Post by Deleted on Jul 2, 2011 17:34:04 GMT -6
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?
> >
> >
> >
> > 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?
> >
> >
welcome to my world
