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 new marketing plan that allows her customers to drink now, but pay later.
She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). These debts become assets (not liabilities, according to accountants & financial whizkids) of Heidi’s Bar.
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. Heidi’s is the most profitable in town. Her “book” profits climb.
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, since he has the debts of the unemployed alcoholics as collateral.
At the bank's corporate headquarters, expert traders transform these customer loans (again assets) into DRINKBONDS, ALKIBONDS and PUKEBONDS.
There are other bonds similarly created, HOUSEBONDS, RETAILBONDS & FIREBONDS. These are now inseparably bundled together with DRINKBONDS, ALKIBONDS & PUKEONDS to a new asset class called JAMESBOND which is traded on the 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 and similarly non-creditworthy others. None tries to find out exactly what assets have been bundled into JAMESBOND!
Nevertheless, JAMESBOND prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses. JAMESBOND is a star.
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 of interest from Heidi. (All along he has been increasing Heidi's credit to cover the interest also payable by Heidi) 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 the eleven employees lose their jobs.
JAMESBOND 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. None even knows how REALLY bad JAMESBOND is due to due to Heid's bankruptcy!
The suppliers of Heidi's bar had granted her 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 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 multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers. Government further prints currency to bridge the deficit.
The investment banks and others use the cash infusion continue the BONDSGAME inviting further disaster.
(Via GiGi)
