June 1, 2009

Wall Street Fables: The secret of the Bonus

Following is a crude con-job. A far away analogy would be the way Wall Street quants (A term used to describe people with more than their share of quantitative skills ... typically guys who can do spreadsheets in their head) have financially engineered returns on dead assets ...

A city boy, Raj, moved to the village and bought a donkey from an oldfarmer for Rs.1000. Thefarmer agreed to deliver the donkey the next day.The next day the farmer drove up and said,

"Sorry Raj, but I have some bad news, the donkey died while I was bringing him here."

"Well then, just give me my money back", replied Raj.

The farmer said, "Can't do that. I wentand spent it already."

To which raj replied, "OK then, just unload the donkey."

The farmer was inquisitive. "What you are going to do with him?"

"I'm going to raffle him off." replied Raj

"You can't raffle off a dead donkey!" exclaimed the farmer.

"Sure I can. Watch me. I just won't tell anybody he's dead." There was a twinkle in Raj's eye.

A month later the farmer met up with Raj and asked, "What happened with that dead donkey?

"I raffled him off", said Raj with a casual look, "I sold 500 tickets at Rs. 10 each and made a profit of Rs 4990 with the donkey worth Rs. 1000 as the prize."

"Didn't anyone complain?", the farmer asked with a look of astonishment.

"Just the guy who won .... So I gave him back his Rs. 10."

And that my friends is a fable on how investment bankers across the world made their hefty bonus'.

No comments: