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THE FINANCIAL CRISIS EXPLIANED IN SIMPLE TERMS
Greta is the proprietor of a bar in Berlin. 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 in effect granting the customers subprime loans.
When word gets around, increasing numbers of customers flood into Greta's bar. Business is booming.
Taking advantage of her customers' freedom from immediate payment constraints, Greta increases her prices for wine and beer, the most-consumed beverages. Her total sales value increases massively.
A young and dynamic customer service consultant at the local bank recognizes that these customer debts are valuable future assets and so he increases Greta'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 or how the securities are guaranteed.
Nevertheless, their prices continuously climb, and the securities become top-selling items.
One day, although the prices are still climbing, a risk manager at the bank (who is subsequently fired for his negativity) decides that the time has come to demand payment
of the debts incurred by the drinkers at Greta's bar.
But they cannot pay back the debts.
Greta cannot 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 Greta's bar, having granted her generous payment due dates, and having invested in the securities, are faced with a new and challenging situation.
Her wine supplier claims bankruptcy, and her beer supplier is taken over by a competitor.
However, the bank is saved by the Government after dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on the non-drinkers.
…… At long last - an explanation that we CAN understand..
Greta is the proprietor of a bar in Berlin. 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 in effect granting the customers subprime loans.
When word gets around, increasing numbers of customers flood into Greta's bar. Business is booming.
Taking advantage of her customers' freedom from immediate payment constraints, Greta increases her prices for wine and beer, the most-consumed beverages. Her total sales value increases massively.
A young and dynamic customer service consultant at the local bank recognizes that these customer debts are valuable future assets and so he increases Greta'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 or how the securities are guaranteed.
Nevertheless, their prices continuously climb, and the securities become top-selling items.
One day, although the prices are still climbing, a risk manager at the bank (who is subsequently fired for his negativity) decides that the time has come to demand payment
of the debts incurred by the drinkers at Greta's bar.
But they cannot pay back the debts.
Greta cannot 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 Greta's bar, having granted her generous payment due dates, and having invested in the securities, are faced with a new and challenging situation.
Her wine supplier claims bankruptcy, and her beer supplier is taken over by a competitor.
However, the bank is saved by the Government after dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on the non-drinkers.
…… At long last - an explanation that we CAN understand..
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