Background Information • Inter Change Bank was a small bank located in Ticino, Switzerland • Failed one year after establishment and was liquidated six years later • Group of American investors deposited $600 million one year before its failure • Inter Change Bank agreed to pay the American investors 1% interest per week on their deposit • Ticino received a bill of $125 billion 27 years later, based on the ruling of a Brooklyn court
The Problem • It would be reasonable to assume that the terms of the investment were discussed prior to the deposit • Likewise, the amount of deposit would have been discussed prior to solidifying the investment terms • Inter Change Bank did not accurately calculate how much the investment would cost them • This contributed to the court ruling of $125 billion against the bank
Potential Options • Accountability falls on both parties to some extent • Inter Change Bank agreed to outlandish rates on the American investment, and did not take the lawsuit seriously • The investors took an exorbitant amount of time to bring their case forward, resulting in an inflated settlement amount • The bank has two options: they can accept the settlement at a significant financial burden to the town, or they can appeal the ruling and present a defense which may reduce or eliminate the debt
Essential Financial Information • • • •
$600 billion investment 1% weekly interest for 7 years 8.54% APR for 21 years Resulting ruling: $125,463,520,421 (rounded to nearest dollar) • Equates to a 21% APR over the entire 28 years
Analysis • Extreme measures are required to pay of the debt of the ruling • A $5 billion per year payment would never allow the debt to be paid off • At 8.54% interest, the debt accumulates $10,714,584,643.87 in interest alone, more than double $5 billion payment amount • At $12 billion per year, Ticino could pay the debt off in approximately 27 years 3 months • The town of Ticino would likely never recover if held to the terms of the lawsuit
Recommendations • Inter Change Bank should not have agreed to pay the investors %1 interest per week • The burghers should have taken the initial lawsuit more seriously • The American investors should not have invested in the too-good-to-be-true investment • Observing parties should choose investments with more reasonable interest rates and take litigations seriously • Common sense and ethical behavior should be applied to financial decisions
References Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate Financial Management (3rd ed.). Upper Saddle River: Pearson Education, Inc.