Asset stripping


Asset stripping

Asset stripping involves selling the assets of a business individually at a profit. The term is generally used in a pejorative sense as such activity is not considered productive to the economy. Asset stripping is considered to be a problem in economies such as Russia or China that are making a transition to the market. In these situations, managers of a state-owned company have been known to sell the assets which they control, leaving behind nothing but debts to the state.

In Insolvecy Law, asset stripping is an illegal practice whereby the assets of a company are sold below market price to another company or individual in order to deny their value to creditors when the original company is liquidated. Essentially, it is a fraud against creditors and shareholders, by selling assets or security below market value to another person.

In the period preceding the Economic crisis of 2008, managers of wall street investment banks and insurance companies conducted a variation of this practice by selling promises to pay in case of default to third parties in the form of derivatives (credit default swaps), claiming that the probability of ever actually having to pay was near zero. Firms reported virtually all of the proceeds of these commitments to pay as income, maintaining little or no capital reserve against eventual claims, which then triggered massive bonuses for "profits" that later turned out to be ephemeral. Wall street bonuses created through this manipulation amounted to $33.7 billion in 2007 [http://www.washingtonpost.com/wp-dyn/content/story/2008/01/29/ST2008012900465.html] , which followed a similar amount paid out in 2006. Roughly $160 billion in assets were stripped this way from Wall Street firms between 2001 and 2007, leaving the firms empty shells with little or no capital remaining, but debts of historic proportions, leading to their eventual collapse, and the ruin of millions of shareholders.

A fictional example of asset stripping can be found in the 1987 film "Wall Street". In this film, the ruthless investor Gordon Gekko, played by Michael Douglas, purchases the failing airline Blue Star, under the pretense that he will restructure the company and return it to profitability. However, we later learn that he intends to liquidate all of the company's assets.

"Asset stripping" is also sometimes used to describe the practice of investors dealing directly with armed militant groups in developing nations to take direct control of assets that legally belong to the state or commons or any group in society that the investor and armed militant can effectively coerce. It has led to deforestation in Africa and Colombia and to other harmful effects. Jim Friedman on a United Nations panel on exploitation of natural resources in the Democratic Republic of Congo, listed this as one of several key concerns in "investment and human rights".Fact|date=February 2007

In anthropology, "asset stripping" can refer to a family which loses wealth when the head of household dies. In many African countries, it is common for the head of household's brothers and sisters to take the house and household goods from a family as opposed to those goods being given to the widow/widower or children. Similarly in developed nations inheritance tax can lead to valuable family assets (e.g. the house) being sold to pay the bill.

Notes

*Economic crisis of 2008


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