Hard Lesson From the Barrak Bar
Barrak is the proprietor of a bar. He realizes that a growing number of his customers are unemployed alcoholics and can no longer afford to patronize his bar. To solve this problem, he comes up with a new marketing plan that allows his customers to drink now and pay later. Barrak keeps track of the drinks consumed and grants the customer's loans.
Word gets around about Barrak's "drink now, pay later" marketing strategy. The numbers of customers increase geometrically coming into Barrak's bar. Soon he has the largest sales volume for any bar in town. Customers are free from immediate payment demands, Barrak gets no resistance when he substantially increases his staff and prices.
Barrak's gross product volume increases quantumly. The local bank recognizes that these customer debts constitute valuable future assets and increases Barrak's borrowing limit. He sees no reason for any serious concern, since he has the debts of the unemployed alcoholics as collateral! At the bank's corporate headquarters, expert traders find a way to make huge commissions, and transform these customer loans into Alcolbonds. These "securities" then are bundled and traded on international securities markets.
Local Investors don't really understand that the securities being sold to them as "AA" "Secured Bonds" really are debts of unemployed alcoholics. Nevertheless, the bond prices continue to climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
Then it happened! While the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Barrak's bar. He so informs Barrak. Barrak then demands payment from the alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.
Since Barrak cannot fulfill his loan obligations he is forced in a flawed attempt to collect from the wealthy to cover his impending bankruptcy. The bar closes and Barrak's employees lose their jobs.
Overnight, Alcolbonds prices drop by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, freezing credit and economic activity. The suppliers of Barrak's bar had granted him generous payment extensions and had invested their firms' pension funds in the Bond securities. They find they are now faced with having to write off his bad debt and with losing over 90% of the phony value of the bonds.
Barrak's booz supplier also had to file for bankruptcy, closing the doors on a family business that had endured for five generations. His beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 120 workers. Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar stimulus no-strings attached cash infusion from the government.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who never entered Barrak's bar. What are the ethics in this case?
Now do you understand that we need to "raze" the bar and replace the bartender and proprietor?
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