Banks and Bankers..

I was trying to explain the financial sector to my daughter last night and my explanation went like this...

Suppose you give me a million pounds and say, "Invest this profitably and I'll pay you well."

So I go out onto the street and hand out cash randomly to passers-by. I give everyone I meet ten thousand pounds each. In return, each scribbles out an IOU for £20,000, payable in five years.

I then come back to you and say, "Look at these IOUs. I have generated a 20% annual return on your investment." You, in return, are very pleased and pay me an enormous commission.

So now I have a large pile of IOUs, which I now call my 'assets'.

So I use these "assets" as collateral to borrow even more money. I then lend this out to even more people or sell them to others like myself who do the same. I also buy insurance to cover me in case the borrowers default and I pay for this with the same IOUs (or assets).

And so it goes on, with each new loan becoming somebody's asset on which to borrow yet more money.

So I make a huge bonus as the total face value of all the assets I've created is now fifty times that of the original £1m

But then one day, the first batch of IOUs becomes due.

But the person who scribbled his name on the IOU can't it pay off right now. And in fact, lots of the borrowers can't.

So, I try to hush this up for as long as possible, but soon everyone get suspicious and you want your original million pounds back.

I try to sell the IOUs and their derivatives that I hold, but everyone else is suspicious too and no one buys them. The insurance company tries to cover my losses, but it can only do so by selling the IOUs I gave it.

And so finally, the government steps in and buys up all the IOUs, bails out the insurance company and everyone else holding the IOUs and all the derivatives stacked on them.

Their total value is way more than a million dollars now but I and my fellow entrepreneurs retire with our profits and everyone else pays for it.