'the eConsultant'

There is a business ‘parable’ out there on the web… an intelligent, digestible summary of the financial and commercial issues that caused recent recessionary times (including the role of some bankers whose consciences apparently quit like Pinocchio’s!). It also covers how the honest, decent, hardworking majority have had to pay (via taxes) for the poor decisions of the financial glitterati and repercussions of imposing their financial instruments.

I replicate the parable / story here so that those with ‘minds that are opened’ can learn from it and hopefully apply necessary insight from such historic lessons to try to ensure the entire planet doesn’t suffer again in future due to (presumably) those financiers who let ‘ambition’ colour their actions (to be diplomatic in my description of their motives). It is a story I’ve found on US websites in 2010 and then Irish sites in 2011 although I can’t yet see how it originated or who wrote it first.

Comments on this post are most welcome to perhaps better explain the economics described here – and the motives of those involved – bankers, business people, investment experts… whoever are the key players, as you know or understand these recent desperate financial times.

Read on if you like to learn…

Mary is the proprietor of a bar in Dublin. She realises virtually all of her customers are unemployed alcoholics and aren’t going to be able to patronise her bar for much longer.

To solve this problem, she comes up with a new marketing plan allowing her customers to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting loans to these ‘customers’).

Word gets around about Mary’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Soon she has the largest sales volume for any bar in Dublin.

By providing her customers freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.

Consequently, Mary’s gross sales volume increases massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into Drink-bonds, Alco-bonds and Puke-bonds. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the 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.

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 Mary’s bar. He so informs Mary.

Mary then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Mary cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Financial contagion commences overnight as Drink-bonds, Alco-bonds and Puke-bonds drop in price by 90%. The collapsed bond asset value destroys the banks’ liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Mary’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various 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 multi-billion euro no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Mary’s bar.

Comments on this post are most welcome to perhaps better explain the economics described here – and the motives of those involved – bankers, business people, investment experts… whoever are the key players, as you know or understand the situation. I look forward to hearing from you.