Case Study 1 Running head: CASE STUDY 1: THE $125 BILLION SWISS SUPRPRISE
Case Study 1: The $125 Billion Swiss Surprise Conor Riley, Collin Steinke, Ashley Twyman, and Shanna Zimmerman MGMT 565 Dr. Joel Light September 6, 2009
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Case Study 1: The $125 Billion Swiss Surprise Inter Change Bank was a small bank located in Ticino, Switzerland which failed and was liquidated six years after its failure. American investors deposited $600 million in the bank one year before its failure and at the time of the deposit, Inter Change Bank had agreed to pay 1% interest on the invested funds. The residents or “burghers� of Ticino received a bill $125 billion 27 years after the failure of Inter Change Bank as the result of a lawsuit filed in a Brooklyn court. Statement of the Problem It would be reasonable to believe that the American investors contacted the bank and agreed with bank hierarchy on the terms of the invested funds and that they disclosed the amount to be invested ($600 million) before actually investing the funds. Inter Change Bank did not accurately calculate how much this investment would cost them at 1% compounding weekly. This led to the failure of the bank and the massive $125 billion dollar court ruling against the residents of the small town who could likely never repay. Potential Options for Management Review There is a degree of accountability that falls on both parties involved in the case. While Inter Change agreed to outlandish rates that are far outside the realm of conventional financial wisdom, there is also a question in why the dispute was not brought forward for review in the prior 27 years? Doing so could have prevented a significant accrual of debt for the town. One must also question the leadership at the firm and what processes led to the conclusion that offering a 1% weekly accrual was a smart business decision. Were there conflicts of interest that were in play? The issue is so far past that an internal investigation of business practices would be extremely difficult.
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Taking all of the above into account, there are two options that the bank or residents could pursue. First would be to accept the ruling and begin arranging a financial plan to settle the debt. Doing so would cause a significant financial burden on the economy of Ticino, and may very well define the future of the community. The second option would be to appeal the ruling of the Brooklyn court and present the bank’s side of the story at the hearing. The burghers could present evidence that will reduce, if not eliminate the previous financial ruling. Essential Financial Information Financial information essential to the analysis of the Ticino case includes the following: 1) $600 billion investment, 2) 1% weekly interest for seven years, and 3) 8.54% APR for 21 years. Though the case mentions that the bill received by the burghers of Ticino was $125 billion, when calculating the amount owed based upon the information above, the actual bill came to $125,463,520,421 (rounded to the nearest dollar). The growth of the initial investment to the amount owed represents approximately a 21% APR over the entire 28 years. The phenomenal rates and length of time contributed to the vast amount of debt the burghers found themselves in. Analysis It would take extreme measures for the burghers to pay off the debt owed to the investors as ordered by the lawsuit. A $5 billion per year payment would never allow Ticino to pay off the debt. In the first year of repayment, the debt earns $10,714,584,643.87 in interest alone, which is more than double the payment amount. Even at $12 billion per year, it would take Ticino about 27 years and 3 months to pay off the debt. It is unlikely a town the size of Ticino could financially recover if held to the terms of the lawsuit. Recommendations and Conclusion
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Inter Change Bank should never have set up accounts that accrue interest at 1% per week. The only way for that kind of account to not break the company is if the bank had an excessively large amount of capital compared to the size of their average account. The burghers should also have taken the investors more seriously when they filed suit. In contrast, the American investors should never have invested in this bank. The old line that an offer sounding too good to be true applies here. There is no way this small Swiss bank could support a $600 million dollar account or the 1% weekly interest. Either the investors were very poorly managed, or they planned on pursuing future litigation. Both parties in the case of the $125 Billion Swiss Surprise have lessons to learn which any spectator can learn from. Observing parties should choose more reasonable interest rates and take litigation seriously. They should also learn to apply common sense and ethical behavior to their financial decisions.
Case Study 1 References Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate Financial Management (3rd ed.). Upper Saddle River: Pearson Education, Inc.
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