{"id":12380,"date":"2011-11-16T23:26:24","date_gmt":"2011-11-16T19:26:24","guid":{"rendered":"https:\/\/mideastposts.com\/?p=12380"},"modified":"2011-11-17T18:09:40","modified_gmt":"2011-11-17T14:09:40","slug":"in-vino-verite-seeing-derivatives-as-they-are","status":"publish","type":"post","link":"https:\/\/mideastposts.com\/middle-east-business\/middle-east-economics-analysis\/in-vino-verite-seeing-derivatives-as-they-are\/","title":{"rendered":"In Vino Veritas: Seeing Derivatives as They Are"},"content":{"rendered":"

\"\"<\/a>I don\u2019t normally propagate stuff I receive via the internet, but a banker friend sent me this little nugget about derivatives, those nasty financial instruments that caused so many problems in 2008. It\u2019s probably been pinging around inboxes around the world by now, but if you haven\u2019t seen it, it\u2019s a treat:<\/p>\n

A Lesson in Economics:\u00a0 Understanding \u2018Derivatives.\u2019<\/strong><\/p>\n

Heidi is the proprietor of a bar in Detroit .<\/p>\n

She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise 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).<\/p>\n

Word gets around about Heidi\u2019s \u201cDrink now, pay later\u201d marketing strategy and, as a result, increasing numbers of customers flood into Heidi\u2019s 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\u2019s gross sales volume increases massively.<\/p>\n

A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Heidi\u2019s borrowing limit. He sees no reason for any undue concern because he has the debts of the unemployed alcoholics as collateral! At the bank\u2019s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These \u201cSecurities\u201d then are bundled and traded on international securities markets.<\/p>\n

Naive investors don\u2019t really understand that the securities being sold to them as \u201cAAA Secured Bonds\u201d really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb \u2013 and the securities soon become the hottest-selling items for some of the nation\u2019s leading brokerage houses.<\/p>\n

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\u2019s bar. He so informs Heidi. Heidi then demands payment from her alcoholic patrons.\u00a0 But, being unemployed alcoholics \u2014 they cannot pay back their drinking debts. Since Heidi cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Heidi\u2019s 11 employees lose their jobs.<\/p>\n

Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank\u2019s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.<\/p>\n

The suppliers of Heidi\u2019s bar had granted her generous payment extensions and had invested their firms\u2019 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.<\/p>\n

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. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi\u2019s bar.<\/p>\n

Do you now understand?<\/strong><\/p><\/blockquote>\n

I have no idea where this came from, but I suspect Detroit, which is the city most often quoted as the biggest casualty of the 2008 financial crisis. Still relevant today, I think.<\/p>\n","protected":false},"excerpt":{"rendered":"

STEVE ROYSTON: This has probably been pinging around inboxes around the world by now, but if you haven\u2019t seen it, it\u2019s a treat.<\/p>\n","protected":false},"author":38,"featured_media":12381,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4,64],"tags":[],"_links":{"self":[{"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/posts\/12380"}],"collection":[{"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/users\/38"}],"replies":[{"embeddable":true,"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/comments?post=12380"}],"version-history":[{"count":0,"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/posts\/12380\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/media\/12381"}],"wp:attachment":[{"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/media?parent=12380"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/categories?post=12380"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mideastposts.com\/wp-json\/wp\/v2\/tags?post=12380"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}