Yesterday a big Yellow Freight delivery truck (way big) pulled up in front of the house and the nice delivery man wanted to drop off two pallets of books, (value $80,000). In fact, all I was supposed to receive were 3 text books. I’m not certain of the value of these books, but a fair market price would be $90, or about $30 a piece.
Wow. $80,000 worth of books. My neighbor is standing outside and says, “wahoo. garage sale.”
“Nah.” I say. “I really only have rights to $90 in books.”
But, my imagination takes off. She’s so right. In fact, if you break these pallets of books up and sell them individually, a conservative estimate of the books’ value would be $112,000 (with the standard 40% mark up).
She leaves for work and I decide it wouldn’t be fair for me to actually sell
the books, they aren’t mine. But I can act like the big boys, I can take a loan out against this asset I am holding just like the bank takes out loans on other people’s savings accounts. That’s not theirs either. Since I am holding the books on pallets in my driveway, I go to the local bank and take out a loan against this asset. The banker makes commissions on the size of the loan, not on my ability to pay the loan back so he says, “that’s a Class A asset, you have the books in your possession. When are you planning this garage sale?”
“Dunno.” I answer, honestly. “I don’t actually own the books. I’m kind of book sitting.”
“That’s okay,” says Mr. Banker. “If you did own the books, you think you can unload them in say 5 years?”
“Sure.” I answer, thinking five years is a long time and heck, it’s only 500 lbs of books. That’s only 100 lbs a year, that would be reasonable. If the books were mine. My neighbor would help and we’d all make out.
“Kewl,” says the banker. “Tell you what, I’m going to loan you $150,000 on those books because the price of books is going up and you’d probably be able to sell them for more than you are thinking. You just pay us a little every month on the interest.” Mr. Banker gets a healthy commission and I have $150,000 in my checking account. Meantime, by this time the shipper has realized its mistake and collected the books.
But I’m so excited, I pay bonus’ to my cats and dogs and still have lots left over. I go to Bank B. I say, look I’m rich. I have all this cash. I want to borrow money for a boat and a car and some new shoes. Bank B extends these loans to me by borrowing against my neighbor’s savings.
Meantime, Bank A takes my loan and places a mature value on the loan of $500,000 (asset plus interest for 5 years). Bank A bundles my loan with a bunch of other people’s loans on temporary assets sitting in driveways around town and wow, that adds up to say, $5 million. So, they take these dollars and buy stock in the company of my neighbor’s employer.
After they have purchased a lot of this stock, at first it drives up the price. Then people start to spread rumors that the stock really isn’t worth so much, so Bank A goes back into the market and bets that the stock will fall. Banks B and C see what Bank A is up to and even though they don’t really own any shares of this stock, they decide to bet that the stock will fall, too. The stock falls. The bets pay off. They pay big bonuses to the traders.
Time passes. I answer the phone and it’s the bank. “You know that loan?”
“It’s time to pay up.”
“Mmmm. I spent the money. And I have all these other loans I took out using the money you gave me as collateral, and I’m a little over extended.”
“Uh oh. We’re over extended, too. Oh, well, time for that garage sale. Just sell those books you used to secure the loan.”
“Well, I didn’t really OWN those books. I told you that. They were just parked in my driveway.”
“And, they’re like, gone. You know. You want to take back the shoes?”
“Shoes are a depreciating asset. You owe us $500,000.”
“I thought I owed you $150,000.”
“That was before we sold the loan as a derivative asset for $500,000 to Bank B and they used that as collateral for this $5 million loan we took out to buy stock in your neighbor’s employer.”
So, my neighbor loses her job because her company can’t make payroll. The banks have cut off the company’s credit because the stock fell. She goes to her savings account to take money out to pay her house payment, car payment and for her kid’s braces and her bank says, “not only can we not give you your money because we used it for collateral and loaned too much money to the lady with the books in her driveway. BTW, would you mind chipping in to pay for the losses on her books?”
My neighbor is a little annoyed but says, “$90? Sure, I’ll chip in. She’s good for it. Can I have my money now?”
“Not exactly,” says the bank. We need you to chip in at least $500,000 for her and we might as well clean up all this other debt, too. Can we have $5 million to recapitalize the bank? Come to think of it, we may need $6 million. All those bonus’ and commissions, you know. Don’t ask me to explain how this happened, I don’t understand it myself. Very complicated. Everybody’s going to have to pitch in and if you don’t? This is a very fragile situation. You’ll never get another job or be able to pay for those braces for your kid.”
“Wait a minute!” My neighbor is extremely annoyed now. “You loaned her $500,000 on a $90 asset? Are you nuts?”
“She’s irresponsible. What can we say. We actually only loaned her $150,000. But that’s beside the point. That debt is now up to $500,000 and we need your help. It’s too complicated for you to understand.”
“Understand this. I’m unemployed. And you want me to pay $6 million dollars for an asset that’s worth $90? There ain’t a garage sale in the world gonna make that kinda money.”
This entire scenario flashes through my mind as I explain to the Yellow Freight delivery guy that he has to take the books back.
My neighbor keeps guns in the house.