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 customer's 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 asset s 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 who collect enormous fees
on their sales, pay extravagant bonuses to their sales force, who in turn purchase
exotic sports cars and multimillion
dollar condominiums.
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 bar.
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 ...