Largest bankruptcies in history
“Only those who dare to fail greatly can ever achieve greatly.” – Robert F. Kennedy.
If you succeed in making big bucks off well-invested funds, it’s not worth much if you suddenly loose everything by making a few easily avoidable financial mistakes. We had a look at the infographic below and decided to describe the 5 biggest corporate bankruptcies in history.
By following these helpful tips, you won’t have to make the same kinds of mistakes in your personal finances.
The Enron incident resulted in bankruptcy that lost $65.5 billion dollars in assets.
Enron grew so rapidly that some must have suspected foul play somewhere, but it took 16 years for them to completely crash and burn. Enron pulled off some of the most creative accounting maneuvers in history. They created a commodity trading website called Enron Online where in every transaction, they were either the buyer or seller to control the trading prices.
When their falsely inflated income started declining, they began hiding the losses. They built assets as needed and immediately claimed their projected profits in the books instead of the actual profits, which were often not even a dime. Then they would later transfer the failed asset over to an "under-the-table" corporation where no one had to report the asset as a loss. These schemes made Enron appear "profitable."
By November of 2001, authorities forced Enron to publicly admit that their company had been falsely inflating their income reports by about $586 million dollars since 1997. Then in December of 2001, they finally declared bankruptcy when their shares were worth only 26 cents. The final death blow for the corporation hit in January of 2002 when authorities suspended Enron from the New York Stock Exchange, and by June, the Department of Justice convicted the Enron's accounting firm, Arthur Andersen, of obstructing justice. The firm appealed the decision and another judge overturned the ruling, but no one could "overturn" the damages to their reputation or forget what happened. Enron's CEO Jeffrey Skilling faced convictions of conspiracy, insider trading and fraud for a 24-year prison sentence. In a new deal he made later, Skilling gave $42 million to Enron's fraud victims and finally ceased challenging his sentence. Skilling's prison sentence ends in 2028.
Wall Street's cumulative losses from the Enron fiasco were so great that the entire Sarbanes-Oxley Act and other laws came about just to make sure no one else could "pull an Enron move" ever again.
Everyone tries to lie about their income among their friends to look better off than they are. However, don't ever try to lie to the bank or lenders about how much money your assets are worth just to get a bigger loan because the legal system is very unforgiving when they discover your real net worth. With today's laws, it's just a matter of time before the truth comes out.
General Motors lost $91 billion dollars in 2009 when they declared bankruptcy.
Experts at Forbes and elsewhere explained that GM had essentially made some poor management decisions too that put them in a precarious position when the car crunch hit the world. For example, GM originally insisted on centrally managing all its divisions with an iron fist around the time they launched Saturn. Other divisions couldn’t upgrade or showcase new models because the Saturn launch took priority. Later the market demanded a new midsize car and SUV designs, but GM leadership refused. Tensions increased among the divisions. Finally, cars sales plummeted rapidly following rising gas prices in the economic recession.
After they filed for bankruptcy, The Guardian reported that the U.S. government ended up holding 60 percent of the company's total equity. They claimed it was the only alternative to otherwise extending massive loans that would've buried GM completely in unsurmountable debt. Canada's government also contributed funds to 12.5 percent of company equity while unions and other bondholders hold the rest of the ownership.
The bottom line is:
You may want to start your own side business one day, but you must know what people want instead of tryijng to sell them what you want them to buy. Pay attention to the current economic conditions and trends in your industry before you take any financial risks.
WorldCom lost $103.9 billion dollars in their bankruptcy case.
In 2005, the court convicted WorldCom's old CEO, Bernie Ebbers, of committing $11 billion dollars' worth of accounting fraud, earning himself 25 years in prison.
E-commerce Times reported that:
"... more than $9 billion in false or unsupported accounting entries were made in WorldCom's financial system to acheive desired reported financial results." It was a consequence of WorldCom trying to make more acquisitions than it could afford to achieve rapid growth, and they tried to do it by forcing their own WorldCom stocks to keep rising in value.
You need to make sure you...
Suppose you want to try to make a lot of money quickly by making your own "acquisitions" like taking out home loans and renting out your properties. Make sure you consult active realtors in your area to know what kind of market conditions to expect and what kind of fees you're facing. Consider all the costs and make sure you can cover them. Never falsify any documents to push a home loan through because you think you'll be able to afford it later.
The Lehman Brothers investment bank lost $691 billion in 2008, kicking off an economic recession.
While you can't exactly equate the actions of a huge, multi-level corporation to the actions of one individual person per se, there are some very bad spending habits that this firm had adopted over the years that resulted in their eventual economic meltdown.
For one thing, in the pursuit of continual expansion, this firm borrowed far more money than they could afford to pay back. Banks like to keep a certain ratio where they only have a debt that's no more than 10 times the amount of capital they have in their accounts today. You need to have these guidelines in place so that if anything goes wrong, you have a safety net to protect yourself and begin paying off any debts that a company might suddenly call in early due to an emergency. This investment firm was borrowing up to 60 times more than what they had, so that means that at any time, any slight drop in the value of their assets made them very vulnerable to bankruptcy. Their spending habits are almost equivalent to a teenager with 60 credit cards who's hitting all the credit limits as if they believed they were going to die tomorrow without ever having to pay anything back.
Secondly, this firm invested far too much in poorly evaluated, mortgage-backed securities. The mortgage game did not have the proper financial regulation that it should've had, and the fierce competition among investment bankers had created a practice of "overlooking the fine print" that had prevailed for many years. As a result, many people valued the mortgages much higher than their actual worth was. The ordinary people who took out these mortgages had accepted them hastily without understanding that they couldn't afford to pay their mortgage fees in the long run, partially because those who sold them the mortgages only cared about their commissions and not about educating their customers. When the bubble burst and people defaulted on their mortgage loans, the investment firm finally saw that it had built its castles on sand. They ended up with such a bad credit history that it was too monumental of a task for anyone to bail them out.
Mr. Geithner told The New York Times: "We explored all available alternatives to avoid a collapse of Lehman, but the size of its losses was so great that they were unable to attract a buyer, and we were unable to lend on a scale that would save them."
Washington Mutual followed suit by declaring bankruptcy in 2008, losing $327.9 billion.
Washington Mutual tanked mostly due to their location and poor planning. A large majority of their clients were in California where the housing market crashed hardest. So many people defaulted on their loans and withdrew their savings funds in the panic following the economic crisis that it drove them over their financial edge. JPMorganChase Bank bought them out in the end.
Here are in three main points:
- You should always control your spending so that you can reasonably begin paying back any debts you owe at any time; after all, interest rates are often subject to change at any time due to the fluctuating market.
- Use mortgage-payment calculators and budgeting tools so that you're always aware of the real costs of all those "background fees." Only by knowing the full details of your actual spending habits can you stay ahead of your payments.
- Always take the extra time to consult an independent financial advisor to assess any investments that you want to make before you put any money into them. Whatever looks especially shiny on the surface might be hiding a lot of false promises underneath, and you want to find out before it's too late.