My friend Barry sent me this. (Not the Barry who broke his leg. The Barry who lost his leg. What is it with Barrys and legs?) Unfortunately, it explains everything.
USA Finance 101– How Our Finances got so Fouled Up!
An Easily Understandable Explanation of Derivative Markets
Heidi is the proprietor of a bar in Detroit. She realizes
that virtually all of her customers are unemployed
alcoholics and, as such, can no longer afford to patronize
her bar. To solve this problem, she comes up with a new
marketing plan that allows her customers to drink now, but
pay later.
She keeps track of the drinks consumed on a ledger (thereby
granting the customers loans).
Word gets around about Heidi’s “drink now, pay later”
marketing strategy and, as a result, increasing numbers of
customers flood into Heidi’s bar. Soon she has the largest
sales volume for any bar in Detroit.
By providing her customers’ freedom from immediate payment
demands, Heidi gets no resistance when, at regular
intervals, she substantially increases her prices for wine
and beer, the most consumed beverages. Consequently, Heidi’s
gross sales volume increases massively.
A young and dynamic vice-president at the local bank
recognizes that these customer debts constitute valuable
future assets and increases Heidi’s borrowing limit. He sees
no reason for any undue concern, since he has the debts of
the unemployed alcoholics as collateral.
At the bank’s corporate headquarters, expert traders
transform these customer loans into DRINKBONDS, ALKIBONDS
and PUKEBONDS. These securities are then bundled and traded
on international security markets. Naive investors don’t
really understand that the securities being sold to them as
AAA secured bonds are really the debts of unemployed
alcoholics.
Nevertheless, the bond prices continuously climb, and the
securities soon become the hottest-selling items for some of
the nation’s leading brokerage houses.
One day, even though the bond prices are still climbing, a
risk manager at the original local bank decides that the
time has come to demand payment on the debts incurred by the
drinkers at Heidi’s bar. He so informs Heidi.
Heidi then demands payment from her alcoholic patrons, but
being unemployed alcoholics they cannot pay back their
drinking debts. Since Heidi cannot fulfill her loan
obligations she is forced into bankruptcy. The bar closes
and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price
by 90%. The collapsed bond asset value destroys the banks
liquidity and prevents it from issuing new loans, thus
freezing credit and economic activity in the community.
The suppliers of Heidi’s bar had granted her generous
payment extensions and had invested their firms’ pension
funds in the various BOND securities. They find they are now
faced with having to write off her bad debt and with losing
over 90% of the presumed value of the bonds. Her wine
supplier also claims bankruptcy, closing the doors on a
family business that had endured for three generations, her
beer supplier is taken over by a competitor, who immediately
closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their
respective executives are saved and bailed out by a multi-
billion dollar no-strings attached cash infusion from the
Government. The funds required for this bailout are obtained
by new taxes levied on employed, middle-class, non-alcoholics.
Now, do you understand ?
