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Dummies guide to what went wrong in Europe

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 DRINKBONDS. These

"securities"  are then bundled and traded on international securities



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



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, 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 Helga'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.


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?