Friday, February 12, 2010

on passing by- again

I am indebted to Tom O’Keeffe for the bones of the following, which I thought was too good not to share.
Derivative Markets: an easy explanation.
Sean owns a pub in Naas. As time goes on he realises that virtually all of his customers are unemployed alcoholics, and as such are no longer able to afford to patronise his bar with the frequency he would like. In an effort to safeguard his business Sean comes up with a new marketing plan that will allow his customers to have their drink now, buy pay later. He keeps track of the drinks consumed in a ledger, thereby in effect granting loans to all his customers.
It doesn’t take long for word to get around about Sean’s “ drink now, pay later” marketing strategy and as a result increasing numbers of customers flood into Sean’s pub.
Very soon Sean has the largest sales volume of any pub in Naas. By providing his customers with freedom from immediate payment demands, Sean gets absolutely no resistance from customers when, at regular intervals, he substantially increases his prices for wine and beer, the most consumed beverages. As a result of these increases Sean’s gross sales volume increases massively.
A young and dynamic manager at Sean’s local bank branch recognises that these customer debts now constitute valuable future assets and offers to increase Sean’s borrowing limit. The bank manager sees no reason for any undue concern as he has the debts of the unemployed alcoholics as collateral.
At the banks corporate headquarters notice is taken of Sean’s position and expert traders transform the customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These bonds, or as they now are, securities, are bundled and then traded on international security markets. Naive investors don’t really understand that the securities they are spending their money on are actually the debts of all Sean’s unemployed alcoholics. Nevertheless, the price of the bonds continues to climb, and as well as attracting ordinary investors they soon become the hottest selling items for some of the countries leading brokerage houses.
One day, however, even though the bond prices are still climbing nicely, a risk manager at the original bank branch decides that the time has come to demand payment on the debts incurred by the drinkers at Sean’s bar. He so informs Sean. Faced with this demand Sean is forced to demand payment from his alcoholic customers, but being unemployed alcoholics they are not in a position to pay back their debts. As Sean cannot now fulfil his loan obligations the bank forces him into bankruptcy. The pub closes and the eleven employees lose their jobs.
When this happens the value of the original DRINKBONDS, ALKIBONDS and PUKEBONDS drop in value by over ninety per cent overnight. The collapsed bond asset value destroys the liquidity of the bank, thus preventing it from issuing new loans, thus freezing credit and economic activity in Naas. Because Sean’s business had been going so well his suppliers had all given him generous payment extensions. Not only that but some of them had even invested their firms pension funds in the bonds. Now they suddenly find themselves faced with having to write off all Sean’s bad debts, and with losing over ninety percent of the presumed value of the bonds. Sean’s wine supplier is also forced into bankruptcy, closing the doors on a family business that had endured for three generations. Sean’s beer supplier, now also facing ruin, is taken over by a competitor who promptly closes the local plant and lets go 150 workers.
So, disaster all round. Well not quite all round. Fortunately enough the bank, the brokerage houses and all their high flying executives are saved and bailed out by a multi billion euro, almost no strings attached, loan from their dear friends in Government. Ah, I hear you ask, how can we afford all this. It’s actually quite simple. The Government will obtain the funds for the bailout from new taxes levied on employed, middle class, non drinkers who have never even been in Sean’s pub.
See, it’s really really easy to understand.

I had intended to bring you an update on the KTK committee after the meeting on December 9th. Unfortunately I have nothing new to report as the meeting has been, yes you’ve guessed it, postponed.
However there is one thing I wanted to point out. I haven’t seen the minutes of the CDA AGM but one item in last month’s Bugle report referred to the non movement on KTK funds and said that funds which had been promised had not been forthcoming despite a lot of effort being made. As a member of the Liaison Committee and having attended all the meetings I am unaware of funds ever having been promised for this application. I do know that there was a lot of toing and froing over many months trying to get proper costings etc and there were some delays due to a change of personnel on the CDA. Earlier in the year I wrote to a member of the CDA after they had contacted the Council saying they had been told that getting the funding was a formality to assure them that I was not aware of this. Hopefully the new year should see some progress on their application.

I haven’t really had time to properly digest the Budget but I was definitely expecting it to be a lot worse then it appears on the surface. Most of what was in it seems to have been well flagged in advance. I am at a loss to understand how FAS need more millions considering the amount of money they were able to waste when we had full employment. As per usual the devil will be in the detail and I am sure there will be a few little surprise stealth taxes in the small print. My main worry would be that Mr Lenihan hasn’t gone far enough and we will have an even bigger problem this time next year. People had geared themselves up for a really hard hitting budget with the expectation that we would take this one massive hit and then we would start to see some progress but if this is not enough what happens then. His assertions that we are on the way out of recession ring a bit false to those who have lost their jobs, or are looking at large drops in their earnings, especially as most of these people had little or nothing to do with the reasons for our current troubles
Finally I would just like to wish all of our readers, contributors and advertisers a very Happy Christmas and a better New Year.

All for now. Mike Edmonds Dec 09.

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