Cooking the Books: The Cost to the Economy

Having seena number of massive risk externalization events over the past few years – Lehman, AIG, BP oil spil, Tepco, Livedoor, Greece, possibly Olympus,etc. – I think it's pertinent to consider what the cost of all these mishaps are. So I dug up the only report that I can remember where someone triedtocalculatethis sort of thing. If (as you can see below), the cost to the economy in 2002 alonewas a.34% drop in GDP, you can just imagine what the total cost of all those more recent events was over the full period of their impact.

Brookings Institution Policy Brief #106 – Abstract: On July 21, the telecommunications giant WorldCom filed the largest bankruptcy petition in U.S. history, which was almost twice the size of the next largest petition, filed by Enron in December 2001. Both bankruptcies resulted from corporate mismanagement, accounting malpractice, and symbolize the broader crisis in corporate governance—a crisis which involves top blue chip companies, has reached political leaders at the highest levels of government, and has resulted in high levels of volatility in U.S. stock markets. In this brief, we provide a ballpark estimate of the costs to the economy, which we estimate will be approximately $35 billion, or .34 percent, off of Gross Domestic Product (GDP), in the first year, assuming the market does not recover from its July 19 level or drop substantially below it. The total, which is calculated
using the Federal Reserve Board’s model of the U.S. economy, represents the range of what the federal government spends per year on homeland security or the increase in the cost of oil imports from a 38 percent (or $10) increase in the per barrel price of crude oil.

Brookings Institution Policy Brief #106
by Carol Graham, Robert E. Litan, and Sandip Sukhtankar
http://bdti.mastertree.jp/f/401ajswy

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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