Posted: March 24, 2011 in News and politics

John Love

Understanding Derivatives: adjective – a financial contract whose value derives from the value of underlying stocks, bonds, currencies, commodities, etc.

I found a perfect description which explains Derivatives and the effect they have had on our economy, it goes like this;

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 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). 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 figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These securities then are bundled and traded on international securities markets.
Naive investors don’t really understand that the securities being sold to them as AAA secured bonds really are 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 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’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 Heidi’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 Heidi’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 their cronies in 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’s bar.

Now do you understand? Write your congressman and see if you can get them to understand. Then threaten to vote them out office if they do not do something to change how business is done on Wall St. and in our banks. Right now they think we do not matter, we have no punch, no clout as things stand. But if we ever wise up and rise up as a group and start voting as a block, well you can and will be in control for once. At least consider voting in blocks for controls of how our money is invested on Wall St. How banks handle mortgages, and who gave credit card companies the power to pretty much do as they please? If you are a baby boomer, anyone long in the tooth, you need to convince your peers that your congressman keep saying that social security will fail in the near future. Social Security did not and has not failed. It actually made huge surpluses. Big government took the trillion dollars and then some surplus and spent it, promising to pay it back with bonds it issued for that purpose. But since they have continued to pork belly the debt into oblivion, they do not want to honor the bonds that are now coming due for the money taken, they think if they don’t mention it, or tell the lie often enough, we will all just starve to death and quit bothering them. Combined with allowing the privileged few to prey on the many and depleting our 401k’s, other savings and investments, taking advantage of people desperately wanting a home, removing services and payments we deserve and earned, our government is guilty of theft at the very least, and I say genocide of the poor and elderly! So hope you understand now that if you sit on your proverbial ass, you will get will exactly what you deserve!
Again, Social Security funds itself. It is the only successful program that if left alone by the federal govt. operates at a surplus. It is not broke. It just has to many politicians sucking at its teats. I finally heard a senator from California, a democrat; tell the truth about Social Security publicly. First one I ever heard do so! Now if we could stop our supposed representatives from only supporting their cronies and bailing out the same people who ripped us off in the first place, well we would be getting somewhere.
I support the notion that we should all vote out every incumbent, and keep it up until our elected officials get the idea that business as usual is not acceptable.
I welcome any feedback!

  1. James Mahon says:

    This is the best thing you have ever written. It is well researched and you have woven it well into a great appeal for grass roots political action. I don’t know where you found the story of the “drink now, pay later” bar explaining how our financial institutions manipulate, connive, and deceive the public, but it is a great, a little over-simplified, but none the less a great way of presenting the information.

    My sons once asked me since I was an economics major for assistance in playing the stock market. My advice to them was to shoot craps instead; that the things that go on in the stock market are without reason. The Stock Market is simply people following each other like lemmings buying and selling worthless pieces of paper on the secondary market. The trends have little or nothing to do with actual business, nor are you actually purchasing a part of the business. Few people have the opportunity of investing in the Prime Market. However, I also didn’t foresee the Housing Market disrupting the whole financial apple cart. I should have watched the markets a little closer. Silly me….

  2. James Mahon says:

    Oh, and I did read it all, but only responded to what I thought was apropos. You and have have discussed all privately, and I feel no need to rehash old ground. In my opinion it would only detract from the strength of what you have written here!

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