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
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
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
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 a six 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?