There is a Tavern in the Town

An Easily Understandable Explanation of Derivative Markets

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Moe is the proprietor of a bar in Detroit.   He realizes that virtually all of his customers are unemployed alcoholics and, as such, can no longer afford to patronize his bar.   To solve this problem, he comes up with new marketing plan that allows his customers to drink now, but pay later.   He keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Moe's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Moe's bar.   Soon he has the largest sales volume for any bar in Detroit.   By providing his customers' freedom from immediate payment demands, Moe gets no resistance when, at regular intervals, he substantially increases his prices for wine and beer, the most consumed beverages.   Consequently, Moe'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 Moe'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 transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS.   These securities on international security markets.   Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the 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 are still 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 Moe's bar.   He so informs Moe.  

Moe then demands payment from his alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.   Since, Moe cannot fulfill his loan obligations he is forced into bankruptcy.   The bar closes and the eleven employees lose their jobs.  

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%.   The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Moe's bar had granted his generous payment extensions and had invested their firms' pension funds in the various BOND securities.   They find they are now faced with having to write off his bad debt and with losing over 90% of the presumed value of the bonds.   His wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, his 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 multi-billion dollar no-strings attached cash infusion from their cronies in Government.   The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Moe's bar.

Now, do you understand why alcoholism and financial greed are not just personal diseases?

PS: One important part of this story have been left out.   The cronies at the Government are Barney's Frank and his Buttys.  Under normal circumstances, the Bank would not lend money to such high risk ventures, so Frank & Buttys ordered the Bank to issue these loans to Moe's Bar and all other bars in his position.   They told the Bank that the loans would be backed up by the full faith and power of the Government, which in everyday English means that the Government will take as much money out of the pockets of the employed, middle class non-drinkers as they need to pay for the drinks of the unemployed alcoholics.

The Banks rejoiced that they could charge a fee and enrich themselves by loaning out other people's money with the full backing of the Government.   The Bank could, in effect, rob the people with the Government's blessing. If the people engaged in the same act and robbed the Bank, they would be thrown in jail. 

Even when the employed, middle class non-drinkers questioned the Government about this practice, Barney's Frank & Buttys swore up and down at the hearings time after time, year after year that the loans were as solid and stiff as the drinks we were buying.

The employed, middle class non-drinkers got shafted by Barney's Frank in the end.   They were left holding a glass that was as empty as their pockets.

Did the Bankers go to jail? NO!!!

Did Barney's Frank & his Buttys go to jail? NO!!!

Did the unemployed alcoholics have to pay the money back? NO!!!

It makes the employed, middle class non-drinkers want to become drinkers.   Too bad they can't afford it.