According to tradition, an Eskimo hunter kills a wolf by soaking his knife blade with animal blood and allowing it to freeze. He then adds layer after layer of blood until the blade is completely concealed by the frozen blood.

Next, the hunter fixes his knife in the ground with the blade up. When a wolf follows his sensitive nose to the source of the scent and discovers the bait, he licks it, tasting the fresh frozen blood. He begins to lick faster, more and more vigorously, lapping the blade until the keen edge is bare. Feverishly now, harder and harder, the wolf licks the blade in the cold Arctic night. His craving for blood becomes so great that the wolf does not notice the razor-sharp sting of the naked blade on its own tongue. Nor does the wolf recognize the instant when its insatiable thirst is being satisfied by its own warm blood. The wolf’s carnivorous appetite continues to crave more until in the morning light, the wolf is found dead on the snow!
Now, replace this same wolf with Bear Sterns, Lehman Brothers, Merrill Lynch, Country Wide and many others. Move them to a place called Wall Street, where they can create and sell poisonous investment products that are sugar coated with greed, and watch them lick their products to death.

“It all started with the sour investment products (investments supported by sub-prime mortgages) Wall Street created!” – James ‘Bird” Guess

Imagine a used car dealership in your neighborhood named Layman Brothers. They have been in business for years, and people in the community know and trust them because they have purchased cars from them in the past. Well, this year Layman Brothers has brand new automobile for you, a 2008 Cadillac Escalade mixed with a Hyundai (just made it up). Layman Brothers tells everyone about this new truck they are selling, which looks like a Cadillac Escalade but only costs half the price because the engine is from a Hyundai.

Many customers were skeptical because they felt the engine was not built to power an Escalade, but once the New Truck Rating Agency ran tests, concluded the truck ran like a regular Escalade and considered it “safe to buy,” hundreds of people wanted one. The truck became an instant hit and sold out immediately in a few months. Layman Brothers had to reorder so many times that the company took out over $250 million in loans to purchase and advertise as many trucks as possible and now their entire lot was full of nothing but Cadillac/Hyundai Escalades.

Nine months later a few people came back and complained that their engine had failed. Layman Brothers did not think it was a big deal since it was only a few of the thousand trucks they already sold. However, more complaints surfaced and people grew skeptical about purchasing the Cadillac/Hyundai Escalade again. Since Layman Brothers made more money in 9 months than it had in the last two years, the company had to figure out a way to make people confident about buying the truck again. They concluded that they would sell warranties that stated if the Cadillac/Hyundai Escalade engine failed, the customer would be entitled to a full cash refund. This immediately calmed customers and sales of the truck skyrocketed again!

Layman Brothers borrowed $500 million dollars using their truck inventory as collateral so they could create more Layman Brother dealerships in Kansas City, Oklahoma City, Dallas, Los Angeles, New York and Miami. They knew the profit potential was huge and decided to buy their own car manufacturing company to create more “mixed auto” products like the Range Rover/Honda and Bentley/Nissan, which all became best selling automobiles. And soon foreign investors from all over the world heard of Layman Brothers’ success and wanted to invest in the company.

So Layman Brothers borrowed $10 billion using the collateral of the other nationwide dealerships and issued $750 million in company stock across the nation to help fund the international dealerships throughout the world. Layman Brothers was indeed “big business,” and employed over 200,000 people and generated over $100 billion a year and had over $250 billion in Cadillac/Hyundai Escalade Trucks sitting in dealership lots all over the world.

Unfortunately, things started to change. More and more people started to complain about their engines going bad. At first it was only about 100 people, then as time went by it increased to thousands of people, and the company was forced to pay out full cash refunds on the warranties it promised. It got so bad that a local Kansas newspaper ran a story that headlined: The Cadillac/Hyundai Escalade is a Lemon? Once that story ran many people started showing up at Layman Brothers dealerships across the city complaining about their engine failures and Layman Brothers gladly honored their refunds.

But what Layman Brothers did not know was those customers were telling everyone they knew about their experience with the truck and soon people all over the nation and eventually all over the world started to return their Cadillac Hyundai/Escalade trucks back to Layman Brothers’ dealerships demanding full cash refunds.

Well, Layman Brothers did not anticipate this type of response from all of its customers at one time demanding over $20 billion of their money back, so once the company dealerships ran out of money paying customer refunds, the company had to apply for business loans at their banks. The banks already heard of the dilemma in the newspaper and informed the company that they needed more collateral in order to borrow money. Layman Brothers told banks it would pledge its new truck inventory as collateral to obtain the loans.

However, the banks refused to accept the Cadillac/Hyundai Escalade trucks as collateral saying recent market accounting reports indicated that the Cadillac/Hyundai Escalade was not worth $30,000 but only $12,000. Layman Brothers and its management team could not believe it! Feeling frustrated and anxious due to complaining customers, they came up with a discount plan to liquidate 10 percent of their inventory to come up with the cash needed to pay customer claims.

However, the company was shocked when they cut the price to $12,000 and only made a few sales. So they cut the price again to $10,000 and made only a few more sales. It was unbelievable, the Cadillac/Hyundai Escalade had once shattered auto sales records and now hardly anyone wanted to purchase them. In the meantime Layman Brothers received a letter from its credit rating agency stating, “since the value of your truck inventory has decreased more than 50 percent your credit score will be lowered.”

Layman Brothers was really scared now because this meant (according to the company’s contract) that all the money Layman Brothers had borrowed from banks to buy the $250 billion worth of Cadillac/Hyundai Escalades could be demanded by banks to be paid in full without delay. And sure enough once one bank called and demanded full repayment of their loan, other banks called to make sure they would not be left out.

With no way to borrow any more money and no way to sell its billions of assets (faulty trucks) to make more money, Layman Brothers had only one option left – Bankruptcy! The company retained a bankruptcy attorney and soon everyone knew their financial situation. The only problem was that if Layman Brothers dealerships filed for bankruptcy, hundreds of thousands of people would lose their jobs. From the manufacturers of the Cadillac/Hyundai Escalade to salespersons, everyone was at risk. Also, what about the other thousands of dealerships who Layman Brothers sold the trucks too and insured the same warranties worth up to $150 billion? What about the banks, who loaned Layman Brothers billions of dollars and even purchased some of the company stock?

Now imagine you are the government who just learned of Layman Brothers’ situation and are trying to decide which is better: a) letting Layman Brothers file for bankruptcy and possibly creating an economic catastrophe or b) providing a government bailout in which Layman Brothers could borrow billions of taxpayer dollars to keep the company from collapsing? Which would you choose?

Note:
The Cadillac/Hyundai Escalade represents a mortgage-backed security and the Cadillac/Hyundai Escalade Warranty represents a Credit Default Swap. The New Truck Rating Agency represents Moody’s, S&P, or Fitch (the credit rating agencies) that approved the investment products and Layman Brothers dealerships represents the late Lehman Brothers (an investment bank that collapsed). 

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James "Bird" Guess
President & Founder

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