The Big Money has taken a look at one theory from Associate Professor of Economics and Law at the University of Missouri, William K. Black. Cobbling together the intrigue of the Mafia, fraud and financial markets, here’s an extract from What the Mafia can teach us about corporate fraud.

TBM: bad economic theory has given people whose jobs should be understanding fraud a screwy sense of how fraud works in the real world. One way of seeing this, as Black describes in a terrific article, is to think about the mob “bust-out.”

The bust-out is what happens when the mob moves in to take control of a business that’s heavily indebted to a loan shark. As Black tells it, why the heck a mobster would ever want to take over a bar or liquor store in this way is incomprehensible to a classical economist. Why take over the business when you’re already getting every cent of profit and more in your weekly vig?

Except that in the real world, things don’t work that way, explains Black, a professor at the University of Missouri-Kansas City. The reason to take over the business is to loot it 1,000 ways to Sunday, from buying vast amounts of liquor on credit to, ultimately, torching the place for the insurance money. Prosecutors and mobsters know this. Economists who think the mob operates like a bank that happens to charge high interest rates miss it.

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