up a series of delinquent accounts to obtain materials, bouncing from one vendor to another when the previous one would shut him off. He max'ed out his credit cards for day-to-day cash and expenses, and drew down every other line of unsecured credit that he could find…" ---------------------------------------------------------------------------------------------------------------------------- Preparing and filing a federal bankruptcy petition is a lot like performing an autopsy on a deceased economic entity. As I go over the lists of creditors, assets, collections and income statements, it drives home the point of how much even a little bit of bad business practice can cost the economy. And one can blame a lot of the cost to the economy on liberal grants of credit to non-creditworthy borrowers. If some credit is good to have, which I certainly think is true, more credit is not necessarily better. Too much credit can enable bad behavior and bad business practice just like cheap booze enables the alcoholic. The creditor can act as a co-dependant to a bad business risk. Too much credit can fund projects (and lifestyles) that do not merit the support, and can take an untenable situation and make it far worse. The owner of the business that is my bankruptcy project for the day comes across as a decent enough guy, but not a detail-oriented, green eye-shade kind of businessman. For several years, he under-bid remodeling jobs, often to get his foot in the door and with the idea that he would make it up on that infamous "Change Order Number One." Or maybe this guy bid the jobs correctly, from the perspective of a more perfect world, but he failed to keep a handle on his labor costs and production schedules. The particular business owner, with whom I am dealing, ran up a series of delinquent accounts to obtain materials, bouncing from one vendor to another when the previous one would shut him off. He max'ed out his credit cards for day-to-day cash and expenses, and drew down every other line of unsecured credit that he could find. The owner and his business was sued on several occasions, but a bit of lawyering (not by me, by the way) obtained delays in proceedings, or filed appeals to the adverse awards at the lowest levels of legal proceedings. Yes, this owner stalled very well - an optimist to the very end, he believed that he could if he could just "get a handle on it," things would work out. This project of mine is not ENRON or Worldcom, but it is one of those 1.6 million bankruptcies that have hit the Federal Bankruptcy Courts every year of late. As to this particular bankrupt party, we are talking about the order of several hundreds of thousands of dollars of unsecured debt, almost all of it incurred for purchase of tangible assets or transient services. The assets and services are gone, used up, consumed, expended. The debt incurred to purchase the assets and services will, accordingly, just vanish into the ether. But moving back up the economic chain, that discharged debt will come out of the hides of vendors and jobbers and service-providers, as well as a couple of banks and insurance companies. One business failure infects and harms many other businesses. In all likelihood, each of the creditors thought they were greasing the skids of the economy, by extending credit to this particular entity. I have spoken with representatives of a couple of the creditors. It sort of amuses me when they say something like, "We knew he had some problems, but we wanted to cut him some slack." Well, that sure did him a lot of good, didn't it? Or "But he always paid his minimum monthly charge…" Yes, he certainly did pay the minimums, right up to the day it dawned on him that his business was utterly insolvent and that he had to seek bankruptcy protection. From the larger perspective, these creditors were pouring water on a drowning man. The creditors threw good money after bad, did not do the debtor's business any real good, and certainly were not helping their own cause by extending more and more credit. The concept of credit implies a belief in, and reliance on, the future success and productivity of the borrower. The borrower has to have a run of good work and good fortune sufficient to repay the debt plus interest. Creditors need to keep in mind that not all borrowers will be successful. And creditors ought to keep in mind that borrowers of unsecured credit, well-intentioned though these borrowers may be at the outset, have even less incentive to be successful. No, I am not longing for the quaint old days, when merchants had signs above the counter that said: "In God We Trust, All Others Pay Cash…" But individuals, businesses, and governments, in the U.S. and in many other places throughout the world, have too much debt on their books. There is too much debt only because there is too much credit. From my humble perspective, as someone who deals with the discharge of debt, I cannot envision how most of the world's debts will ever be repaid. |
