APPLYING THE 1993 ARTICLE TO 2008. Akerlof and Romer distinguished between “looting” and excessive risk taking (page 11), and their distinction turns on whether the owners of the company would prefer that the gamble pays off and the company remains solvent. In any event, the mechanism they outlined has implications whether the owners are reckless with risk or have an intent to loot. In 2008, rather than owners inflating accounting profits and taking money out of a company by way of dividends, you could think of executives inflating accounting profits by marking to thin markets and taking money out of the company by salaries and bonuses. And although the government did wind up bearing a lot of the losses, you could also think of the passive shareholders in the companies as bearing losses just as shareholders and creditors do in the case of a bankruptcy.
The distinction between “looting’ and excessive risk taking turns on factual questions of intent. Akerlof and Romer did point out some characteristics of “looting” which echoed 15 years later: “someone who is gambling that his thrift might actually make a profit would never operate the way many thrifts did, with total disregard for even the most basic principles of lending: maintaining reasonable documentation about loans, protesting against external fraud and abuse, verifying information on loan applications, even bothering to have borrowers fill out loan applications.”