Vernon in Virginia~Formerly Alaska
New member
[size=large]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 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 customer's
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 their cronies in Government. The funds required for
this bailout are obtained by new taxes levied on employed, middle-class,
non-drinkers who have never been in Heidi's bar.
And there you have *hiccup*
"
[/size]
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 customer's
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 their cronies in Government. The funds required for
this bailout are obtained by new taxes levied on employed, middle-class,
non-drinkers who have never been in Heidi's bar.
And there you have *hiccup*
"[/size]