Monday, March 16, 2009

The Financial Crisis (An Explanation That May Help)

by Dick Mac

Linda is the proprietor of a bar. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Linda's bar. Taking advantage of her customers' freedom from immediate payment constraints, Linda increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Linda's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide.

No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items. One day, although the prices are still climbing, a risk manager at the bank decides that the time has come to demand payment of the debts incurred by the drinkers at Linda's bar (he, of course, is fired due to his negativity).

However the drinkers cannot pay back the debts. Linda can not fulfill her loan obligations and claims bankruptcy. DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%.

The suppliers of Linda's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor. The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties and vested interests. The funds required for this purpose are obtained by a tax levied on non-drinkers.

Thanks to jendi for sending this along.

1 comment:

AKA Ted Faigle said...

As a hotshot Wharton grad I say this is the best damn (hic) analysis I have seen so far of what the hell happened last night to give us all such a ferocious hangover. Quick - toss me one of those pukebonds!

Never mind. Too late.

Ugh. Gross.