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This is a simple but accurate outline of the financial instrument that was a major contributor to the Global Financial Cricis (GFC) and caused so much heartache to people throughout the world. I don’t know who wrote the words but I acknowledge and thank that person for his/her work. It describes how, what is called a Collateralized Debt Obligation (CDO), works. A CDO is just one of many financial instruments in the group of financial instruments called Derivatives. —————– Heidi is the proprietor of a bar in Detroit … 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. Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit . By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively. A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern because 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 DRINKBONDS. These “securities” then are bundled and traded on international securities markets. Naive investors don’t really understand that the securities being sold to them as “AAA Secured Bonds” really are 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 still are 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 Heidi’s bar. He so informs Heidi. Heidi then demands payment from her alcoholic patrons. But, being unemployed alcoholics — they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and Heidi’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 Heidi’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. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non drinkers who have never been in Heidi’s bar. Now do you understand? Recent Posts - COMPARATIVE PERFORMANCE OF THE US ECONOMY - Have Orthodox Economists, Misrepresented the ideas of Adam Smith and the Utilitarian Philosophers? - Should selected industries be permitted to import foreign workers? - Is a golden rule of exploration drilling about to change? - Detection effectiveness of angled versus vertical drilling
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MALA ŠKOLA KAPITALIZMA OVO nađoh na mrežama…baš je dobro: Helga je vlasnica bara. Gotovo sve njezine mušterije nezaposleni su alkoholičari i od takve klijentele njezin bar ne može opstati. Kao rješenje svog problema ona stvori genijalan plan: dopustiti će im konzumaciju ‘na dug’ (piješ sada/platiš kasnije). Helgina strategija brzo se pročuje: mušterije ubrzo navaljuju u Helgin bar, i njezin bar ubrzo bilježi najveći promet u gradu. Nijedna mušterija ne p…rotestira što Helga s vremena na vrijeme podiže cijene pića, jer se plaćanje ionako može odgoditi. I tako se promet i prihod Helginog bara ubrzo dramatično povećao. Dinamični potpredsjednik lokalne banke u Helginom prihodu prepoznaje golemi potencijal, te Helgi povećava kreditni limit. Za njega to nije problem, jer iza svega kao polog stoje dugovi Helginih mušterija! To ubrzo primijete i eksperti za burzovno poslovanje u centrali banke, te odmah smisle kako će ostvariti goleme bonuse pretvaranjem Helginih kredita u ‘alko-obveznice’. Tim vrijednosnim papirima sada se trguje na svjetskoj burzi. Naivni investitori ne razumiju da su kupljene obveznice u stvari dugovi nezaposlenih alkoholičara, pa cijena obveznica stalno raste, i uskoro, u nekim vodećim državnim brokerskim kućama one postaju najpovoljnije za trgovinu. Premda cijene dionica i obveznica i dalje rastu, jednoga dana menadžer Helgine banke odluči kako je došlo vrijeme da Helga vrati kredit. O tome obavještava Helgu, a ona potom zahtijeva da joj mušterije plate. Kako je riječ o nezaposlenim alkoholičarima, naravno da oni svoje dugove ne mogu platiti. Helga ne može ispuniti svoje kreditne obveze u lokalnoj banci te proglašava bankrot. Bar se zatvara i njezini zaposlenici gube posao. Preko noći, cijena ‘alko-obveznica’ pada za 90 posto. Srušena vrijednost obveznica uništava likvidnost banke: banka ne može odobravati nove kredite i njezina se ekonomska aktivnost zamrzava. Dobavljači koji su Helgi odobravali odgođeno plaćanje pa čak i investirali u obveznice visoke vrijednosti, sada moraju otpisati njezin dug uz gubitak od preko 90 posto pretpostavljene vrijednosti obveznica. Njezin dobavljač vina proglašava bankrot i zatvara obiteljski biznis koji je uspješno poslovao pune tri generacije; njezinog dobavljača piva preuzima konkurentska tvrtka koja odmah zatvara lokalnu pivovaru i otpušta svih 150 radnika. Srećom, banku, brokersku firmu i njezine direktore multimilijunskom financijskom injekcijom spašava vlada, bez dodatnih obaveza. Fondove potrebne za spašavanje država će osigurati novouvedenim porezima koje će plaćati zaposleni ljudi srednje klase, koji uglavnom ne konzumiraju alkohol i nikada nisu bili u Helginom baru.