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Themes:     Opinions & Politics (21)    Spirit & Humour (2)  
Tags:    Common welfare economy     Ethics
 
Manuel Monday, 10 December 2012

The true story of bonds

Helga is the owner of a bar, one of those where serious drinking takes place.


Realising that almost all of her clients are unemployed and that they will have to cut down on their intake and number of visits, she introduces a genial marketing scheme whereby clients can drink but pay later. She makes a note of all which is drunk in a book which functions as a credit book (or better put, the clients’ debits!).


The “drink now, pay later” formula meets with great success: the word spreads, business increases, and Helga’s bar becomes the most important in the town.


She puts up the prices occasionally but nobody complains about this as nobody is paying: it is a virtual increase. In consequence the sales volume increases.


Helga’s bank, comforted by the business increase, increases her overdraft. After all, reason the risk managers, the overdraft amounts are guaranteed by all the credits the bar has towards its clients: the collateral is in place.


The bank’s Investment and Magical Financial Solutions Office has a good idea. They take all the credits accumulated by Helga’s bar and use them as guarantee to issue a brand new obligation and position it on the international markets: the Hangover Bond.


The bonds immediately obtain an AA+ rating, as does the bank which issues them, and the investors do not realise that the bonds are effectively guaranteed by the debts of unemployed drunkards. In consequence, and given that they are performing well, everybody buys them. Consequently the price increases, so much so that the managers of Pension Funds, attracted by the irresistible combination of a bond with a high rating yielding well and an increasing price, buy them. As a result the portfolios all around the world are full of Hangover Bonds.


One day however a new Director comes to the bank and as there is an air of crisis going around and so as to reduce risks he asks Helga to reduce her overdraft and to pay any outstanding excess over the new limit fixed. At his point and in order to get money together Helga asks the customers to pay their debts. This is of course impossible considering that they are all unemployed and have drunken away their savings.


Helga is therefore not able to pay off the overdraft and the bank cuts off her finances. The bar goes bust and all her employees are jobless.


The price of the Hangover Bond falls by 90%. The bank that has issued the bonds goes into difficulty and immediately freezes all activity and no more loans are granted to companies. The local economy is paralysed.


Meanwhile Helga’s suppliers who, in virtue of her success, had supplied all the alcoholic beverages with generous payment terms are now loaded down with unenforceable invoices, in that she is not able to pay. Unfortunately they had also invested in the Hangover Bonds and have a loss of 90% on these. The beer supplier starts to make employees redundant but then also goes bust and closes down.


The wine supplier is bought by a competitor, which then decides to close down the local factory, make redundant all the employees, and relocates 6.000 kilometres away. Fortunately the bank is saved, thanks to a substantial interest free and non- guaranteed government loan.


To make up for the loan the government has simply taxed all those who had never been to the bar because they were either teetotal or too busy at work to go!


Right, now you can try and apply the dynamics behind the Hangover Bond to the news of these days, just to have an idea of who is drunk and who is sober!

source zeusnews.it
 
 
 
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Thursday, 17 January 2013 Michael DWyles S.C.
 
Manuel, Congratulations on the true story of bonds
 
 
 
 
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