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 and soon she has the largest sales volume of any bar in Detroit .

By providing her customers' freedom from immediate payment demands,
Heidi gets no resistance when she substantially increases her prices
for wine and beer, the most consumed beverages. Her sales volume
continues to increases massively.

 

A young and dynamic vice-president at the local bank recognizes these
customer debts to be valuable future assets and increases Heidi's
borrowing limit.  He sees no reason for undue concern since he has
the individual debts of the alcoholics as collateral.

 

At the bank's corporate headquarters, expert traders transform these
customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These
securities are then traded on security markets worldwide. Naive
investors don't really understand the securities being sold to them
as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, their prices continuously climb, and the securities
become the most traded items for some of the nation's leading
brokerage houses, thereby attracting huge commission income and
staff bonuses.

 

One day, although the bond prices are still climbing, a risk manager
at the bank (subsequently fired due to his negativity), decides that
the time has come to demand payment on the debts incurred by the
drinkers at Heidi's bar.

 

Heidi demands payment from her alcoholic patrons, but being
unemployed, they cannot pay back their drinking debts. Therefore,
Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBONDS and ALKIBONDS drop in price by 90%. PUKEBONDS performs
better, stabilizing in price after dropping by 80%. The decreased
bond asset value destroys the banks liquidity and prevents it from
issuing new loans.

 

The suppliers of Heidi's bar, having granted her generous payment
extensions and having invested in the securities are faced with
writing off her debt and losing over 80% on her bonds. Her wine
supplier claims bankruptcy, her beer supplier is taken over by a
competitor, who immediately closes the local plant and lays off 50
workers.

 

The bank and brokerage houses are saved by the Government following
dramatic round-the-clock negotiations by leaders from both political
parties. The funds required for this bailout are obtained by a tax
levied on employed middle-class non-drinkers.

 

 

Finally an explanation of derivatives we can all understand.............