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Understanding Derivative Markets
This story has been passed around by bloggers and others.
Its origin is unknown. This version was contributed by Mike Raszeja

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 by granting her customers high interest loans.

Word gets around about Heidi's "Drink now, Pay later" marketing strategy. Increasing numbers of customers flood into Heidi's bar and soon she has the largest sales volume of any bar in Detroit.

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when she substantially increases her prices.

A young and dynamic vice-president at the local bank recognizes these growing customer debts as valuable assets and purchases her customers' high interest loans.

At the bank's corporate headquarters, bond experts transform these customer loans into Collateralized Debt Obligations (CDOs) called ALKIBONDS. These bonds are then traded AND leveraged on worldwide security markets.

Naive investors don't really understand the securities being sold to them as AA rated bonds are really the debts of dropouts from Alcoholics Anonymous. Their prices continue to climb, and the securities become the top-selling bonds of some of the nation's leading brokerage houses, who collect enormous fees on their sales. Extravagant bonuses are paid to their sales forces, who then purchase exotic sports cars and multimillion dollar condominiums.

One day a risk manager at the bank decides that the time has come to reduce the principal on the debts incurred by the drinkers at Heidi's bar.

The bank's new policy now requires a principal payment from each of Heidi's debtors, but the unemployed alcoholics cannot afford to pay both interest and principal on their drinking debts.

ALKIBONDS lose 90% of their principal value. The decreased bond asset value destroys the bank's liquidity and prevents it from issuing new loans.

The suppliers of Heidi's bar, having accepted ALKIBOND CDOs in lieu of payment for wine and beer, are ruined.

Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor, who immediately closes the local plant and terminates fifty workers.

Following dramatic round-the-clock negotiations by leaders from both political parties, the bank and brokerage houses are saved by the taxpayer because they are "Too BIG to FAIL". The funds required for this bailout are obtained by printing more money and by a tax levied on anyone who still has an income or anything else worth taxing.