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Offline bigokieguy

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« on: April 19, 2009, 11:25:05 AM »
Derivative markets . . . an understandable explanation:
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 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 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 increases massively.

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 DRINK BONDS, ALKIBONDS and
PUKEBONDS. 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.

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.
DRINKBOND and ALKIBOND drop in price by 90%. PUKEBOND 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 I can understand
« Last Edit: December 31, 1969, 07:00:00 PM by bigokieguy »

Offline leglace

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« Reply #1 on: April 19, 2009, 11:29:33 AM »
That was an interesting read. I liked it. thanks. :D
« Last Edit: December 31, 1969, 07:00:00 PM by leglace »
When all else fails, do the opposite...

Offline ocianain

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« Reply #2 on: April 19, 2009, 11:30:06 AM »
Nice!
« Last Edit: December 31, 1969, 07:00:00 PM by ocianain »
The Seeking For One Thing Will Find Another - Irish Proverb

Offline bigokieguy

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« Reply #3 on: April 19, 2009, 11:31:54 AM »
Quote from: "ocianain"
Nice!
One of my brothers sent it to me.
« Last Edit: December 31, 1969, 07:00:00 PM by bigokieguy »

Offline ac1998

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« Reply #4 on: April 19, 2009, 01:08:31 PM »
The only thing I would add is that not everyone buying the booze is unemployed alcoholics. Some of them are actually hard working people, but instead of buying a beer, they buy $200 bottles of Dom Perigon.
« Last Edit: December 31, 1969, 07:00:00 PM by ac1998 »

Offline bigokieguy

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« Reply #5 on: April 19, 2009, 04:51:17 PM »
Too many folks were simply living beyond their means.
« Last Edit: December 31, 1969, 07:00:00 PM by bigokieguy »