The G-Crisis

What exactly is the G- Crisis?

There used to a person named George in Europe. He used to work at an investment banking firm. He was among the talented lot in the investment world. A few years later, a few of the investment bankers came together to form a “Association of Investment Managers” which came to be regarded as an ELITE investment managers club. Given his reputation in the market he was offered to join the ELITE club given he fulfills certain requirements.

George was very excited about this offer. He however knew he wouldn’t qualify as a member as he did not completely comply with all disclosure requirements. Being aggressive, he had taken larger exposure in the leveraged securities (securities bought from borrowed money) which was the roadblock of his becoming the member of the group. He had short term liabilities coming up which he had to put up with. But the desperation to become a member of the ELITE club made him fudge the disclosure data.

He asks his long time friend Gore Sam in US to help with how the disclosure should be presented so that he gets the membership. His friend suggests that he hide the leverage by issuing a long term loan in US dollar. He can then swap his loan at a favorable fake exchange rate. This would help him realize more money (less debt) in the accounts and reduce his short term liabilities. (To give a more complex understanding, Gore Sam asked him raise a loan of a Million USD in the US. This converted as 5 million GHX (the local currency) at existing exchange rates (1 USD: 5 GHX). He suggested he should undertake a simultaneous currency swap on the loan at an exchange rate of 1 USD: 3 GHX on the same loan. This way he could show that his debt obligations are low and he could repay his short term liabilities. However Gore Sam asked him for a Commission to arrange for the “off market” favorable exchange rate swap. Even the commission was agreed to be loaned to George by Gore Sam so that he doesn’t face any immediate liquidity crunch and which he could pay over a few months). George was confident of making amends in his accounts after he realizes the returns from his leveraged position in securities. He followed the advice and made it to the ELITE club.

A few months later, the investment decision he had taken on leveraged securities back-fired. Now he had lenders asking him to pay up their money. Under tremendous pressure of an eminent default he yields before the Club members disclosing the crisis. The Club members are baffled at his admission of manipulation. Some of them decline to help George. However since the reputation of the club is at stake they agree to help. They however impose extensive restrictions on George.

1. He is asked to curtail down his living expenses.
2. He is asked to work overtime so that he can earn more.
3. He may increase his fees he charges from his clients.

It is decided only at an eventuality of default would the fund be provided which would be based on every club members individual paying capacity.

Credits
George – Greece
ELITE club- European Union
Gore Sam – Goldman Sachs