Financial Risk Manager

Ways of Financial and Risk Management

Global Economic Crisis Explained in Simple Analogy

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Phajja is the proprietor of a Siri-Paya and Nehari Shop in Lahore. Sales are low and, in order to increase them, he comes up with a plan to allow his customers to eat now and pay later. He keeps track of the meals consumed on a ledger. Word gets around and as a result increasing numbers of customers flock to Phajja's shop. Phajja's suppliers are delighted and are very willing to sell more and more raw materials for the meals he prepares. Phajja shows them his ledger of receivables and they extend him credit.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and gives Phajja a credit line and then increases Phajja's borrowing limit. Taking advantage of his customers' freedom from immediate payment constraints, Phajja jacks up the prices of his Nehari and Siri-Paye. Customers dont mind as they are not required to pay on the spot. Sales volume increases massively; Banks and suppliers lend more; Phajjaopens more outlets. He sees no reason for undue concern since he has the debts of the customers as collateral. At the bank's corporate headquarters, expert bankers recognize Phajja's customer loans as assets and transform these customer assets into BONDS. These negotiable instruments are given exotic names suchas SIRI-BOND, PAYA-BOND, MAGHAZ-BOND AND BONG-BOND an so on.These securities are then listed on the Stock Exchange and traded on markets worldwide. No one really understands what the names mean and how the securities are guaranteed but, nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a credit risk manager of the bank decides that the time has come to demand payment of one of the debts incurred by Phajja. Phajja, in turn, asks his clients to pay up. One by one they refuse; the clients cannot pay back the debts. Phajja refuses to serve them any more. The clients stop coming. Phajja is really screwed now. He cannot fulfill his loan obligationsand therefore claims bankruptcy. All Bonds drop in price by between 80% to 95%. The suppliers of Phajja, having granted generous payment due dates and having invested in the securities are faced with similar problems. The meat supplier defaults on payment to the sheep and cattle supplier and claims bankruptcy. The atta supplier is taken over by a competitor; Phajja lays off the cook and staff. Bankruptcies soar, unemployment mushrooms.

The bank that lent the money in the first place is set to collapse. It is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties with Phajja commuting back and forth in his Executive jet and Mercedes 500SEL, brokering the deal.The funds required to save the economic collapse are obtained by a tax levied on the citizens, most of whom do not eat Nehari or Siri-paye.


posted @ 10:33 AM,


At March 23, 2009 at 2:16 PM, Anonymous Anonymous said...


At March 27, 2009 at 2:42 PM, Anonymous Anonymous said...

It seems a good analogy but it is the cradle of the economic system. In Pakistan when this practice is not honored, then you have others who fall in the category below:

You are a landowner, industrialist in Pakistan. You invest in hiring thugs, criminals, and bribe the corrupt and outlawed government officials. you become a reputable and honorable persnality by having a fleet of Pajeros, Prados and several kalanshikoves. Here you ask your patrons and borrow huge sums form the banks guaranteed and influenced by your corrupt friends. You transfer money to Dubai, Europe and other unknown destinations of small Caribbean Islands.
You buy a home abroad and move your family memebrs one by one. Then you stay in Pakistan to contest elections. You win or your firneds, you get the loans, written off. You start a new again.
So, Phajja system is better or the Cultural corrupt system. It seems the phajja story is written by some so called economic consultant on the payrole of some corrupt officials.


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