Another great email forward I received (I am on a roll with these), this one does a good job of explaining how we got our financial crisis. Since Obama has rolled out his budget, we should all understand why these massive numbers were needed in the first place. But who said understanding finance must be boring? Obviously not the author of the below piece.
(If you like such explanations, here is another one about the subprime crisis by John Bird and John Fortune: http://www.youtube.com/watch?v=mzJmTCYmo9g)
The financial crisis explained in simple terms
Heidi is the proprietor of a bar in Berlin. 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 DRINKEBONDS, ALKOBONDS and PUKEIBONDS. 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) of the bank 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. Heidi cannot fulfill her loan obligations and claims bankruptcy. DRINKEBOND and ALKOBOND drop in price by 95 %. PUKEIBOND 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. Many German Banks and Investment Firms holding worthless or near worthless DRINKEBONDS, ALKOBONDS and PUKEIBONDS and are near broke. The banks are 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 and by the Government borrowing from overseas (Not to worry, its future generations of drinkers and non-drinkers who can pay off the loans.)
Finally an explanation!
