DERIVATIVES

This is an article I received in an email. It had no one to attribute it to, so here goes:

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 because 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 DRINKBONDS.

These "securities" then are bundled and traded on international
securities markets.

Naive investors don't really understand that the securities being sold to
them "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, DRINKBOND 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
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 derivatives?