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My normal blog is at http://www.billbuchan.com. I'm a burnt out, overweight middle-aged geek with delusions of adequacy.
An Easily Understandable Explanation of Derivative Markets
| 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). 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, 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 are then bundled and traded 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 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 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 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. Now, do you understand? |
Posted by Bill Buchan
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Ronnie Biggs to repay proceeds of Great Train Robbery after ‘genuine oversight’
Notorious Great Train Robber, Ronnie Biggs, has announced that he is to
return the proceeds gained from the 1963 multi-million pound train heist
in an attempt to restore public confidence in the once honourable criminal
classes. Biggs, currently serving a sentence in Norwich prison after
returning to the UK in 2001, has described the manner by which he came
into the money as ‘an honest mistake’, and has called for a change in
the rules which are making morally-upright criminals look like money-grabbing
cheats.
‘I didn’t realise I was doing anything wrong,’ said the ailing 79-year-old
today in a prepared statement. ‘The train stopped and everyone just
jumped on the wagon, so I assumed it was totally on the level. But
I tell you, as soon as I checked the law some 36 years later and found
that I may have been in the wrong, I couldn’t have been more embarrassed.
I turned myself in straight away. I just hope that by giving
the money back now it’s not too late to change the public’s opinion of
me.’
After initially being convicted for the Great Train Robbery in what he
thought was a gross miscarriage of justice, Biggs escaped from prison in
1965 and remained on the run until he discovered his mistake in 2001. Although
he insists that at the time of the robbery he stuck to the gang’s rules
100%, he has admitted that he felt ‘uncomfortable’ claiming so much money.
And he has now called for a complete overhaul of the system which
forced him to acquire second, third and fourth homes in different countries
just to avoid being apprehended by the police and returned to prison.
Yet despite getting his comeuppance, Biggs remains nostalgic for a time
when robbers had standards. ‘There was a time when being a criminal
meant something, when you were looked up to by the community,’ he lamented
today. ‘But this modern generation of criminals is completely lacking
in moral fibre. They’ll take anything, and it’s decent everyday
people who are left to foot the bill.’
Now in declining health, Biggs is hopeful that he will soon be granted
early release in anticipation of a surge in demand for prison places. ‘But
if not, I ain’t sharing my cell with no thief,’ he spat today.
Posted by Bill Buchan
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