Three guys are traveling together, and they stop at a hotel to spend the night. To save money, they decide to rent only one room, and they ask the hotel clerk what the price of the room is for the night. Upon learning that the room is $30 for the night, they each chip in $10 and head for the room.
A little while later, the hotel clerk realizes that the room only rents for $25 a night, so he takes the $5 and hops in the elevator, intent upon refunding $5 to the three travelers. On the way to the room, the clerk decides to make a little money off the deal, and he pockets $2 of the $5 overpayment. He knocks on the door and tells the voyagers of the $3 overpayment and gives them each back one dollar.
The three men take the money without question, and are thrilled that they now have each only paid $9 instead of $10 for the room. But it appears that there is a missing dollar. If each guy only paid $9 for the room, then the total cost of the room is $27. Add this to the $2 pocketed by the hotel clerk, and the total is $29. What happened to the extra dollar?
Now, before you get out your calculator, please be aware that you are probably not smart enough to figure out this conundrum, since problems such as this one are best left to the talented elite few who sit on top of the money chain and — each year — make millions of dollars in bonuses coming up with ways to create profit from thin air.
These are the same people who are too big to fail and, while sitting high atop their ivory towers, they create money from nothing, as if spinning gold from straw. Fortunately for them, when there is no more straw, they can be bailed out with an infusion of real gold, with which they can line their pockets while they figure out new ways to manufacture profit from thin air. After all, who better to figure a way out of the mess than the people who ushered it in?
Please understand that these same people are so smart that they have devised new and creative ways to keep their books in order. Instead of using the old fashioned analog methods of computation, they have actually taken a mathematical quantum leap that has allowed them to upgrade their way of thinking to a modern digital means of calculation, which — in turn — enables them to utilize less to have more.
Investors Wanted
Here’s how I (one of the small brains) perceive the game to work. The banker’s commodity is money, and to make money, these bankers need to sell their commodity, or, in their case, lease their product, with a specific interest rate. The borrowers, or renters of the commodity, need to show the bankers that they are worthy of such a loan. The more valuable that the borrower appears, the better the rate that they will get on their lease, because the banker then sees that the borrower has collateral in case of a default on the loan. Investors seek large returns on their investments and look for companies that show growth. Therefore, if a company can attract investors, the company can build collateral as well as good credit, which then attracts banks to lend at a decent rate, which — in turn — will help the company show a profit, thereby attracting more investors.
Just for fun, let’s take a look at how someone can open and run a profitable sound company in today’s selectively-burgeoning marketplace. For example, let’s say that someone invests into a small sound system. Two speakers, two subwoofers, a small mixing console, some microphones, direct boxes, cables, stands, a van and anything else they might need to start renting their gear and doing small shows. Their total investment is $10,000, but, in the old fashioned way of calculating, they are already showing a loss due to the depreciation on the equipment starting from day one.
They go out and do a few shows with the gear at a rental rate of $500 per day, and the good news is that, after 20 rentals, they will have broken even on the gear. It’s not an excessive amount of rentals before starting to turn a profit, but it does mean that someone has to care for the equipment; gas has to be bought to move the gear around; pieces will need to be replaced and repaired; and someone has to deal with the client.
Using this method, it appears that it will be hard work and long hours before this company can become truly profitable, and it will take someone with a real passion for audio to make it a success. A more modern approach might be the better way to go if turning a profit is the desired result.
Rosy Projections
Using genius computation, the more creative way to express the worth of this company would be to take the $500 rental and multiply it by the projected rental period of, say, 20 times per month, or 240 times per year. Now take the $120,000 and multiply it over a 10 year period, and the projected worth of said company is now $1.2 million dollars, which is a pretty good return on the initial $10,000 investment.
Numbers such as these begin to attract investors, and pretty soon, the company has raised some capital. Let’s say 10 investors each invest $10,000, which, based upon the previous figures, boosts the company’s worth to $12 million over a 10-year period. Thanks to the recent investments, the books show that there is about $100,000 in cash that’s available, despite the fact that most of it has gone to the CEO’s yearly salary.
Regardless of the fact that there is no discernable income for the company, other than the investments and the one working system, the banks consider a company that has a paper value of $12 million a safe bet in terms of a loan, and thus grants the company a $1 million loan.
The company now has some money to play with, and pays a high dividend to their investors, which, of course, makes for happy investors, and the company then appears even more profitable. This, in turn, attracts more investors who believe that the company is a goldmine, and the banks then extend a larger line of credit to the company.
Paper Profits
Through loans and investments, the company now boasts a net worth of about $15 million, with the CEO now taking home a huge yearly salary. While some of the money has been used to grow the company, most of the infused cash has been taken up by the executive salary and dividend payouts as well as loan repayment. On paper, the company credit is excellent, and again, more money is attracted through loans and investments, even though very little of the cash has been earmarked for audio equipment.
At some point, the executive decides that he needs more of a salary, and that means less dividends paid to the investors. The company is still repaying their loans, but now some of the investors want to cash out. The company can cover the cost of a few investors pulling out without anyone suspecting any wrongdoing, but when there is a run on the company bank, then the company starts to default on their loans. The banks and investors then step in and try to liquidate the company’s assets and find that the only available assets were the employee’s pension funds and 401K plans that have already been liquidated to pay off a few of the disenchanted investors and several bank loans.
Aftermath
Although the company is bankrupt and the employees are put out on the street with nothing, the CEO is fortunate enough to have squirreled away a good portion of the money in his personal account so that he can live the lifestyle to which he has become accustomed while he is negotiating a bailout of his firm.
The few sound systems that were purchased with investment cash are virtually worthless and can be stored away just in case the CEO decides to start another audio firm. Lawsuits will be filed, outrage will be noted, investigations will be launched and fortunes will be lost. Prison time and pardons may or may not be offered to certain individuals and, most likely, there will never be a satisfying answer or conclusion to the reasons and methods of the how and why the business was run.
The geniuses behind the whole debacle will speak eloquently about collateral debt obligations, sub-prime loans, adjustable rates versus fixed rates and mortgage-backed securities while deriding the involved parties as rapacious and irresponsible, but the question will still remain — as in the story of the three men and a hotel room — “What happened to the extra dollar?”
