Thursday, April 2, 2009

A Sad Little Story

A friend sent me this recently.  I do not know its ultimate origin.

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The financial crisis explained in simple terms:

Wendy is the proprietor of a bar in Washington.  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 in a ledger, thereby granting the customers loans.

Word gets around, and as a result increasing numbers of customers flood into Wendy's bar.  Taking advantage of her customers' freedom from immediate payment constraints, Wendy 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 Wendy'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, their prices continuously climb, and 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 the time has come to demand payment of the debts incurred by the drinkers at Wendy's bar.

But the drinkers cannot pay off their debts -- they're unemployed and they're alcoholics!  Wendy in turn can't 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 Wendy's bar, having granted her generous payment due dates and having invested in the securities, are faced with a new situation: they must write off her accounts as uncollectable and suffer the loss of their investments. 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. Wendy, her suppliers, and all the investors who bought DRINKBONDs, ALKBONDs and PUKEBONDs are left holding the bag.  The funds required for saving the bank - here's the good part! - are obtained by a tax levied on all non-drinkers.

Now do you understand?

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Kent comments:

It’s good as far as it goes.  But the story needs some additions.  The out-of-control-government needs to be mentioned, not just at the end of the story, but at the beginning and the middle also.  To make the allegory more complete and accurate, add these features:

First, government agencies decree that everyone has a right to come to Wendy’s place and get drunk.  They ‘lean’ on Wendy to ‘encourage’ her to run a tab with anyone who wants a drink.  Remember, according to the government, everyone has a right to a drink at Wendy’s bar.

Second, the government creates special agencies to ensure that bankers can and will float DRINKBONDS, ALKBONDS, and PUKEBONDS.

Third, the government doesn’t just tax all current non-drinkers in order to ‘save the bank.’  The government borrows untold boatloads of money based on the government’s promise that many generations of future non-drinkers will pay, pay, and pay some more – plus interest.

Finally, add the little twist that two presidents from different parties are involved.  They both have somewhat unusual ears.  One can’t pronounce ‘nuclear.’  The other thinks he is a god.

This is becoming too complex for an allegory!

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