Tuesday, March 17, 2009
This little story was emailed to me, the sad part is it is a good analogy of the financial meltdown.
I don’t know who the original author is.
The financial crisis explained in alconomic terms:
Heidi is the proprietor of a bar in Kansas City. 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 effectively granting her customer’s loans.
Word gets around and as a result, increasing numbers of customers pour
into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment
constraints, Heidi 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
Heidi's credit 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 the exchange prices continue to climb, the
securities become top-selling items.
On Wall Street the Bank’s shares climb as they have managed to rid themselves of risky loans, they look to invest the money somewhere and they see that “Drinkbonds”, “Alkbonds” and “Pukebonds” are top selling securities so they invest heavily in them.
One day, although the prices are still climbing, a risk manager at the
bank (subsequently, of course, fired due his negativity) decides
that eventually the time has come to call in the debts incurred by
the drinkers at Heidi's bar.
However they cannot pay off their debts.
Heidi cannot fulfill her loan obligations and files for bankruptcy.
Drinkbond and Alkbond drop in value by 95%.; Pukebond holds up
a little better, bottoming out at 80% of its former value.
The suppliers of Heidi's bar, having granted her generous payment
deadlines and having invested in the securities, are faced with a new
situation. Her wine supplier files for bankruptcy, and her beer supplier
is taken over by a competitor.
The bank is bailed out by the Government after dramatic round-the-clock
consultations with leaders of the principal political parties. With the new influx of money the bank gives out huge bonuses to the geniuses who saved their company by getting a Government to bail them out.
The funds required for this purpose are obtained by levying a tax on
Got it now?