Explaining Investment Banking
Investment Banking and the Creative Farmer
JustinMcbride, a friend of mine, posted his version of this story on the wall of my Facebook page ( http://www.facebook.com/home.php ) some time ago.
I posted it on another blog that I write for no better reason than I thought it was a damn funny story. But I wanted to use it explain the Art of Investment Banking. Banking is the art of creating a lot of low interest money to buy assets that you make a bigger return on and keep it for yourself. It is called leveraging the assets . In this story,My Grandpa Harry took a little money from a lot of people who thought they had a chance to turn a small investment into a windfall.
When my gandpa,Harry, first set up farming on his first few acres he bought a mule from another farmer for $100. The farmer agreed to deliver the mule the next day. The next day the farmer drove up and said, "Sorry Harry, but I have some bad news. The mule died.'"
Grandpa Harry replied, "Well then, just give me my money back."
The farmer said," 'Can't do that. I went and spent it already."
Harry said, "OK, then, just bring me the dead mule."
The farmer asked, "What ya gonna do with a dead mule?"
Grandpa Harry said, "I'm going to sell him off."
The farmer said, "You can't sell off a dead mule!"
Harry said, "Sure I can. You just have put him in the right package."
A While later, the farmer ran into Grandpa Harry and asked, "What happened with that dead Mule?" Grandpa Harry said, "I raffled him off. I sold 500 tickets at two dollars apiece and made a profit of $898.00."
The farmer said, "Didn't anyone complain? Grampa Harry said, "Just the guy who won. So I gave him his two dollars back...Amen
The trouble for the Investment Banker (Grandpa Harry) in todays economic turndown was that all the investors thought they each were holding the winning ticket and came looking for their mule. To make the matter worse, The asset was already bad when they bought it. Grandpa Harry was about to "take a long drop on a short rope". Lucky for him the Sheriff( Federal Reserve and Treasurey )stepped in and saved him. Now the Sheriff got to decide what to do with Grandpa Harry before the next election. Good luck with that.
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