August 10, 2010

ILLINOIS IS BROKE: “These are the organizations that the State of Illinois owes $100,000 or more as of July 22, 2010, according to the Office of the Illinois Comptroller. For many small businesses and social service agencies, the delay in state payments has been ruinous. Illinois owes nearly 2,000 organizations $100,000 or more.”

UPDATE: Reader Michael Rutman emails:

I think that a lot of people are missing that this kind of situation is actually very common in business. Almost everyone that has worked at a dot bomb or other startup has taken stock in lieu of pay. They have earned a certain percent of the company in expectation of cashing in when they go public.

Over time people leave, new people join, old people are still around. You have a major mix of people with too much owed to them. Then you have the new people come in to take you public and they want a big chunk. These companies are in the exact same position that the USA is in. How do they handle the current investors without just printing more stock and upsetting their long term valued employees?

They do it by separating everyone into three groups.

1) Those you owe that you don’t care about.
2) Those you want to owe because you need them.
3) Those you owe and care about.

They then do a reverse stock split, which sounds like it would screw both groups 1 and 3, however, they can make it up to group 3 by just issuing new stock. Those in group 1, well, they don’t care about group 1. Those are the ex-employees and initial seed money. They can’t offer you anything today. Those in group 3, they won’t care, you made them whole. Those in group 2, well, you need them.

Look at what happened in North Korea recently, or any other country that revalued its money. They split people into the same three groups and did the exact same thing to them. Those with clout got to revalue much more than a typical citizen. Those really connected got to buy worthless money for pennies on the dollar and exchange it.

Now you might think the pensions for unions and the government are going to be favored and therefore benefit, but that ignores the fact that the pension is owed to the retired workers with little clout and owed by governments and unions with amazing clout. Imagine if guaranteed payouts are revalued down while current assets are made whole. In a stroke of a pen every union and government is suddenly solvent.

Internationally, China wants to flee from our bonds, just make them whole. Mauritania wants to flee, oh well, they don’t count.


ANOTHER UPDATE: Reader David Tulka writes: “I copied the page into a spreadsheet and ran some math. The outstanding total is $3,176,751,338.20”

And reader Timothy Voigtman emails: “Reader Michael Rutman’s analysis perfectly explains the government auto bailout.”

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