Tuesday, November 4, 2008

Satire: How to get Bankrupt?

Funny but true:
Once there was a little island country. The land of this country was thetiny island itself. The total money in circulation was 2 dollars as therewere only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land.B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country,and land is non producible asset, its value must definitely go up. So, heborrowed 1 dollar from A, and together with his own 1 dollar, he bought theland from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.* B sold his land and got 2 dollars, so his net asset is 2 dollars.* C owned the piece of land worth 2 dollars but with his 1 dollar debt toA, his net residual asset is 1 dollar.* Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regrettedhaving sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2dollars from B and acquired the land back from C for 3 dollars. The paymentis by 2 dollars cash (which he borrowed) and cancellation of the 1 dollarloan to C. As a result, A now owned a piece of land that is worth 3dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.* C now has the 2 coins. His net asset is also 2 dollars.* The net asset of the country = 5 dollars. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own theland. So he bought the land from A for 4 dollars. The payment is byborrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His netasset is 2 dollars.* B owned a piece of land that is worth 4 dollars, but since he has a debtof 2 dollars with C, his net Asset is 2 dollars.* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country hasonly one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey,what if the land price stop going up, how could B repay my loan. There isonly 2 dollars in circulation, and, I think after all the land that B ownsis worth at most only 1 dollar, and no more."
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.* B owed C 2 dollars and the land he owned which he thought worth 4 dollarsis now 1 dollar. So his net asset is only 1 dollar.* C has a loan of 2 dollars to B. But it is a bad debt. Although his netasset is still 2 dollars, his Heart is palpitating.* The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country ? Of course, beforethe bubble burst B thought his land was worth 4 dollars. Actually, rightbefore the collapse, the net asset of the country was 6 dollars on paper.B's net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2dollars bad debt to B, but in return he acquired the land which is worth 1dollar now.
* A owns the 2 coins, his net asset is 2 dollars.* B is bankrupt, his net asset is 0 dollar. ( he lost everything )* C got no choice but end up with a land worth only 1 dollar
* The net asset of the country = 3 dollars !!!?

1 comment:

Anish Goyal, India said...

good one!
thankfully they didn't indulge in securitization or good and bad mortgages!!

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