THEOLDMAN

An Easily Understandable Explanation of Derivative Markets
-Original Author Unknown


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 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 bank’s 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-drinkers.


Now, do you understand?

Nec

i understand that unemployed alcoholics need to stop drinking

Chefboiali

Phuck. Makes more sense now.

RB

Biased explanation, but thats the gist of it. They're making the banks and investment firms out to be the ultimate evil in this scenario. The problem being that a lot of those holy-grailers (middle-class, employed americans) rely on banks to live. Without the bailout of the banks, the banking system in general would be in great disarray and those salt of the earth people would be even more fucked without the bailout.

fathergoat

You forgot that deregulation of bars allowed Heidi to open tabs for jobless drunks. Because getting drunk is the American dream and everyone should be able to get drunk regardless of their financial situation. And we are not paying with our tax dollars (yet). They are essentially printing new money and trying to back it by selling bonds to foreign countries with the intent of paying them back over time. Right now few are buying the bonds. Even China doesn't want them buy they kinda fucked themselves.

ShaolinLueb

makes sense.

LABARINTH

I am all for ballouts. The economy is fucked beyond repair. The best case scenerio is the US economy callapses and we have to start completely from scratch. The more likely scenerio is that the powerful banking industry eventually move us to a world bank. I don't particularly wish to live through either of these scenerios and bailouts just prolong the inevitable.

Chefboiali

Say hello to the Amero and the North America Union. Coming to your ass, real soon.

o:

LABARINTH

exactly. I am all for bailouts prolonging that as much as possible.

BetterBob

You missed the part where congress forced her to make the loans to the drunks.