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Goose egg: a parable

Andy is a genetic engineer who has managed to develop a goose that actually makes golden eggs. As with all mutations, there are issues, and due to bizarre replication errors, it turns out that the geese don't actually lay the eggs, but keep them stored inside like tumors, and to retrieve the eggs, you have to wait a year until the goose dies and cut them open. At that point, you will have exactly $2000 in gold eggs from each goose.

Andy is selling these geese at a price of $1 million for 1000 geese. The minimum is a 1000-goose lot... Andy has a lot of geese.

Barry has $1000 to invest. He really likes the golden goose idea, because he could basically double his money, but Andy won't sell the geese in less than lots of 1000. But Barry is an astute investor, so he goes to Charlie.

Charlie is an investment banker. Barry asks Charlie to loan him $999,000 so he can buy the geese as an investment. Charlie is a little nervous about lending that much out for what is essentially an unsecured loan, but Barry has recieved an insurance note from his friend David who promises to back up the loan if something happens. Charlie is assured, and he loans the money to Barry, who buys the geese from Andy. Because the loan is guaranteed, Charlie only charges a small amount of interest, so Barry will pay Charlie $1 million back total: his $999,000, plus $1000 interest.

Now Barry is in the position where he stands to make a million dollars profit: in a year, he'll make a million bucks free and clear.

But now David is interested in his own goose-egg investment. All of his assets are tied up in other investments, so he goes to Charlie to take out a similar loan, and gets the same amount and same rate and so on. But when it comes time to insure the investment, David thinks "hey, I'll talk to my good friend Barry, he owes me one". And Barry, knowing that he stands to make a million bucks in the next year says "sure, I'll back up that investment", so Charlie is happy, and makes the loan to David who then buys his own goose farm.

Everybody is happy.

Until the virus hits.

Suddenly all of those geese are getting sick. The egg production gets screwed up, and only a third of the final expected egg harvest comes through. Instead of the expected $2 million in gold, Barry only has $666,666.67.

Barry's loan comes due. He's over $333k short and can't pay it back, so Charlie calls in the insurance marker from David. Well, of course, David has his own problems with his own geese, and himself owes his own $333k to Charlie. And since Barry and David each guaranteed each other's loans, they're each on the hook to Charlie.

Nobody will buy the geese at top price anymore because they're sick, so the price drops to $250 each. Even if Barry and David could sell all of their geese, they still wouldn't have enough to pay back their loans, and end up owing Charlie something like $83,333 each. Barry and David end up going bankrupt leaving Charlie holding a big-ass chunk of debt and a couple thousand sick geese.

Charlie calls up his uncle and says "Hey, I got burned by some deadbeats, and it's really cutting into my bottom line. I could really use some financial help here."

Now Charlie's Uncle Elephant and Aunt Donkey bicker a lot about money, but they really want Charlie to be happy because they know that when they're old and need to retire, Charlie will take care of them.

So they pony up money to buy the sick geese from Charlie at $700 each. Charlie is happy because he no longer has to deal with cranky sick geese, and even though he's a little miffed that he's losing $300 on each goose from their original market value (and writes this off as a loss of $600,000), he's at least infused with lendable working capital again, and has a little more "elbow room" to weather any future calamities:

Barry paid back $666,666.67
David paid back $666,666.67
Uncle paid out $1,400,000.00

Charlie now has $2,733,333.34 available to lend. He hasn't made money, since all of that infusion isn't profit, but capital.

Uncle Elephant and Aunt Donkey now have a bunch of sick geese, but they believe that an antidote will be found and the geese will eventually return to full egg production.

Question: who is to blame for the catastrophe?



( 6 comments — Leave a comment )
Oct. 1st, 2008 10:00 pm (UTC)
Answer: Aunt Donkey and Uncle Elephant, since they made the rules about who can lend and who can insure.

Also, Charlie, since Charlie spent more than a little bit of money himself on lobbyists, who convinced Uncle Elephant and Aunt Donkey that he didn't need any of those bothersome regulations telling him who he could lend to and how he should spend his money.
Oct. 1st, 2008 10:08 pm (UTC)
According to people like Christian Civil League of Maine Executive Director Michael Heat the problem is very likely god's anger at teh gays. But I think I have beaten that point enough for one day.

The problem as I see it is that Charlie allowed Barry and David to insure each-other with the same investment as collateral. And that Aunt & Uncle bailed him out rather than let him have only $1,333,333.34 to lend and taking the deduction on the lost of $66,6666.66.

Although, I am not sure I follow the analogy of Barry and David insuring each-other in the current situation. And because I have been in far too many meetings today: I am not saying that it is not correct; I just cannot resolve the analogy right now.
Oct. 2nd, 2008 01:22 am (UTC)
Question: who is to blame for the catastrophe?

Adam Smith.
Oct. 2nd, 2008 01:41 am (UTC)
I couldn't tell you who's to blame, but I don't think buying insurance is the answer. Who's going to bail out the insurers?
Oct. 2nd, 2008 12:12 pm (UTC)
The geese. How dare they get sick before their gold tumors are ready to harvest? They should realize that they aren't supposed to die until later.
Oct. 2nd, 2008 02:33 pm (UTC)
Barry and David for investing in something that they could not really afford, hedging bets that things will go well.

And to Charlie for allowing them to borrow the money.
( 6 comments — Leave a comment )

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