Skip to comments.Easily Understood Explanation of Derivative Markets (In plain language, even a drunk can understand)
Posted on 02/25/2010 3:16:15 PM PST by Popman
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.
Heidi 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 figure a way to make huge commissions, and 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.
Now do you understand?
works for me.
Even a caveman?
does that mean they all gave up drinking? how does it end? the suspense is killing me!
Bookmarked to read w/a glass of vino...
A drunk might be able to understand it, but I doubt the average politician could (even a sober one).
At least the caveman had a job before he started drinking :)
The really scare part is that we still don’t know where the banks, AIG and Fannie and Freddie stand. We don’t have the faintest idea of the current performance of all these derivatives. We do know that the USG and Fed have sort of guranteed them or bought them. This lack of transparency and the continuance of USG unconditional support of US realestate is going to bite us again.
Europe is unraveling before us..do we know what our exposure is both on an off balance sheets..? No.
It’s called a bar tab.
There are sober politicians?
Unfortunately for us, the real world derivative deathstar is estimated to be a 600 trillion to 1 quadrillion ponzi scheme (at least 10 times larger than the World GDP). All the TBTF insolvent banks are up to their armpits in PUKEBONDS. And that is why all the king’s horses and all the king’s men are scrambling to prop this mess up long enough to bail out with suitcases of ill gotten gains.
A few more things. The Government:
1) Subsidized the suppliers of alcohol,
2) Made drinking costs tax deductible, and
3) Forced the banks to treat unemployed drunks as just-as-valuable as the hard-working tea totallers
Unemployed Alcoholism being part of the American Dream, doncha know.
True, but how many bar tabs does your neighbor, the teetotaler pick up for you ?
"There's no question about it," Mr Bush said. "Wall Street got drunk, that's one of the reasons I asked you to turn off the TV cameras. It got drunk and now it's got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments."
I guess the email is more appropriate than one would think.
Of course we do !
Gee, that sounds just like socialism
No, it's just an urban legend.
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