Monday, March 23, 2009

The present financial crisis explained in simple terms.............................

One-eyed-Gordon is the proprietor of a bar in London. In order to increase sales, he decides to allow his loyal customers - most of whom are unemployed alcoholics - to drink now but pay later.

He 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 One-eyed-Gordon's bar. Taking advantage of his customers' freedom from immediate payment constraints, One-eyed-Gordon increases his prices for wine and beer, the most-consumed beverages. His 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 One-eyed-Gordon'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, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) at the bank decides that the time has come to demand payment of the debts incurred by the drinkers at One-eyed-Gordon's bar. However they cannot pay back the debts. One-eyed-Gordon cannot fulfill his 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 One-eyed-Gordon's bar, having granted his generous payment due dates and having invested in the securities, are faced with a new situation. His wine supplier claims bankruptcy and his 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. The funds required for this purpose are obtained by a tax levied on the non-drinkers.

Finally an explanation everyone can understand..


Chikki said...

Lol. The ending is debatable though, where you say 'Non-Drinkers' are made to pay the price.In reality, all though non-drinker's have to pay the price, it is also to save their own ass.
If they don't pay now, they are getting into a bigger trouble obviously.None of us can imagine the kind of catastrophe that would have come if we allowed citibank, UBS, Auto companies, AIG (Specially) to sink. Forget all that, Just letting AIG sink would have brought mayhem, a real one!:-)

Which is why, I say, we should leave it to Leaders sometimes,:-), who know whats better for us than we do.:-)!!

Quirky Indian said...

Quite well-put. Actually, the tax is on everyone, drinkers and non-drinkers. But Gordon's customers have already drunk their fill! So who cares?


Quirky Indian