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Derivative Markets

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Derivative Markets

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  #1 (permalink)
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Got this from a friend today. Wanted to share it with all. Have a laugh!

Easily Understood 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 a new marketing plan that allows her customers to drink now, but pay

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.

Any questions?

After all, it's what you learn AFTER you know it all, that counts!
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Last Updated on May 17, 2010

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