View Full Version : Explanation of the financial mess we're in...

03-27-2009, 11:13 PM
A coworker forwared this to me today... I thought it pretty funny (in a sad kinda way)

Derivative markets .... put in terms even I understand:

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 questionable risks as 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 sales volume for any bar in Detroit. This makes her bar the "AIG" of alcohol consumption.

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 continues to increase massively as her customers see no downside in participating.

A clever and dynamic young vice-president at the local bank looking for new revenue opportunities recognizes these customer debts as valuable future assets, and increases Heidi's borrowing limit.

He sees no reason for undue concern for him or the bank, since he has the debts of Heidi's customers as collateral. At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKIEBONDS. These new securities are then traded on security markets worldwide. Naive investors (pension funds, charities, individual investors) don't appreciate the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, their prices continuously climb, and these new deriviative securities become the top-selling items for many of the nation's leading brokerage houses.

The bank VP who is now President, along with the bank and thousands of corporate traders active in this overly optimistic derivative conspiracy with no definable value make billions in profit and bonuses. They give members of the U.S. Congress (both parties) millions in campaign donations and special deals when they deregulate in 1997, allowing derivative traders to go unchecked for the next 11 years. Additionally, the regulatory agency (SEC) responsible for financial oversight recognizes the intent of Congress, becoming a finishing school for "trader wannabes" that move on to banks and brokerage houses after a short stint in the agency.

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 Heidi's alcoholics.

Heidi demands payment from her alcoholic patrons, but being unemployed (No Job, No Income, No Assets) NINJA's they cannot pay back their drinking debts. Therefore, Heidi cannot fulfill her loan obligations and claims bankruptcy.

Suddenly, DRINKBOND and ALKIBOND drop in price by 90 % in 2008. PUKIEBOND 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. Investors loose trillions in value in what they believed to be safe investments.

The suppliers of Heidi's bar, having granted her generous payment extensions over the years, and also 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 in a fire sale, who immediately closes the local plant and lays off 50 workers.

However, the bank and brokerage houses identified as "to big to fail" are saved by the Government following dramatic round-the-clock negotiations by leaders from both political parties. Of course, the funds required for this massive bailout are obtained by a tax levied on employed middle-class drinkers and non-drinkers who always paid thier bills.

03-28-2009, 09:17 AM
Wow............ What can you say.......... Wow

03-28-2009, 09:39 AM
I saw this posted on TT somewhere awile ago... still amazed by it the second time.

03-28-2009, 06:33 PM
Never seen it, but it's great! Wonder if the idiots in Wasington have ever seen it?

X-5 Driver
03-28-2009, 06:39 PM
Never seen it, but it's great! Wonder if the idiots in Wasington have ever seen it?

The idiots in DC engineered this mess. I doubt they care.

03-28-2009, 07:30 PM