Derivative markets....an understandable explanation:

We thought you might find this entertaining...

Author Unknown

 
photo by dailyinvention

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 ledger (thereby granting 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 and 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 she substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases massively.

She becomes the most profitable bar in the USA...

A greedy 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 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 bonded together into large packages and gradually upgraded to Triple-A (AAA) "very low risk" packages by greedy bond raters, and 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 top-selling items for some of the nation's leading brokerage houses.

Eventually, though, Heidi realizes she is not taking in enough cash to make even the minimum monthly loan payments to the bank, so she demands payment from some of her alcoholic patrons. 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 perform better, stabilizing in price after dropping by 80%.

The decreased bond asset value destroys the banks liquidity and prevents it from issuing new loans.

Retirees, who have worked hard all their lives and invested in these bonds, realize that their savings are all gone. Their money was used to buy drinks for Heidi's customers for all these years. And now these same retirees can no longer get a loan from the bank to buy a car or take a vacation, because the bank is insolvent and no longer writing any loans.

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

The bank and brokerage houses are saved from bankruptcy by the Government, following dramatic round-the-clock negotiations by leaders from both political parties. The funds required for this bailout are obtained by taxes levied on employed middle-class non-drinkers and by reducing benefits to the retirees.

So now you understand why I'm sitting on my porch, staring at my tiny social security check and my empty brokerage statement, and wishing I had been an unemployed drunk all my life...