In this piece, we will take a look at the five biggest failed companies due to poor management. For more companies, head on over to 10 Biggest Failed Companies Due To Poor Management.
5. Financial Corporation of America (FCA)
Asset Value at Time of Bankruptcy: $34 billion
The Financial Corporation of America (FCA) was the holding company for savings and loan ‘thrift’ firm the American Savings and Loan Association. The thrift was set up in 1922, and the Financial Corporation of America (FCA) was headquartered in Irvine, California.
The Financial Corporation of America (FCA) started to shake in 1984 when it posted a $1.1 billion loss due to turmoil in the real estate industry. Its problems would be reminiscent of the 2008 financial crisis that took place decades later, as the American Savings and Loan Association had also invested heavily in mortgage backed securities (MBS). These securities use mortgages as their asset base, and offer buyers a profit from the amount of mortgage that is paid by a homeowner. However, if the mortgage goes bad, the MBS is worthless. American Savings posted another loss in 1987, and the Financial Corporation of America (FCA) filed for bankruptcy a year later.
4. Enron Corporation
Asset Value at Time of Bankruptcy: $66 billion
Enron Corporation was an American company that traded in energy and commodities. The firm was set up in 1985 and was headquartered in Houston, Texas.
Enron Corporation’s mismanagement, or what can simply be dubbed as good old accounting fraud, is now taught as an example in business schools of what not to do if you want to avoid bankrupting your company and going to jail. These practices can simply be described as inflating revenue, recording future profits in today’s books, and creating special entities to sell your debt and thus reduce the liabilities on your balance sheet.
3. MCI WorldCom
Asset Value at Time of Bankruptcy: $104 billion
MCI WorldCom was the second largest phone company in the U.S., and it was set up in 1998 after Worldcom and MCI Communications completed their merger.
MCI WorldCom is another example of accounting fraud, in which its chief executive, chief financial officer, and chief accounting officer listed expenses as capital expenditure and inflated revenues. By capitalizing expenses, a firm can overstate its net profit since the expenses are reflected on the balance sheet instead. The bubble burst in 2002 when an internal team discovered the fraud.
2. Washington Mutual, Inc
Asset Value at Time of Bankruptcy: $328 billion
Washington Mutual, Inc, also called WaMu, was a holding company for WaMu Bank, which was the largest American savings and loan association, or thrift, in 2008.
WaMu Bank began feeling the tremors of the 2008 financial crisis as soon as in 2007 when it closed nearly half of its home loan offices. Crisis hit the next year, when Washington Mutual, Inc announced that it will now close the remaining home loan offices, a sharp turn in the fortunes of a firm that had one time intended to turn itself into the Walmart of banking. The Federal Deposit Insurance Corporation (FDIC) took over and sold Washington Mutual, Inc to JPMorgan for $1.9 billion after WaMu’s customers withdrew $16.7 billion worth of deposits in just ten days.
Washington Mutual, Inc declared bankruptcy on September 26, 2008, an important date as you’ll find out below.
1. Lehman Brothers Holdings Inc.
Asset Value at Time of Bankruptcy: $691 billion
Lehman Brothers Holdings Inc. was the fourth largest investment bank in America before trouble hit. The firm was headquartered in New York, New York, United States.
Lehman Brothers Holdings Inc.’s management practices, which saw the firm borrow unimaginable amounts to write mortgages, and then use these mortgages as the basis of a new asset class (called a mortgage backed security) to sell to other investors, is a bone chilling example of how a handful of executives can ruin lives and generations. By 2008, Lehman Brothers Holdings Inc. had $680 billion in assets that were supported by only $23 billion of its own capital. As the U.S. economy slowed down due to high interest rates, these mortgages defaulted, and Lehman Brothers Holdings Inc. was left unable to pay its obligations.
Lehman Brothers Holdings Inc. declared bankruptcy on September 15, 2008, just eleven days before Washington Mutual, Inc. would fall. As a result of the decisions taken by these banks, the U.S. Federal Reserve’s balance sheet has grown from $1 trillion in 2008 to close to $8.6 trillion as of November 2022. This balance sheet shows the Fed’s purchases, and it often buys distressed securities, such as mortgage backed ones by printing the U.S. dollar, to stop the market from destroying itself. From September 1, 2008, to December 8, 2008, the balance sheet grew from $905 billion to $2.2 trillion, resulting in a weaker dollar and reduced consumer purchasing power for the ordinary American.
In short, the impact of the decisions made by Lehman Brothers Holdings Inc. that led to the 2008 financial crisis is still felt globally in 2022.
Disclosure: None. You can also take a look at 10 Growth Stocks with Upside Potential and 15 Best Consistent Dividend Stocks to Buy.
