Credit crunch explained in simple terms

I was sent this viral with an inexplicable German setting – but a very decent explanation of all the financial engineering. Alternatively or additionally, here’s a link the a very decent FT article today

Heidi is the proprietor of a bar in Berlin . In order to increase sales, she decides to allow her loyal customers – most of whom are unemployed alcoholics – to drink now but pay later. She 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 Heidi’s bar.

Taking advantage of her customers’ freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her 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 Heidi’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 Heidi’s bar.

However they cannot pay back the debts.

Heidi cannot fulfill her 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 Heidi’s bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her 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.

Here’s a pic of perhaps what Heidi might look like:

alcoholic by nottobefound


9 Responses to “Credit crunch explained in simple terms”

  1. 1 Dr. Florentin Fonche April 23, 2009 at 1:37 pm

    What really is a credit crunch?

    A credit crunch (also known as a credit squeeze or credit crisis) is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs).

    We are currently facing a severe one globally.

  2. 2 Chelsea April 9, 2009 at 11:47 am

    I think Heidi is well messed up. How stupid can u b 2 think that they wil have the money to pay back!?!?

  3. 3 JimBob March 12, 2009 at 10:18 pm

    Here’s what’s next for Heidi:

    To get out of the mess the government executes an ever more desperate series of measures: a) as they now own Heidi’s bar they force her to reduce her prices so that the alcoholics return and drink more, b) the alcoholics are offered cash from the government, not to pay down the bar tabs but to start parallel bar tabs – now at every bar in the city, c) they flood the city with alcohol and remove all the water so that the few people who had avoided alcohol in the previous rush now have no choice but to drink alcohol – bought on tick, and d) they debase the currency to such an extent that the entire debt owned to Heidi’s bar will no longer buy a box of matches.

  4. 4 C March 12, 2009 at 6:01 pm

    Ha, yep we got drunk alright, falling down drunk, and it’s going to be one long hangover.

  5. 5 M.IT March 12, 2009 at 11:45 am

    Perhaps you should add at the end of “After the risk manager decides …”: The bank also decides that from then on credit should only be extended to drinkers and to other banks investing in the drinkers if they can show that they are credit worthy. The drinkers and the other banks scream and cry.

    The bank CEOs call their former colleague the Treasury Secretary and they meet with the Next Treasury Secretary and “deduce” that, because the drinkers and the banks cannot get credit, there must be a worldwide credit freeze. Together, they whine to the president who decides that he should “chuck out” his principles….

  6. 6 aksteve March 12, 2009 at 8:41 am

    Heidi started it, its her fault. What a dumb bird loaning drinks to Alcoholics.

  7. 7 FedUp March 12, 2009 at 7:54 am

    All I know is that this financial crisis is directly traceable to the incompetence of GW Bush SOME alcohol must surely be involved.

  1. 1 An analogy for the real estate crash | Les Jones Trackback on March 12, 2009 at 6:43 pm
  2. 2 Ever had a viral? | David M Doolin Trackback on March 12, 2009 at 5:33 am
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