Goldman Sachs and the Bailout

Paddy is the proprietor of a bar in Dublin. He realises that virtually all of his customers are unemployed alcoholics and, therefore, can no longer afford to patronise his bar. To solve the problem he comes up with new marketing plan that allows his customers to drink now, but pay later. He keeps track of the drinks consumed in a special ledger (thereby, effectively issueing his customers with loans).

Word gets around about Paddy's 'drink now, pay later' marketing strategy and, as a result, increasing numbers of customers flood into Paddy's bar. Soon he has the largest sales volume of any bar in Dublin.

By providing his customers freedom from immediate payment demands Paddy gets no resistance when, at regular intervals, he substantially increases his prices for wine and beer, the most consumed beverages. Consequently, Paddy's gross sales volume increases massively. A young and dynamic vice-president at his local bank recognises that these customer debts constitute valuable future assets and increases Paddy's borrowing limit. He sees no reason for any undue concern since he holds the debts of the unemployed alcoholics as collateral ! !

At the bank's corporate headquarters expert traders figure out a way to make huge commissions, by transforming these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities were then bundled and traded on international securities markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the 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 houses.

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 of the debts incurred by the drinkers at Paddy's bar. He so informs Paddy.

Paddy then demands payment from his alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Paddy cannot fulfill his loan obligations he is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by over 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Paddy's bar had granted him generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off his bad debts and with losing over 90% of the presumed value of the bonds. His wine supplier also claims bankruptcy, closing the doors on a family business that had lasted for three generations; his 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 multi-billion dollar no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Paddy's bar.

Now, do you understand ?