Derivative Markets: An Explanation Presented In Banker-Speak.

[Jeff Tumbarello]

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 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 even a Banker should understand. With a little
work on simplification, maybe we could bring the Politicians up to speed...