Friday, 21 March 2014

The European Financial Crisis Explained

I was emailed this a couple of weeks ago,
I don't know who wrote it but I think it is worth sharing.
And it is a reminder why we have to improve the way we do business.
Hope you agree :-)

> The European Financial Crisis.
> In “laymans” talk this should explain it to you all.
> 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 multibillion 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.
> Now do you understand?

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