A Dummy's guide to
what went wrong in Europe.
Helga is the proprietor of a bar.
She realizes that virtually all of her customers are
unemployed alcoholics and, as such, can no longer afford to patronize her bar.
To solve this problem she comes up with a new
marketing plan that allows her customers to drink now, but pay later.
Helga keeps track of the drinks consumed on a ledger
(thereby granting the customers' loans).
Word gets around about Helga's "drink now, pay
later" marketing strategy and, as a result, increasing numbers of
customers flood into Helga's bar.
Soon she has the largest sales volume for any bar in
town.
By providing her customers freedom from immediate
payment demands Helga gets no resistance when, at regular intervals, she
substantially increases her prices for wine and beer - the most consumed
beverages. Consequently, Helga's gross sales volumes and paper profits increase
massively.
A young and dynamic vice-president at the local bank
recognises that these customer debts constitute valuable future assets and
increases Helga's borrowing limit. He sees no reason for any undue
concern, since he has the debts of the unemployed alcoholics as collateral. He
is rewarded with a six figure bonus.
At the bank's corporate headquarters, expert traders
figure a way to make huge commissions, and transform these customer loans into
DRINKBONDS.
These "securities" are then bundled
and traded on international securities markets.
Naive investors don't really understand that the securities
being sold to them as "AA Secured Bonds" are really debts of
unemployed alcoholics. Nevertheless, the bond prices continuously climb and the
securities soon become the hottest-selling items for some of the nation's
leading brokerage houses.
The traders all receive a six figure bonus.
One day, even though the bond prices are still
climbing, a risk manager at the original local bank decides that the time has
come to demand payment on the debts incurred by the drinkers at Helga's bar. He
so informs Helga.
Helga then demands payment from her alcoholic patrons
but, being unemployed alcoholics, they cannot pay back their drinking debts.
Since Helga cannot fulfil her loan obligations she is forced into bankruptcy.
The bar closes and Helga's 11 employees lose their
jobs.
Overnight, DRINKBOND prices drop by 90%.
The collapsed bond asset value destroys the bank's
liquidity and prevents it from issuing new loans, thus freezing credit and
economic activity in the community.
The suppliers of Helga's bar had granted her generous
payment extensions and had invested their firms' pension funds in the BOND
securities.
They find they are now faced with having to write off
her bad debt and with losing over 90% of the presumed value of the bonds. Her
wine supplier also claims bankruptcy, closing the doors on a family business
that had endured for three generations; her beer supplier is taken over by a
competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and
their respective executives are saved and bailed out by a multi-billion
dollar no-strings attached cash infusion from the government.
They all receive six a figure bonus.
The funds required for this bailout are obtained by
new taxes levied on employed, middle-class, non-drinkers who've never
been in Helga's bar. *
"Heavens to Helga," exclaims Kia, "there oughta be a law."
It's fraud, not misfeasance.
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