Italian bank accepts cheese as loan collateral; U.S. banks should watch and learn

Posted Feb 25th 2009 12:20PM by Connie Madon
Filed under: Financial Crisis

Imagine this: You live in Castelfranco Emilia, a small town in northern Italy, and you want a loan for $9,000. So you walk into the bank and the manager says: "OK, how many wheels of Parmesan cheese do you have for collateral?" You answer, "I have three wheels." (Each wheel is worth $3,000.) "Fine, we'll take your three wheels as collateral for your loan," he says and draws up the contract.

Meanwhile, you take your three wheels to the warehouse for inspection. All cheese must be aged for at least one year. Cheese that does not meet the strict standards at the warehouse is downgraded and the price reduced. After the inspection is completed, the bank manager gives you a check for $9,000.

Not only does the bank take cheese as loan collateral, the interest rates on those loans are low because the bank actually houses the collateral for the loan, i.e. the cheese.

Now, is there a lesson to be learned here? You bet there is. Our bankers could learn a basic lesson in collateralized loans. We should send the presidents of our major banks to Italy to learn how to make loans without using their fancy derivatives like CDOs and CLOs that brought the world to ruin.

Let's get back to basics where the bank that makes the loan holds the collateral mortgage on its books until maturity.

And one final note. Anyone using David X Li's Gaussian copula function must be summarily fired.

What are your comments on this idea?

Tags: cheese collateral, CheeseCollateral, featured, financial crisis, FinancialCrisis, Italian banking, ItalianBanking

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Reader Comments (Page 1 of 1)

2-25-2009 @ 1:45PM

sarah glen said...

Sounds like a good way to unload excess goods.

2-25-2009 @ 3:33PM

micuzzu said...

Leave it to the Italians. Banking was started in Italy when trading was over a BANCO. I guess they still know the art of banking

2-25-2009 @ 2:32PM

matt said...

Amen. Voodoo financial practices will be our ruin. Basing investments and loans on actual THINGS of value instead of smoke and mirrors is the only thing that EVER made sense.

2-25-2009 @ 3:29PM

richard clark said...

will someome take your wife as collateral?

2-25-2009 @ 3:50PM

BHarrison said...

32-25-2009 @ 3:29PM

richard clark said...
will someome take your wife as collateral?

======> Well, my wife's value is almost intrincsically incalcuble; but she is too precious to have to put her in a ware house for loan collateral . . . Ha!

2-25-2009 @ 5:26PM

thedude said...

The Cheese Standard ! Why does this make me feel better than the thought of a gold standard

Are there different grades of Parmesan that can affect the value of a particular wheel.

I don't know enough about cheese but is there a way to prevent the market from being flooded with excessive Parmesan and lowering the value of the cheese being held in the collateral warehouse ?

Any object is only worth as much as someone is willing to pay for it, we could go back to the barter system but then wha would all the useless white collar workers do to survive ?

2-25-2009 @ 4:17PM

Tom said...

Mmmmm. Good aged parmisan cheese. I'd take it - after all, you can't eat gold.

2-25-2009 @ 9:30PM

todd said...

Our banks are not interested in doing business, they just want to rip you off.

2-25-2009 @ 11:00PM

ITS COMMON SENSE said...

Listen what's a $9000 loan....nothing. You know how much cheese you need for collateral the way The USA does business. All you folks make very good points. Pus who remember Crazy Eddie's the guy who had inventory that did not even exist, but he still fooled people. Crazy Eddie stored inventory in a train all the boxes on the train looked official. The people who were supposed to go and check it out opened only the boxes on the top and outside cause they were too lazy and did not realize that Crazy Eddie only had the real product on the outside of the freight and the middle was boxes with rocks to make the boxes heavy. When you deal with loans that big it is impossible to keep track of a million wheels of cheese because people are too lazy to do their jobs in the first place who knows if they are all real or not and you could get stuck with fake products.There could be 400,000 wheels of cheese that looks like cheese, but in reality they are just rubber or plastic wheels. I can't believe this is even that this is even a story. The writer of this article is dumb and I can't believe this person even has a job. What a crock. Worry about something more important dummy.