An Easily Understandable Explanation of Derivative
Markets
In case you have had trouble understanding the current economic crisis, let me help you understand by explaining in terms that even the most intoxicated alcoholic can understand.
Let's use Heidi, she is the proprietor of a bar in Detroit Michigan. 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 new marketing plan that allows her customers 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. Soon she has the largest sales volume for any bar in Detroit.
By providing her customers' freedom from pesky 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 at an extraordinarily rate.
A young 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 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 and 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 thirty-seven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 95%.
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. Now, they find they face having to write off Heidi's bad debt and are losing over 95% 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. Heidi's beer supplier is taken over by a competitor, who immediately closes the local plant and lays-off 1,050 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are too large to fail and are bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in the Government (employed alcoholics).
The funds required for this bailout are obtained by passing new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi's bar.
The non-drinkers wake up one morning and march on Washington to demand redress of their grievances and the Government cronies tell them they are lunatics and to shut up.
The employed and unemployed non-alcoholics ignore political party affiliation and respond by voting the employed Government cronies out of office.
Now, do you understand Washington elite…?
Markets
In case you have had trouble understanding the current economic crisis, let me help you understand by explaining in terms that even the most intoxicated alcoholic can understand.
Let's use Heidi, she is the proprietor of a bar in Detroit Michigan. 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 new marketing plan that allows her customers 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. Soon she has the largest sales volume for any bar in Detroit.
By providing her customers' freedom from pesky 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 at an extraordinarily rate.
A young 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 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 and 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 thirty-seven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 95%.
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. Now, they find they face having to write off Heidi's bad debt and are losing over 95% 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. Heidi's beer supplier is taken over by a competitor, who immediately closes the local plant and lays-off 1,050 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are too large to fail and are bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in the Government (employed alcoholics).
The funds required for this bailout are obtained by passing new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi's bar.
The non-drinkers wake up one morning and march on Washington to demand redress of their grievances and the Government cronies tell them they are lunatics and to shut up.
The employed and unemployed non-alcoholics ignore political party affiliation and respond by voting the employed Government cronies out of office.
Now, do you understand Washington elite…?
