In this piece, we will take a look at the ten biggest failed companies due to poor management. For more companies, head on over to 5 Biggest Failed Companies Due To Poor Management.
The allure of the corporate world results in thousands of fresh graduates flocking to the corporate sector for employment as they are enticed by both the prestige of working for large companies and the lucrative salaries that are offered. The largest companies in the world often employ thousands of individuals and are linked to even more suppliers. Their values are larger than the gross domestic products (GDPs) of several countries in the world, and they earn billions of dollars in revenue.
As an illustration, Apple Inc (NASDAQ:AAPL), which is the most valuable technology company in the world, earned $316 billion in revenue during the twelve months that ended in September 2022. This is greater than the foreign exchange reserves held by most of the world’s central banks, except the top nine. And if you think that revenue is not an adequate indicator of a company’s value, since it does not reflect the costs of doing business and selling products, and therefore is not available to the owners, then worry not. Apple Inc (NASDAQ:AAPL)’s total assets as of September 2022 stand at a whopping $352 billion, which would make it the world’s tenth largest central bank should it covert all these into cash and then start lending to banks at the benchmark interest rate via government legislation.
But, as the saying goes, ‘the bigger you get the harder you fall’, should these companies fail either due to incompetence or fraud, the consequences are devastating for the broader ecosystem as well. A perfect example is the recent crash of the cryptocurrency exchange FTX. This is the latest example of corporate failure due to either deliberate fraud or overzealous risk taking, and as FTX failed in November 2022, the broader cryptocurrency market was dealt a big shock as well. How big? Well, it is estimated that cryptocurrency prices dropped collectively by a whopping $183 billion in the aftermath, with Bitcoin alone touching a two year low price level. As if this weren’t enough, the FTX saga also led investors, who were already fleeing to safer assets, to dump the stocks of other cryptocurrency companies, which might very well have been legitimate enterprises. This led to the value of cryptocurrency stocks dropping by $1.25 billion.
Corporate failures have been around for as long as corporate history has been recorded, and the oldest example of one failure is that of the Medici Bank. Having made the Medici Family the richest family in Europe in the 13th century, with net worth estimates of $129 billion, larger than that of some of today’s billionaires such as Larry Ellison and Michael Dell, the bank nevertheless collapsed as the leaders of the Medici family focused their attention on politics. The failure occurred due to incompetent management. As an example, the London branch of the Medici Bank had been owed 10,000 pounds from the King of England, 1,000 pounds by the nobility, and another 7,000 pounds stuck in irrecoverable goods. When the King couldn’t pay his debts due to war, the London branch became defunct, and the bank was never able to recover its debts. These failures and collapses are the reason why major companies hire firms like Goldman Sachs Group Inc (NYSE:GS), Credit Suisse Group AG (NYSE:CS), and Bank of America Corp (NYSE:BAC) for due diligence and audits before making any major deals.
Some of the failures on today’s list are greater than that of the Medici Bank, and some names that you should know about include Washington Mutual, Inc, Lehman Brothers Holdings Inc., and Enron Corporation.
Luis Louro / shutterstock.com
Our Methodology
We collected modern day corporate failures and then ranked the firms in terms of their asset value before they declared bankruptcy.
Biggest Failed Companies Due to Poor Management
10. New Century Financial Corporation
Asset Value at Time of Bankruptcy: $26 billion
New Century Financial Corporation was an American firm that was set up in 1995 and converted into a real estate investment trust (REIT) in 2004. The firm was headquartered in Irvine, California.
New Century Financial Corporation was the second largest subprime mortgage issuer in the world in 2006 as it made a whopping $52 billion in subprime loans. However, troubles would start the next year, when New Century Financial Corporation announced that it would not make any more new loans. This was the earliest indicator of the 2008 financial crisis, and was also used as a signal by the now legendary investors Charlie Geller and Jamie Shipley to finally be vindicated of any blame for betting against, or ‘shorting’, the subprime mortgage bonds that nearly destroyed the American economy in 2008.
9. Wirecard AG
Asset Value at Time of Bankruptcy: $28 billion
Wirecard AG was a German financial firm that provided payment processing, electronic commerce, and financial services. The firm was headquartered in Bavaria, Germany.
The story of Wirecard AG is full of intricacies. Some claim that its former chief operating officer, Jan Marsalek, was allegedly an operative of the Russian military intelligence, and after becoming a wanted fugitive, he is currently hiding out in Russia. Others claim that they have faced hacking attempts after publicly criticizing the firm. Warning signs came as early as 2008, and ended in 2020 when the firm filed for insolvency after revealing that 1.9 billion Euros were simply “missing.”
8. Bank of New England Corporation
Asset Value at Time of Bankruptcy: $30 billion
The Bank of New England Corporation was an American regional bank that was set up in 1985 and headquartered in Boston, Massachusetts. It had been the 18th largest bank in America at its peak, and when it went down, it was still in the list of top 50 banks in the country.
Trouble at the Bank of New England Corporation began in 1990 when it posted a $1.2 billion loss. This came as the bank made risky real estate investments to fuel growth, but as the market slowed, these turned into losses instead. Just as the first signs of trouble started to emerge, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) tried to save the Bank of New England Corporation by pumping in close to $3 billion. The bank’s customers started to panic, and withdrew their deposits after spending time in long lines outside the Bank of New England Corporation’s branches. However, the measures failed and eventually, the bank was divided into parts and sold off. Payments continued until as long as 2009.
7. FTX
Asset Value at Time of Bankruptcy: $32 billion
FTX is a cryptocurrency exchange that is headquartered in the Bahamas. An abbreviation for ‘Futures Exchange’ the firm was set up in 2019 and within just three years it would see its valuation jump to a whopping $32 billion.
In hindsight, FTX’s troubles were always there due to the relationship between it and the trading platform Alameda Research. Alameda, a trading company, owns FTX, the exchange in which Alameda’s stablecoins are traded. This then ensured that Alameda profited when traders on FTX lost. A large chunk of Alameda’s assets were also held in the form of FTT tokens issued by FTX, and the chips started to fall when Binance chief Changpeng Zhao revealed that his firm will sell its FTT holdings. This led to a panic, and FTT’s price dropped rapidly, and since Alameda’s assets were also in FTT, the trading arm also dropped in value. The scope of mismanagement of client funds was revealed by the Wall Street Journal, which outlined that FTX had lent Alameda $10 billion of client money, which couldn’t be recovered since Alameda suffered from the FTT price drop.
These recent events have made major companies more vigilant, who were already hiring entities like Goldman Sachs Group Inc (NYSE:GS), Credit Suisse Group AG (NYSE:CS), and Bank of America Corp (NYSE:BAC) for due diligence and audits before making any major deals, especially in the crypto markets.
6. Refco
Asset Value at Time of Bankruptcy: $33 billion
Refco was a commodities and futures contract broker that was headquartered in New York, New York, the United States. The firm was set up in 1969, and would go on to sell its shares on the New York Stock Exchange (NYSE) in 2005.
Refco’s decision to list its shares on the stock market also led to the start of a chain of events that would eventually see it become a gone concern. The firm’s chief executive officer Phillip R. Bennett used a shell game in which he hid his company’s bad debt by creating a fake company that bought the debt from Refco, and used money borrowed from Refco to pay the debts. In short, Mr. Bennett used Refco’s money to buy debts that Refco couldn’t recover.
This scheme started in 2002 and was discovered in October 2005, just two months after Refco was listed on the NYSE. It called a loss of big names in finance into question, as heavy hitters such as Goldman Sachs Group Inc (NYSE:GS), Credit Suisse Group AG (NYSE:CS), and Bank of America Corp (NYSE:BAC) had all completed due diligence into Refco before it was listed on the public stock market. As for Mr. Bennett, he was sentenced to 16 years in Federal Prison in 2008. Refco had more than $900 million in bad debts and fake bonds, and a year before its collapse, its chief financial officer also left the firm with a $45 million payout.
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Disclosure: None. 10 Biggest Failed Companies Due to Poor Management is originally published on Insider Monkey.
