The Tribune

By SIMON COOPER

Res Socius

THERE’S a story doing the rounds that bears repeating. The location is a small town somewhere. It begins when a bar owner (let’s call her Helga) discovers her business is sinking because the economic downturn has turned her customers into unemployed alcoholics. She comes up with a great new idea she calls her “drink now, pay later” plan. Her bar is soon full again. Her suppliers are delighted. She keeps track of sales though a ledger.

Helga discovers she has created infinitely elastic demand. She can increase her prices until they are the highest anywhere in town and still attract more customers. In no time at all her turnover exceeds all the other bars put together. She takes over the shop next door and hires more staff.

A bright spark at Helga’s bank knows business talent when he spots it. He decides that Helga’s debtors book makes perfect collateral as future assets for a larger overdraft. His reward is a six-figure bonus. Helga’s is her ability to increase her stock and to sell even more drink on credit.

Strategists at the bank’s headquarters convert the collateral against Helga’s overdraft into Drink Bonds that they trade on world security markets. This earns the executives huge commissions. The bonus cash-register cranks out a few more millions.

Drink Bonds investors are exquisitely happy because prices keep on growing exponentially. Even if they knew they owned the debts of unemployed alcoholics they wouldn’t be all that concerned. After all, hadn’t they been assured they were ‘AAA Secured Bonds’ by somebody? Within weeks, Drink Bonds are in such high demand that the bank runs out of stock and rewards all its traders with six-figure bonuses, too.

The risk manager at Helga’s bank becomes concerned she is over-extended. He orders her to call in all her loans (he is unaware of the broader implications). The borrowers are still unemployed alcoholics and can’t help her. She goes bankrupt. The bar closes. All staff are laid off without compensation, and join the unemployment queue. The landlord has his own cash flow crisis to deal with.

The news hits the financial markets badly. Drink Bond prices fall by 95 per cent overnight. The bank’s liquidity is severely affected. It is forced to freeze credit arrangements and refuse all new loan applications. The economy of the small town it serves begins to slow down further.

Helga’s suppliers have their own problems. She went bankrupt owing them large sums of money. Moreover, the biggest one also invested their firm’s pension funds in Drink Bonds, too. The wine supplier that had been in business for three generations closes down. A competitor takes over her beer supplier and trashes 150 jobs for all the right reasons. The unemployment queue grows longer.

Helga’s bank and their broker network find themselves in serious financial difficulty after the markets blacklist them. Fearing a financial market meltdown, the government provides multi-billion dollar cash injections with no strings attached. All the executives keep their jobs. In fact, they get six-figure bonuses for negotiating the bailout.

Years later, economists discover that the cash injection was funded by a new stealth tax the government levied on employed, middle class workers like you and me that nobody noticed at the time. Does this make the reasons behind the financial crisis clearer? Animal Farm rules. Okay?

NB: Simon Cooper is a founding partner of Res Socius, a business brokerage firm and businesses for sale directory service. Res Socius is authorised by the Bahamas Investment Authority to facilitate the sale and purchase of businesses and provide consultancy services. Contact 376-1256 or visit www.ressocius.com.