- Asset stripping
Asset stripping involves selling the
assets of a business individually at a profit. The term is generally used in a pejorativesense as such activity is not considered productive to the economy. Asset stripping is considered to be a problem in economies such as Russiaor Chinathat 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 militantgroups in developing nations to take direct control of assets that legally belong to the stateor commonsor any group in society that the investor and armed militant can effectively coerce. It has led to deforestationin Africaand Colombiaand to other harmful effects. Jim Friedmanon a United Nationspanel on exploitation of natural resources in the Democratic Republic of Congo, listed this as one of several key concerns in " investmentand 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 taxcan lead to valuable family assets (e.g. the house) being sold to pay the bill.
Economic crisis of 2008
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Look at other dictionaries:
asset-stripping — ˈasset ˌstripping verb [uncountable] FINANCE the practice of buying a company whose shares are worth less than its assets, then selling its assets in order to make a quick profit: • The new owners turned out to be more interested in asset… … Financial and business terms
asset stripping — Where a business is acquired and the assets are sold off separately to realise a profit. Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010 … Law dictionary
asset stripping — asset .stripping n [U] the practice of buying a company cheaply and then selling all the things it owns to make a quick profit used to show disapproval … Dictionary of contemporary English
asset-stripping — ► NOUN ▪ the taking over of a company in financial difficulties and selling each of its assets at a profit … English terms dictionary
asset-stripping — assˈet stripping noun (now usu derogatory) The practice of acquiring control of a company and selling off its assets for financial gain • • • Main Entry: ↑asset * * * ˈasset stripping [asset stripping] noun … Useful english dictionary
asset stripping — A pejorative term for the deliberate depletion of *assets in an organization. Asset stripping often occurs following an *acquisition (definition 2), when an acquirer believes that the breakup of a purchased organization’s assets can enhance their … Auditor's dictionary
Asset Stripping — The process of buying an undervalued company with the intent to sell off its assets for a profit. The individual assets of the company, such as its equipment and property, may be more valuable than the company as a whole due to such factors as… … Investment dictionary
asset-stripping — N UNCOUNT (disapproval) If a person or company is involved in asset stripping, they buy companies cheaply, sell off their assets to make a profit, and then close the companies down … English dictionary
asset stripping — The acquisition or takeover of a company whose shares are valued below their asset value, and the subsequent sale of the company s most valuable assets. Having identified a suitable company, an entrepreneur would acquire a controlling interest in … Accounting dictionary
asset stripping — The acquisition of a firm for a price that is well below its total asset value, and the subsequent sale of these assets. This may occur either because a particular asset, such as property, is valued in the firm s balance sheet at well below its… … Big dictionary of business and management