Tuesday, March 10, 2009
Jessica is the proprietor of a bar.
To increase sales, she decides to allow her customers (most of them are unemployed) to drink now and pay later.
She keeps track on their tabs.
Word gets around about this scheme, increasing numbers of customers flood into Jessica's bar.
Taking advantage, Jessica increases her prices for wine and beer.
Jessica's sales volume increases massively and there by her virtual profit.
Since she was buying more liquor than any other, she got good extended debt period from her suppliers.
A dynamic consultant at the bank recognizes Jessica's customer debts as valuable future assets, increases her borrowing limit.
Kim, Jessica's competitor astonished by the sales, introduces the same scheme in her bar to increase sales.
At the bank headquarter; experts transform these customer asset-backed securities into bonds like DRINKBONDS and PUKEBONDS.
These bonds are then traded on markets. No one really understands what these are and how they are guaranteed.
Nevertheless, as their prices continuously climb, the securities become top-selling items.
So no one was complaining, customers getting drink on debt.
Jessica getting drinks on credit from supplier.
Bank sold these securities off to market as bond and these bonds were being purchased and sold among themselves by investors.
Although the prices are still climbing, a risk manager (the spoil sport) of the bank wakes up suddenly.
He decides that the time has come to demand payment of the debts incurred by the drinkers at Jessica's bar.
However they cannot pay back the debts. Jessica cannot fulfill her loan obligations and claims bankruptcy.
DRINKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 85%.
The suppliers of Jessica's bar, having granted her generous payment due dates are now faced with tough situation.
Within a month, Jessica's supplier also claims bankruptcy.
Only the bank is saved by the government.
The required funds for this purpose are obtained by a tax levied on the non-drinkers.
Now Kim's bank is next in line asking for bailout from government.