[abuguapo]

Sent to me by a friend yesterday...don't know if already on here somewhere...but thought I would share in case not...



Understanding Derivatives
>
>
> This is good. The lesson on "understanding derivatives", while contrived,
> is delivered in a simple manner that virtually any person can grasp. Heidi
> is a nice person who wishes to please her (non-paying) customers. The
> clients (alcoholics) get their "fix". (Unpaid) credit sales increase. Heidi
> is recognized by increasing (phantom) revenues and her lenders extend more
> credit. Debt is perceived as collateral by the participating lenders, and
> even more support is extended by creating bonds backed by this (phantom)
> collateral. Bondholders are stuck with these highly rated but hollow
> financial instruments, Then, the house of cards collapses, and the damage
> extends far beyond the direct participants in this bizarre process.
>
>

>
>
> Understanding Derivatives -- A Primer
>
>
>
> 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 DRINK BONDS.
> These "securities" then are bundled and traded on international securities
> markets.
>
>
>
> Naive investors don't really understand that the securities being sold to
> them as "AAA Secured Bonds" really are 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 still are 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 Heidi's 11 employees lose their jobs.
>
>
>
> Overnight, DRINK BOND prices drop by 90%. The collapsed bond asset value
> destroys the bank's 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 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 multibillion dollar no-strings
> attached cash infusion from the government. The funds required for this
> bailout are obtained by new taxes levied on employed, middle-class,
> nondrinkers who have never been in Heidi's bar.
>
>
>
> Now do you understand?