Saturday, February 28, 2009

Financial Crisis in Terms We Can Understand

I didn't write this ; I found it on a financial blog I read. I modified it a little, though, for my own entertainment.

Dave Baskwill is the proprietor of a bar in York, Pa. In order to increase sales, he decides to allow his loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. He 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 Dave's bar.

Taking advantage of his customer's freedom from immediate payment constraints, Dave increases his prices for beer and wine, the most consumed beverages. His sales volume increases dramatically.

Larry Mangan, a young and dynamic customer service consultant at the local bank, recognizes these customer debts as valuable future assets and increases Dave's borrowing limit.

He sees no reason for concern since he has the debts of the alcoholics as collateral.

At the Bank's corporate headquarters, Gary Black, an innovative and ambitious banker, transforms these customer assets into DRINKBONDS, ALKBONDS, and PUKEBONDS. These securities are then traded on markets worldwide. Nobody 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 of the bank (subsequently fired due to his negativity) decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Dave's bar.

However, they cannot repay their debts.

Dave cannot fulfill his loan obligations and claims bankruptcy.

The suppliers of Dave's bar, having granted him generous payment terms and having invested in the securities are faced with a dire situation. His wine supplier claims bankruptcy; his beer supplier is taken over by a competitor.

The bank is saved by the government following dramatic round-the-clock consultations by the leaders of the governing political parties.

The money required for this bail-out is obtained by a tax levied on non-drinkers.

1 comment:

  1. Thanks, Rob. Putting the current situation in perspective without invoking politics and the resultant bickering is pure genius. We are all screwed. Really. Might as well golf and have fun!


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