The Explanation

If you’d like to read a succinct explanation of the behaviors by top management that I’ve been complaining about here for the last several months, Simon Johnson has as good as any:

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

The more money is shovelled through the front door by the government, the more will be shovelled out the back by these companies’ managements.

When management engages in behavior that’s not directed at solving the problems of the company and preserving or increasing shareholder equity but at preserving dividends, it’s looting.

2 comments… add one
  • Brett Link

    I imagine the Russians would be especially familiar with that behavior, considering how many of the oligarchs milked their firms for money and then stored it overseas.

  • The more money is shovelled through the front door by the government, the more will be shovelled out the back by these companies’ managements.

    The smart managers will be certain to contribute to all the right politicians. That way they can take the money and run without fear of prosecution.

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