this is plain explanation of the credit crunch. This is a clear explanation in a layman's terms.
Linda is the proprietor of a bar in Cork . 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 granting the customers loans).
Word gets around and as a result increasing numbers of customers flood into Linda's bar.
Taking advantage of her customers' freedom from immediate payment constraints, Linda 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 Linda'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 to his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Linda's bar.
However they cannot pay back the debts. Linda cannot fulfil 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 Linda's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. 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 consultation by leaders from the governing political parties (and vested interests).
The funds required for this purpose are obtained by a tax levied on the non-drinkers.
Now I understand!
1 comment:
As the employee of a certain multinational bank that, though it didn't get burned on Alkbonds has provided funding to several companies that did, I am rather confused by the current optimism of recent weeks.
Companies who find that their customers are no longer credit worthy are still in trouble, as are their suppliers, and their suppliers suppliers etc etc. Although a little confidence does no harm .... realistically it's going to be a while before it becomes clear just how many people bought into the drinking debt game, and even longer for new pubs to open to replace Lindas...I predict 4 more years of this...
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