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When a consumer defaults on debt, their credit rating is hurt, and their ability to borrow funds in the future is greatly reduced. But when a corporation defaults on debt, it doesn't necessarily prevent them from turning around and borrowing more money, sometimes from the very lenders who just got shorted. This is because corporation's credit ratings (bond ratings) are based on their ability to pay back funds more than based on past actions. I'm guessing the logic is that corporations are rational actors, and defaults are caused by market actions, not irresponsible behavior, unlike consumers. So if a corporation defaults, and bond holders take a loss, the company may now be on sound financial footing, so bond holders will turn around and begin lending to the reorganized company immediately. I know, simplified explanation of a complex situation, but it's undeniably true that corporate default is less stigmatized than consumer bankruptcy in America. Going bankrupt in America can even effect your ability to find work.

I'm guessing the difference in treatment of personal and corporate default is also true in Israel, based on legislation being proposed to remedy this. More after the squiggly.

From Haaretz:

Financial institutions managing long-term savings will be prohibited from lending to companies controlled by anybody who defaulted on debt any time in the preceding ten years, under a new "Financial Turpitude" bill that will be presented to the Knesset today.
Imagine that, that corporations, and more importantly their managers, will have to face negative repercussions after a default. More interestingly:
Any dividends distributed by the company delivering the haircut, and any other companies the controlling shareholder owns, will be forfeit. The money will be used to repay the bondholders.
For instance, in September 2009 a debt settlement was reached at Zim Integrated Shipping Services, which belongs to the Ofer family. The company put off repaying money from 2012 to 2016 in exchange for some debt conversion into stock and higher interest. Yet in 2010 Zim's parent company, Israel Corporation, paid $70 million in dividends to shareholders, and another of the group companies, Israel Chemicals, paid $680 million in dividends.
So, if a company like Bain buys a controlling interest in another company, runs it into the ground, pillaging anything of value, and leaves the company bankrupt and defaulting on debts, their parent company can't pay a dividend or take a profit until they make whole the bond holders of the subsidiary.
I'm not a financial expert, nor a lawyer, but I do know something about running up debt. As a person, I can't divide up my actions, and create legal fictions that my left hand isn't responsible for the actions of my right hand. Corporations and corporate managers shouldn't be able to either.

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Comment Preferences

  •  What a loser of a company! (1+ / 0-)
    Recommended by:
    wilderness voice

    Not only do they welch on debts, they do business with Iran!!!

    http://www.jpost.com/...

    Lenin's famous quote about capitalism selling the rope for the gallows comes to mind.

  •  Donald Trump does this (3+ / 0-)
    Recommended by:
    phonegery, voroki, wilderness voice

    I can't count the number of bankruptcies he has had. But the various projects are insulated from one another.

  •  Jewish religious law (3+ / 0-)
    Recommended by:
    phonegery, Samer, theRoaringGirl

    does not accept the idea of limited liability. If you owe someone money, your entire assets are basically collateral. If you truly have no assets, you don't have to pay until you get some, but the idea of shielding assets is something that the Torah does not accept. It is nice that Israel is considering something that is consistent with this idea.

  •  Citizen's United (2+ / 0-)
    Recommended by:
    phonegery, Samer

      Here in the US, if corporations are people, then why shouldn't this be applicable?   Unintended consequence?

  •  Great idea...however how will they... (0+ / 0-)

    ...convince all those share-holders who will be out of receiving those quarterly payouts... that this is a good thing?  There are many things we do or don't do in life that are not good for us as individuals but convince ourselves otherwise.  When the same is true but applied on a "whole-population" basis we are not able to see the good in it due to our focus on our individual issue with same.

    Our nations quality of life is based on the rightousness of its people.

    by kalihikane on Tue Feb 28, 2012 at 08:24:55 AM PST

  •  Israel appears quite progressive from time to time (1+ / 0-)
    Recommended by:
    charliehall2

    I was pleased to see movement in Israel towards unionizing part time and contract workers so they will be eligible for the same benefits as regularly employed full time employees.  In the US, employers are encouraged to hire part time workers and contract workers because they are cheaper and do not have the same level of benefits.

    This is from a report on IBA TV a week or so back and I really did not get the nuances of the situation but it appeared that while some nations are embracing austerity, others are continuing to expand and extend their social safety nets.  Time will tell which strategy pays the greatest dividends  

    •  Israel is quite progressive (2+ / 0-)
      Recommended by:
      charliehall2, wilderness voice

      They're very progressive on a whole slew of issues. Socialism isn't the dirty word in Israel that it is in America. Keep in mind that many early immigrants came to Israel from Russia, and experiments like the Kibbutz (which unfortunately have largely been dismantled or converted to non-communal ownership) drove a lot of Israel's early growth.

      •  one of the ironies is that Israel was originally (1+ / 0-)
        Recommended by:
        charliehall2

        the sweetheart of the Left, particularly the French Left and it was the RW with reservations about Israel as a state

      •  Among those issues (1+ / 0-)
        Recommended by:
        wilderness voice

        A good universal health insurance system with no for profit health insurers.

        There is almost no private ownership of land -- government agencies control most land and it is ground rented.

        Progressive taxes.

        Draconian taxes on automobiles.

        Great public transportation.

        Draconian regulation of the financial sector.

        Liberal immigration policies. (Yes, non-Jews can immigrate to Israel -- it is just a three year wait to get a passport rather than a one year wait. And there are no quotas. Just have a job lined up before you go.)

        Proportional representation. (This darling of 20th century  Progressives actually has not worked out well, greatly increasing the influence of extremist political movements.)

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