Understanding the Current World Financial Situation

From My InBox:

A simple explanation for the present financial crisis - the Indian way.....

Once upon a time in a village in India , a man announced to the villagers that he would buy monkeys for *$10.*

The villagers seeing there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at *$10*, but, as the supply started to diminish, the villagers stopped their efforts.

The man further announced that he would now buy at *$20.* This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms.

The offer rate increased to* $25 * and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at *$50*! However, since he had to go to the city on some business, his assistant would now act as buyer, on his behalf.

In the absence of the man, the assistant told the villagers:
'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at *$35* and when he returns from the city, you can sell them back to him for *$50*.'

The villagers squeezed together their savings and bought all the monkeys.

Then they never saw the man or his assistant again, only monkeys everywhere!

* Welcome to WALL STREET...........*



The story is not complete, so I have added 2 episodes:

The real situation is actually more complicated. Had the transactions been confined to physical real monkeys, one could do a physical estimate and expose the con. The smart assistant (he went to Stanford) sold monkey futures to the villagers. Say he sold a contract for a future sale of 10 monkeys to be delivered in 2 weeks at $20 per monkey = $200. But there is no physical delivery in a future contract. Since the villagers expected the price to rise to $50, $20 is a real bargain. That $200 future monkey purchase contract would be worth $500 in 2 weeks. The assistant could sell any number of futures without reference to the actual population of monkeys. There was no need to sell real monkeys from the cage. When the con is exposed the villagers will be left with the original real monkeys and investors in futures with reams of paper.

And the assistant's brother-in-law was even smarter (he went to Harvard). He issued monkey bonds paying 5% pa (compared to the 1% pa from an old fashion bank). The money would be invested in another forest 100 miles away where there had been sightings of, on the average, 50 monkeys daily over the last 30 days. This information was passed on to a rating company. The young punks in the rating company then assumed that if there would be a daily harvest of 50 monkeys, then the expected income would amount to $912,500 (= 50 x 365 x $50). After deducting $100,000 for his profit, he would have $812,500 which could service total bonds of $16,250,000 at 5% pa.

Being a prudent person, the assistant's brother-in-law only expected to issue bonds of $11,000,000 in aggregate. Wow! That's very safe and the bond deserves a triple A rating subject to a fee. Of course, there has to be some risk. So there is a term in the monkey bond that made it worthless should a 'credit event' occur, 'credit event' being defined as anyone of the following: complete extinction of the monkey species, three monsoons in a row in India or DBS Bank becoming insolvent. Now any banker worth his MBA knows these would not happen. So off the banker went to sell $11,000,000 worth of bonds to retirees who were greedy enough to believe the banker's "It's very safe" story.

Of course, we now know that the assistant's brother-in-law disappeared along with the assistant, having pocketed $10,000,000 after deducting say, a million dollars to the banker.

Now the central bank says, "Caveat emptor, mate!"