BANKRUPTCY EXPLAINED

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country.. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars..
* The net asset of the country = 5 dollars. A bubble is building up..

5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A..
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."
(8) A also thought the same way..
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.

(10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins; his net asset is 2 dollars.
* B is bankrupt; his net asset is 0 dollar. (He lost everything)
* C got no choice but end up with a land worth only 1 dollar * the net asset of the country = 3 dollars.
************ **End of the story; BUT ************ ********* ******
There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared. A few points worth noting -
(1) when a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology (or speculation).

Dubai's stock market has dropped by more than 10%, adding to substantial losses over recent days amid fears of a faltering property market.

Two of the biggest fallers were the Gulf emirate's property giant Emaar and construction firm Arabtec.
Shares also fell heavily in several Middle East exchanges including Abu Dhabi, Egypt, Qatar and Saudi Arabia.
The Saudi slide came despite assurances from officials that the country was not exposed to the global financial crisis.
The Dubai Financial Market sank to 3,043 by mid-morning with prices of all 27 quoted shares falling. The market fell by 5.1% on Tuesday.
Foreign investors are reportedly selling interests in Dubai amid fears of weakness in the emirate's construction bonanza and a greater exposure to global markets than its Gulf neighbours.
Unwarranted falls
Saudi Arabia's stock exchange - the Middle East's largest - fell by more than 7.5%, trading below the 6,000-point mark for the first time since 2004.
Saudi central bank deputy governor Mohammed al-Jasser tried to reassure investors, saying the country had no liquidity problems and was safe from the financial crisis engulfing the US and Europe.
He said recent sharp falls on the Saudi stock market, which have hit banks, were unwarranted and bank deposits were safe.
"The situation is stable and does not require any emergency measures as if there were a problem with the banks meeting their commitments," Mr Jasser told al-Arabiya TV.
The latest declines mean Saudi bank shares have lost more than half their value since the beginning of the year.
Record falls
Egypt's Case-30 index sank another 12.5% percent within minutes of opening, after a fall of 16.47% on Tuesday.
"We're swamped here," Ahmed Hefnawi, an analyst with investment bank EFG Hermes told AFP news agency.
Kuwaiti economist Hajjaj Bukhdur said: "High tension and panic are gripping the Gulf stock markets".
"Some major portfolios and investment funds are pressurising governments to intervene by injecting liquidity," he said.
Kuwait's Central Bank cut discount interest rates by 1.25% percentage points to 4.5%, hoping to address growing concerns about financial liquidity.
But its stock exchange, the Arab world's second biggest, fell by 2.8% in the morning's trading.
Qatar's exchange meanwhile, dropped 8.3%, the biggest single-day market fall in several years in the gas-rich state.
The Tel Aviv stock exchange was closed for a Jewish holiday, having risen on Tuesday thanks to a 0.5-point cut in the base interest rate to 3.75%.

BBC