Wednesday, November 3, 2010

Risk Shifting, Government Patronage, and Too Big To Fail - Chess Club Edition

This guy is brilliant - he figured out the same thing that Bear Stearns, Citigroup and Goldman figured out, except he was in High School :

Clubs made money by reselling burritos or pizza from nearby restaurants during lunch. Each of these lunch sales typically made about $100 in profit. 
Unfortunately, the rules around lunch sales were restrictive. Only one club could sell per week, and other clubs like the Science Club had a much stronger precedent for needing lunch sales. Without a precedent for needing money, I was unable to acquire enough lunch sale dates.
I studied the rules for operating clubs on campus and found the loophole I needed: clubs were allowed to go into debt to the student government for $200. I figured that if I were in debt to the student government, I'd have more leverage in getting lunch sale dates.
I immediately spent $200 on chess boards, chess clocks, and books. I bought more than we needed because I wanted to maximize our debt. Then I went to the student government treasurer, gave him the receipt, and was reimbursed for the expense.
The student government wasn't too happy about the situation. They wanted me to pay them back as they were on a tight budget. I told them I couldn't raise money because they wouldn't give me lunch sale dates.
They relented and started giving me lunch sale dates so that I could pay them back. Even though we made $100 per lunch sale, I only paid them back $50 at a time to maximize the time we were in debt. Soon afterwards, the student government relaxed the rules to let clubs have lunch sales more days per week.
Sounds a lot like TARP, doesn't it? When the government is effectively on the hook for your debt (either literally in the Chess Club case, or via a potential collapse of the banking system and currency in the Financial Crisis), it's amazing what kind of patronage you can secure from them.

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