Wednesday, March 18, 2009

The Financial Crisis Explained

Contributed by "PK"

Kelly is the proprietor of an Irish bar in New York 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 granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into Kelly's bar.

Taking advantage of her customers' freedom from immediate payment constraints, Kelly 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 Kelly's borrowing limit.

He sees no reason for undue concern because he has the promissory notes of Kelly's customers as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS.

These securities are then sold and traded on markets worldwide.
No one really understands what these abbreviations mean and how thesecurities are guaranteed.

Nevertheless, as their prices continuously climb, securities become top-selling items.

One day, although the prices are still climbing, a risk manager of the bank, (subsequently fired for his realism), decided that the time has come to start demanding payment from Kelly for the debts incurred by the drinkers at her bar.

Unfortunately Kelly's customers cannot pay back any of their debts to Kelly.

Kelly cannot fulfill her loan obligations to the bank and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by only 80%.

The suppliers of Kelly's bar, having granted her generous payment terms and also having invested in the securities are faced with a new and desperate situation. Her wine supplier claims bankruptcy and 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. They came up with a miraculous rescue plan that saved the bank.

The funds required for this massive rescue are obtained by levying a new income tax on all the non-drinkers.