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Asset reconstruction is the handling of distressed assets to attempt to recover their value and clear them from the books. It arises in response to a financial crisis that causes the number of bad loans to rise rapidly in response to a series of economic problems. Some governments directly fund asset reconstruction programs as part of an economic recovery plan, and it is also possible to see private firms performing this service.
The asset reconstruction company assumes bad assets from another company to clear them from that company's books. It may purchase the assets at a very discounted price, causing the original company to take a loss, but clearing nonperforming assets can allow it to start accurately assessing financial health and working on a recovery plan. Once the company takes possession, it can work on recovering those assets.
For example, an asset reconstruction company may assume a group of home loans in default. The company can pursue collections and if this does not work, it can start foreclosing and selling the properties in order to extract cash from the loans and close them out. The asset reconstruction company specializes in this activity and can handle the process more efficiently than a regular financial institution, because it has the personnel, experience, and support network to do so. It may own a real estate firm that can handle the process of evaluating the properties, listing them, and making any necessary modifications to make them more saleable.
For companies with bad loans on their books, asset reconstruction creates a possibility to repair their financial situation and meet the needs of shareholders and other investors. Nonperforming assets can become a serious liability and may contribute to a crisis in investor confidence as people grow concerned about the possibility of complete bankruptcy. The company can write down the assets, sell them, adjust its books, and move forward. The loss taken on the assets is tax deductible and will allow the company to position itself better for economic recovery.
Companies offering asset reconstruction services may also agree to work as contractors. In this case, the original owner retains the title to the assets and the contractor works on recovering their value for a fee. Some companies may prefer this option, as it allows them to keep assets on the books longer. Companies can also create spinoffs to handle their bad assets, keeping them within the company's umbrella while isolating them from other operations.
@Logicfest -- But what if you have a huge corporation or two that would go under without the government stepping in and helping them out through asset reconstruction? If those companies are forced to shut down, think about all the lost jobs and the economic chaos that will result.
You do have a good point, but governments are left in a tough position when it comes to considering asset reconstruction to help out struggling companies. If the government does nothing, people complain about high unemployment rates that hit when the companies close. If it saves those companies by bailing them out through an asset reconstruction plan, taxpayers cry foul because someone was able to engage in arguably reckless behavior and
get away with it.
Perhaps there are times when asset reconstruction is the best plan of action. Still, using taxpayers' money to bail out companies is an issue that has always sparked heated debate and that probably won't change a bit.
It is a terrible idea for governments to participate in asset reconstruction. Typically, the only benefit is to the people who created a big mess in the first place through risky investments, paying executives far too much, oddly liberal lending programs and other questionable things. Almost every time this happens, taxpayers are left holding the bag and get virtually nothing in return. That is just wrong.
If a business can't cut it in the free market, it should fail. Period.