Laughing as the Rich Go Broke
Why do the rich go broke? The question is titillating—a little like peeking in the bathrooms of the Rich and Famous. And for those purposes, Timothy O’Brien’s piece in the NYT this morning is perfectly suited. Lots of juicy details about how the once-rich ran through their money.
But there is an interesting tangle in the analysis. While the dominant chord of the piece is about the man-child and instant gratification (giggle, giggle), business reversals also explain why some of the high and mighty suddenly crash back to earth.
So, for example, Buffalo Bill Cody is noted for having raked in about $30 million in the Chicago World’s Fair. He lost it in the financial panic of 1907 and died without enough money to pay the undertaker in 1917. Welcome to a free market economy. Or go back a bit further. Robert Morris (a story told in rich detail in Republic of Debtors, not the NYT story) was a wealthy man who bankrolled much of the American Revolution, then got caught short in land speculations, seeing the value in places like Washington just a little too early. He spent a long stretch in debtor’s prison, and his fortunes never recovered.
There are three points here: First, bankruptcy is about many things, including business failure. Those who roll the dice and get very, very rich sometimes roll it again and get very, very poor.
Second, it isn’t necessary to be rich to go broke in business. Professor Robert Lawless and I did some work that suggests that about one in seven bankruptcy cases classified by the government as “personal” are in fact failed entrepreneurs.
Third, the stories of silliness are much more entertaining than the stories of bad business gambles. Those bad business gambles are a reminder that entrepreneurs take enormous financial risks and they are one of the reasons to preserve a strong, effective bankruptcy system. When Congress changed the laws on consumer bankruptcies, they preserved enough loopholes to protect George Foreman if his investments take another reversal. But for lots of ordinary folks trying to run their own small businesses, the changes in “consumer” bankruptcy took away their safety net as well.
I'm applauding for this post!! As an entrepreneur myself who had a business failure, I saw how fast a fortune can be lost by forces beyond my control. I also saw how I was taking more risk than I realized. There needs to be a way to quantify risk, because the lenders have found a way to transfer virtually all risk of loss to the small business owners they are lending to. Any business loan to a business with owners who have more than 20% of the stock ownership must sign a personal guarantee for the business loan, before they will lend to the business. In virtually all cases, I would believe that that personal guarantee isn't worth much because the debt is so large that all the personal assets of that guarantor will not cover the debt. If the business fails, that owner is kicked out on the street, and homeless. No consumer protection because it is all governed by UCC laws. With the bankruptcy laws the way they are now, you don't have the ability to use bankruptcy protection successfully to get a fresh start. One failure is all you get.
What I have learned from this experience is that the trend of law in this country is shifting all risk to the small business owner, and the big guys buy from small business because they can bully them into unfair contractual terms, then eventually, if that small business gets into trouble, they just stop paying them what they owe. A self appointed 6 months of free products and services from them, so to speak.
I really wanted to be an entrepreneur, and even tried another business. But soon that went under because I bought into a franchise and was defrauded. I tried to follow up with that, and found myself fighting a well financed litigious predator that had the legal strategy well planned in advance, and repeatedly bankrupted his franchisees and kept it off his public disclosures - legally. How? By having the franchisee waive ALL rights, and bullying the franchisee in trouble to the point they cannot afford to sue, and settle with a contract to keep everything quiet, complete with a court approved gag order. Filing a complaint with the government would violate the contract, and reopen the franchisor's lawsuit, and subject the franchisee to the consequences of the gag order violation, which includes arrest.
In the end, it ain't worth being an entrepreneur in my mind. Some may get lucky, and there are those who do. What they don't realize, is that the laws are weighed against them, and they unknowingly waive rights every time they do business with a big customer, or a lender. One flick of a pen can throw them into bankruptcy, for no good reason. It is too easy to lose everything you worked for, even if you have more than you'll ever need right now.
Historically, I have been told numerous times that the successful entrepreneurs have failed many times before making it big. Without a fresh start. Many entrepreneurs will never succeed. If this bankruptcy law existed in Thomas Edison's day, we may not have the use of electricity yet.
Jim Anderson
The Truth About Credit
September 18, 2006 9:12 AM | Reply | Permalink
It depends on what you mean by rich. Even people who are quite well off by most standards can be bankrupted by our healthcare system if they have chronic, debilitating illness in the family.
September 18, 2006 10:17 AM | Reply | Permalink