There's no way to know how often this sort of thing has happened in the past. We only find out about the cases where a bank is not able to earn back it's loss and runs out of cash. At that point they have to admit they're insolvent.

If the bank was able to earn back the money and become solvent again, then no one outside the bank would know it happened and the bank would have every reason to cover it up to save its reputation.

Only because when it does work, you never find out.

See also: loss aversion as a cognitive bias resulting in excessive risk taking http://en.wikipedia.org/wiki/Loss_aversion http://blog.usabilla.com/how-loss-aversion-and-risk-influenc...

Also the London whale http://en.wikipedia.org/wiki/2012_JPMorgan_Chase_trading_los... Nick Leeson http://en.wikipedia.org/wiki/Nick_Leeson et al.

> As far as we know, it never works.

You might not know if it does work, but due to the cognitive bias mentioned above, odds are against it.

That's not true at all. Almost every bank in the western world did this in the past six years. They became technically insolvent due to losses in the housing bubble, but through, for example, huge piles of free money given to them by the U.S. government, were able to keep on trucking until they could earn enough money and get back into solvency. That was the entire theory behind the bailout.

Not all banks that were insolvent managed to keep on going; many failed. But many survived.

So this strategy works perfectly well if you have the ear of the Federal Reserve or another entity that can provide very large amounts of money. It works well when the amount you are insolvent by is small compared to your revenue stream. It does not work well if you are a Ponzi scheme operator and if you have stolen ALL of the money.