What Should the residents and elected representatives of Anytown, USA do about this Crisis?

Written by: Jim Neal on Oct 1, 2008 1:01 PM EDT

Mr. Banker owns the Wall Street Bank in Anytown, USA. The Wall Street Bank is the only bank in Anytown. Mr. Banker has invested most of his customers' deposits in high-yield securities. Those securities paid him high interest rates and made him a richer man.

One day, those securites began to fall rapidly in value as people defaulted on their mortgages. Suddenly, Mr. Banker's investments had fallen so far in value that he faced a loss of $190 million the $200 million in which he had invested in the Wall Street Bank. And residents of Anytown were beginning to rush to withdraw their deposits, fearing that the Wall Street Bank was longer a safe place to entrust their money.

Mr. Banker began running radio and television ads proclaiming "our economy will collapse, you will lose your jobs and your homes and won't be able to pay for your childrens' education. Remember what happend to Anytown 80 years ago when a bank failed!"

That scared the Mayor. He told the City Treasurer to make short-term loans to the Wall Street Bank while the Mayor and the City Council decided what to do.

The City Treasurer, who worked for the Mayor, agreed with Mr. Banker. He assured the Mayor that The City of Anytown could issue $190 million of bonds in order to buy the $190 million of bad investments Mr. Banker had made. "I know some smart money people right down the road in Nextown, USA and I can hire them to manage these securities. We can sell them later at a higher price. Prices always goes up, right?" he told the Mayor.

The Mayor rarely questioned the wisdom of his City Treasurer, much less take the time to reflect on his decisions. In no time the Mayor was saying "yes, yes, listen to my Treasurer. Watch Mr. Banker's interview on CNBC. Anytown's economy will collapse without the Wall Street Bank." The Mayor proposed to the City Council that it  approve the purchase of the Walls Street Bank's $190 million in bad assets. The Mayor insisted that the Council must grant his Treasurer the sole authority to manage those bad securites as he deemed to be in Anytown's best interest. He assured the Council that the Treasurer would keep them updated on what he was doing in a reasonable time after he had done it. And he also assured them that the City of Anytown would encourage Mr. Banker to ease the terms for residents who were struggling to keep their homes and that Mr. Banker's compensation would be scaled back.

The Treasurer felt that Mr. Banker deserved a chance to recover. Though some of the money people he knew in Nextown had also invested in some of the same securities which were crippling Mr. Banker, they had fared better overall. The Treasurer figured that he could probably negotiate a good deal and hire them for only about $2 million per year to manage the bad investments for him.

"Anytown's economy will collapse if we don't act" the Treasurer admonished the Council.

The Council knew that if it authorized the proposal, the $190 million of City of Anytown Bonds would would have to be repaid by the citizens of Anytown. The City of Anytown would have to raise its taxes and/or make major cuts in projects the Council had promised, like the construction of Anytown's new solar-powered municipal utility, the new Anytown Municipal Hospital and roll-out of a new health care program. Nonetheless many on the Council argued that "the cost of having Anytown's economy collapse is a risk we can't afford to take. We have to do something. After all, doing something is better than doing nothing, right?!"

It was an election year in Anytown and the elections were only a month away. Mr. Banker and his friends in Nextown had been the largest campaign contributors to many members of the Council. They were calling and calling the Council members and telling them that they must authorize the repurchase of the Walls Street Bank's $190 million of bad assets. At the same time, many of the Council members had concerns about how voters in Anytown would react.

The residents of Anytown were plain scared. They didn't understand what was happening and watching CNBC made them even more confused. They feared that the Mayor and the Treasurer might be right. On the other hand, they didn't like the notion that they should have to bail out Mr. Banker.  A few citizens, in fact, were pretty sure that if the Wall Street Bank closed, there were banks in nearby towns which would either assume ownership of the Wall Street Bank or open a new community bank. Others wondered exactly what was "the cost of doing nothing." Would doing nothing cost more than $190 million? And if so, was there a better way to protect them without bailing out Mr. Banker; why couldn't the Treasurer invest in the Wall Street bank in such a way that the City of Anytown, instead of Mr. Banker, would benefit the most if the Bank did recover? John Smith told his neighbors that's what Anytown, Sweden had done years ago in a similar crisis-- and it worked. John's neighbor Linda Jones had once worked at a bank, and even she felt that the proposal was so vague that the City Treasurer had too much power with their money.

Nobody seemed to agree or to be able to give them an answer which made sense. The only constant was panic...especially all those people on CNBC!

Mr. Banker was feeling a bit anxious but he was becoming more and more confident that the City Council and the citizens of Anytown were gripped by such panic that they'd come around and support the Mayor's proposal. He'd learned as a long-term investor in the stock market how so many people interpret the S&P 500 or Dow Jones daily ups and downs as some sort of statement about the future. And that's when he had made the most money: when the stock market was volatilve. A lobbyist Mr. Banker knew had called him the prior evening and reminded him that "Panic usually trumps caution and reason. Folks just hate living with uncertainty. Offer them a solution wrapped in a pretty package, keep stoking the fires and you'll get what you want."

What Mr. Banker wanted was for the citizens of Anytown to take responsbility for the losses he had incurred. It was the best of all worlds for him: when he made a lot of money as the private owner of the Wall Street Bank he kept it, but when he lost money the public picked up the tab. And he wanted to keep Anytown and its leaders scared  for time was not his ally. That way, he was sure he could restore the Wall Street bank's profitability and the rewards would still be his. The City Treasurer and City Council would have to figure out what to do with those investments he's just as soon forget about.

Other corporate chieftans in the USA were closely monitoring the decision of the Anytown City Council. For their businesses had lost money as well, and they hoped that they could argue that the public should pick up the tab. After all, in America fair is fair.

So what should the residents of the City of Anytown say when they call the members of the City Council expressing their opinion?

Tags:
Location: Chapel Hill, NC 27514