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phoenix, az
Experience: Intermediate
Platform: ninjatrader
Trading: oil
Posts: 6 since Jul 2012
Thanks Given: 0
Thanks Received: 10
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Helga is the proprietor of a bar. 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.
Helga keeps track of the drinks consumed on a ledger (thereby granting
the customers' loans).
Word gets around about Helga's "drink now, pay later" marketing
strategy and, as a result, increasing numbers of customers flood into
Helga's bar. Soon she has the largest sales volume for any bar in
town.
By providing her customers freedom from immediate payment demands
Helga gets no resistance when, at regular intervals, she substantially
increases her prices for wine and beer - the most consumed beverages.
Consequently, Helga's gross sales volumes and paper profits increase
massively. A young and dynamic vice-president at the local bank
recognises that these customer debts constitute valuable future assets
and increases Helga's borrowing limit. He sees no reason for any undue
concern, since he has the debts of the unemployed alcoholics as
collateral.
He is rewarded with a six figure bonus.
At the bank's corporate headquarters, expert traders figure a way to
make huge commissions, and transform these customer loans into
DRINKBONDS. These "securities" are then bundled and traded on
international securities markets.
Naive investors don't really understand that the securities being sold
to them as "AA Secured Bonds" are really 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.
The traders all receive a six figure bonus.
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 Helga's bar.
He so informs Helga. Helga then demands payment from her alcoholic
patrons but, being unemployed alcoholics, they cannot pay back their
drinking debts. Since Helga cannot fulfil her loan obligations she is
forced into bankruptcy. The bar closes and Helga'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 Helga'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 attached cash infusion from the government.
They all receive six a figure bonus.
The funds required for this bailout are obtained by new taxes levied
on employed, middle-class, non-drinkers who've never been in Helga's
bar.
Now do you understand?
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