The Mortgage Meltdown Explained….
by Tom on June 13, 2009
in Market Musings, banks
I’ve read this explanation in other places before, but it really explains it well. So, I’m taking the liberty of reposting it in it’s entirety….
Getting Drunk And The Mortgage Meltdown | Mortgage Sales and Marketing Blog
The financial crisis explained in simple terms:Tom is the proprietor of a bar in Las Vegas.
In order to increase sales, he decides to allow his loyal customers – most of whom are unemployed alcoholics – to drink now but pay later.
Tom keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around and as a result increasing numbers of customers flood into Tom’s bar.
Taking advantage of his customers’ freedom from immediate payment constraints, Tom increases his prices for wine and beer, the most-consumed beverages.
His sales volume increases massively.
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Tom’s borrowing limit.
He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS.
These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed.
Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Tom’s bar.
However they cannot pay back the debts.
Tom cannot fulfill his loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.
The suppliers of Tom’s bar, having granted him generous payment due dates and having invested in the securities are faced with a new situation.
His wine supplier claims bankruptcy, his beer supplier is taken over by a competitor.
The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on the non-drinkers.
Finally an explanation I understand . . .
