Got this as an email forward. It makes perfect sense.
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 DRINK BONDS.
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, DRINK BOND 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 DRINK 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 a six 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?
That's about right except that the addicts in the real world were the high rollers in financial institutions.
In Europe? This is a guide to what went wrong all around the world but particularly in the US with sub prime mortgages.
Gotta say EmpressFelicity that this is a perfect example of what's been happening.
I used to work for a bank in the UK and saw crap like this pulled on a local level all the time. The Bank changed it's bonus policy so you got higher bonuses if you brought in new business. There was no emphasis on making a profit from the customer. It was about bringing in large numbers, which meant we had to lower rates and lower margin (profits) to compete with other banks. Lots of managers even brought in business that they knew were bad bets but hoped they'd have "moved on" before it was realised. Plus even if the cutomer went bust and the Bank was unable to obtain the funds you'd lent, it didn't affect your bonus payment. Now times that across all the branches in the country, and by the number of Commercial/Corporate managers that were doing this and you'll start to get a picture of how rife the problem was.
However, it wasn't just across the commercial arena that this was happening. Big mortgages were chased down and taken on at barely any profit. Again competing with other lenders just to get new business in the door. It was all about how big your lending book was rather than how big your profit margins were. When it came to personal loans a simple credit search was normally enough to get your funds. No affordability forms were completed or even asked for. If "computer said yes" the consumer got the money.
And of course, the other Banks were doing the same thing. Afterall if they didn't they wouldn't get new customers and would lose that all important market share.
Your story is sad but not surprising.
After doing a bit of reading here and there (e.g. Murray Rothbard's The History of Banking) I've come to realise that the banks' behaviour (and by extension, their customers' behaviour too) is rooted in the very financial system itself.
It's a system that is actually built on debt. For each - say - £1 of actual money in the system, banks are allowed to lend out ten times as much. So 90% of money doesn't actually exist, even on paper. A bank will lend money that doesn't exist, so that it can earn interest on the loan. The interest doesn't exist either, but that's someone else's problem some way down the line. Let's just pick up the bonus and enjoy the party while it lasts.
A friend of mine is a bank manager. He often used to tell tales of how his job was to get people into debt, and the more debt generated, the more he would be rewarded. No wonder the banksters are so maligned these days! My biggest concern now, is the burgeoning payday loan companies, and their excessive rates of interest. Kids need financial education at school, and the sooner the better. In our local High Street there is a Payday loan company, a Hire Purchase furnishing shop, and one or two shops where you can trade goods for cash. A little further along, there is a Credit Union, where the interest rates are reasonable, and the staff are friendly, and not motivated by greed. I would like to think that the Credit Union will eventually get the upper hand, but I suspect that it never will, because people are generally so poorly informed, and so easily duped by a bit of advertising razzmatazz.
You're totally right Amanda, but I think the school system is probably too politicised to do a proper job of educating children about how the financial system really works. I think parents should educate themselves, and then pass it on to their children.
Yeah Amanda I gotta say the financial education is really lacking in schools. It was proven perfectly when I was at a family members house the other day. Over dinner my cousin, who is studying law at a prestigious university asked, "How do credit cards work?"
She didn't know anything about them but was interested because she'd just received an offer through the post offering her one and she liked the option they gave her of being able to choose the design on the card face etc.
Really I think it's up to parents to educate their kids so they don't get screwed. Like you mentioned above, there are so many more avenues for people who don't know what they are doing to get humped.
A lot of people think the Bank is on their side. It's important to understand the person at the Bank is just a salesman now. He's not your buddy or your friend. His job is to get money out of you. He doesn't care if this will make your life hard for the next 10 years. All he's thinking about is keeping his boss off his back for another day for selling enough and the bonus he can get if he meets all his targets.
You wouldn't believe anything the used car salesman says to try and sell you a duff motor. It's the same thing with the banks.
This all sounds so familiar to me. In the early 90's I worked for Mercantile credit, of whom Barclays bank was the parent company. All the sales staff at the time were pressured to push PPI, because the company made a whopping 55% profit on the product, in addition to the interest payments from the loan, and interest that was charged on the product itself (because the finance was given up front for the PPI)
Sales staff were told that they couldn't 'force' the product on the customer, but more often than not the loan application would be declined if the customer did not opt for PPI. They were then often told by the underwriters that "because of their individual circumstances the application had been declined. However, should you wish to reapply for the loan with the inclusion of PPI, then an underwriter would look more favorably at the application."
Noweadays we have pay day loans, with an APR above 1000%. Scandalous.
Good one. That is about what it is. Great post voted up.
Bars may open or close, bankers may issue AA bonds (A-ctive A-lcoholics bonds) or not. As long as there are alcoholics on this planet, there will exist vinyards and breweries and destilleries. So where is the problem ? :-)
I got a kick out of this clever way of making the point. It made me smile as I have my morning coffee. On a serious note, though, it does occur to me that there's another story; and that is the fact that at this late stage in the history of the world (or at least in developed countries), the root of why there are so many "alcoholics" (metaphorical ones or otherwise) without jobs and/or adequate income in the first place remains so inadequately understood by so many (including so many who incorrectly believe they have all the answers).
If all those people who had reason to flock to Helga's bar had been too busy being involved in making their income and too whole to want/need to drink quite so much; a whole lot of the problem wouldn't have happened in the first place. BUT, we live in a world where business and technology have brought developed countries so far, a whole lot of people have come to value those things so highly that the problems that take root in families and schools are often things people don't even connect/associate with problems in an economy.
Over here in the UK we have become a society of addicts, whether it is chemicals, food, shopping, porn, video games or whatever.
I'm no great lover of organised religion, but with so much break down occurring in family units, many people without a supportive family or any support from an institution like a church are looking to fill the gaping holes in their lives.
Apart from the personal tragedy, this is bound to impact on the economy as we have many people who are physically able but have problems with drink, drugs, gambling, alcohol etc who can't work. And many more who may have jobs, but are not working to anything like their full capacity. There was even a teenager in the paper a few days ago who was taken to hospital weighing 68 stone - what a waste of a young life as even if she loses weight she has lost so many precious years of her youth?
Crazy world out there. Thanks for the explanation. Sounds vaguely familiar across the pond.
You shouldn't be fooled into thinking ordinary people are responsible for the financial crisis. The blame lies squarely with the financial sector and those responsible for regulating it.
There has been a huge attempt to deflect blame in this issue. It is reckless gambling by brokers plus greed. It is not down to Joe Average taking out the mortgage he was sold by guys trying to make a fast buck.
When you look at the way things are going and have seen examples of projects that EU money has been squandered on in the past, you cannot help but wonder how it can turn things around and resolve the current and future problems.
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