Current Financial Crisis in Simple Terms

[Guest paddy]

Heidi is the proprietor of a bar in Norfolk. 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 Heidi's

bar. Taking advantage of her customers' freedom from immediate payment

constraints, Heidi 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 Heidi'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 of the bank, (subsequently of course fired due to his negativity),

decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar. However they cannot pay back the debts and Heidi cannot 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 Heidi'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

consultations by leaders from the governing political parties.The funds required for this purpose are obtained by a tax levied on the non-drinkers.

[Guest paddy]

here's one more.....

Still confused about how AIG lost its shirt by going into the securities lending business big time? We understand. It's terribly complex and full of words that make your eyes glaze over.

So we decided to break it down into the simplest terms Wall Street transactions can be explained: Story of two cows.

You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest.

You brag to everyone about your financial health. You have assets--two cows you own, plus one Paulson owes you--worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

You express confidence in your financial health. Your assets are now worth only $200--your two cows plus the one John owes you--but your liabilities are still only $100. If necessary, you could sell the assets at this distressed price and pay off all your loans.

You hold onto your cows because you are sure the market is "dislocated." Some day someone will want to eat beef again.

The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who want to make dog food.

John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the loan. You now have three cows worth six bucks.

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout.

[Guest RedDevils]

here's one more.....

Still confused about how AIG lost its shirt by going into the securities lending business big time? We understand. It's terribly complex and full of words that make your eyes glaze over.

So we decided to break it down into the simplest terms Wall Street transactions can be explained: Story of two cows.

You have two cows.

John Paulson .....

.....

.....

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout.

Hahaha... I only know 2 cows...

1 "Cow Pay".... the other "Cow Bu" .... Sorry off topic... :offtopic: