can someone explain it better?

Discussion in 'General Discussion' started by catfish83861, Apr 10, 2009.

  1. catfish83861

    catfish83861 Active Member

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    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
    DRINKBONDS, ALKIBONDS and PUKEBONDS.

    These securities are then traded on security markets worldwide. Naive
    investors don't really understand 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 his negativity), decides that the time
    has come to demand payment on the debts incurred by the drinkers at
    Heidi's. 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 understand .....:(:eek: catfish
     
  2. 358 winchester

    358 winchester New Member

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  3. carver

    carver Moderator Supporting Member

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    DAV, Deep in the Pineywoods of E. Texas!
    That's about the way it works!
     
  4. AL MOUNT

    AL MOUNT Active Member

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    Cleaning my Thompson in The Foothills of the Ozark
    Durn cat..... :eek:

    Has Pistolschutze been tutoring you on the sly.... :p
     
  5. cycloneman

    cycloneman Well-Known Member

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  6. muddober

    muddober Active Member

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