Two Cows Go To Wall Street

John Carney has a great "two cows" explanation of Wall Street’s goofy transactions and vaporous balance sheets:

You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John’s $10 to make up the rest.

You brag to everyone about your financial health. You have assets–two cows you own, plus one Paulson owes you–worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

Read the rest here.

Related posts:

  1. Two Cows and Venture Capital
  2. Wall Street and Web 2.0
  3. Links: Shortseller Sellers, Leverage, Norway, Wall Street Art, etc.
  4. Wall Street 2.0 and Tightly Coupled Systems
  5. Should Wall Street Have Saved Itself?