Wednesday, October 13, 2010

Actually, We Aren’t All in This Together – the rest of the story (for accountants only)

(accountants recap)

It is hard for one to gauge the size of the bubble that Sam created if one only listens to the reactions from the story’s participants.

Sam’s fortune was immense. Before its demise it was valued at 10 trillion dollars.

When Sam came wandering in, there were 10 bars in town. As Sam started to buy drinks at Bernie’s the other bars were immediately forced to close. Very quickly Bernie’s bar, like any other business that is subsidized by a disinterested entity, learned to raise it prices. Toward the end well drinks and beer were going for upwards of $10,000 a glass. But since there was no cost to the patrons, most drank the finest Champagne at $100,000 a glass even if they liked beer better.

Of course it is needless to say that billions of dollars of alcohol made its way out the back door to be resold in other towns, states and countries. This black market employed tens of thousand of people. Billions, perhaps trillions of dollars of income went untaxed.

Bernie’s bar ended up enveloping 4 square miles of the downtown area and could serve 300,000 people in an evening. So at the peak of the bubble, tens of billions of dollars could run through the bar in a night.

Obviously US Dollars could not be used to handle the transactions so everything was handled through credit with Sam’s expenses being sent directly to Ms. Bair’s staff of 1,000 accountants and wire transfers going back to the creditor’s offshore bank accounts.

With the growth of an economy than ran on debt, high interest was a necessity. 100% a week was not uncommon.

The town could be compared to gold rush Dawson City on steroids. Gas was $1000 a gallon, a meal in a restaurant was $10,000 and a room at one of the 1000 hotels in the area went for $50,000 a night.

Many that lived outside the 100 square mile area of easy commute while tipsy chose to move closer to the bar.

At the peak of the bubble this real estate had no value. There were not enough zeros on any number that could purchase a square foot of land.

As that is how it was sold.

Ms. Bair and Mr. Hoenig continually tried to get Sam to understand the enormity of what was happening.

Mr. Hoenig never did accept a free drink. But one must not feel empathy as his bank was making profits of $100 billion a year.

Mr. Hoenig could clearly see the problem and sold his loans to speculators before the bust for 500 cents on the dollar. Today of course all these loans are worth nothing.

Presently his bank is the only healthy one in the area.

Klugman never sensed that anything was wrong until the very end. His economic forecasting business still thrives.

Mr. Volcker is the only person in the story that never changed his lifestyle before, during or after the crash.

He continues to feed the birds in the park and enjoys going to work every day.

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