Thursday, April 16, 2009

Is profiting from failures ethical?

Back when the railroads were first building their network of rails, many startups failed, were bought up at bankruptcy prices, and then went on to financial success once the debt was washed away. We saw the same thing with some of the long distances fiber-optic cable companies. They borrowed huge sums of money to build their infrastructure and couldn’t earn enough to pay back the loans, individual assets were bought by other companies at bankruptcy prices, and then used by the new owners to make a lot of money.

In the current economy the push seems to be to wash many companies debt to retired employees away by reneging on their pensions and health benefits. Allowing the retirees to “fail” will help the companies to stay afloat and to generate a profit in place of their current losses. The “new” profit comes directly from the money not being repaid to the original investors or in this case the people who already worked for the retirement payments and health benefits.

Do the beneficiaries of those bankruptcies have an ethical obligation to the people who lost their investment (in form of hours worked or in the cash used to buy stocks) in the original company? If those investors and employees had not fronted the hours or money the asset would not have been created, and these future profits never realized.

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