At last, what we've all been waiting for, an understandable
explanation of :
::::::::: Derivative Markets ::::::::::
Heidi is the proprietor of a bar in Detroit. In order to increase
sales, she decides to allow her loyal customers - most of whom are
unemployed alcoholics - to drink now but pay later. She keeps track
of the drinks consumed on a ledger (thereby granting the customers
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 sale volume for 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
A young and dynamic vice-president at the local bank recognizes these
customer debts as valuable future assets and increases Heidi's
borrowing limit. He sees no reason for undue concern since he has the
debts of the alcoholics as collateral.
At the bank's corporate headquarters, expert traders transform these
customer loans into DRINKBONDS, ALKIBONDS and BARFBONDS. These
securities are then traded on security markets worldwide.
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, their prices continuously climb, and the
securities become the top-selling items for some of the nation's
leading brokerage houses who collect enormous fees on their sales,
pay extravagant bonuses to their sales force, and who in turn
purchase exotic sports cars and multimillion dollar condominiums.
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
DRINKBOND and ALKIBOND drop in price by 90 %. BARFBOND 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
The bank and brokerage houses are saved by the Government following
dramatic round-the-clock negotiations by so-called leaders from both
The funds required for this bailout are obtained by a tax levied on
employed middle-class non-drinkers.
Finally an explanation I understand.
Don't attempt anything without the gloves.