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 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 and soon she has
the largest sale volume for any bar in Detroit.
By
providing her customers freedom from immediate payment demands, Heidi gets no
resistance when she substantially increases her prices for wine and beer, the
most consumed beverages. Her sales volume increases massively.
A
young and dynamic vice-president at the local bank recognizes these customer debts
as valuable future assets and increases Heidi’s borrowing limit. He sees
no reason for undue concern since he has the debts of the alcoholics as
collateral.
At
the banks corporate headquarters, expert traders transform these customer loans
into DRINKBONDS, ALKIBONDS, and PUKEBONDS.
These
securities are then traded on securities markets worldwide. Naive investors
don’t really understand the securities being sold to them as AAA secured bonds
are really the debts of unemployed alcoholics.
Nevertheless,
their prices continuously climb, and the securities become the top-selling
items for some of the nations leading brokerage houses.
One
day, although the bond prices are still climbing, a risk manager at the bank
(subsequently fired due his negativity), decides that the time has come to
demand payment on the debts incurred by the drinkers at Heidi’s bar.
Heidi
demands payment from her alcoholic patrons, but being unemployed they cannot
pay back their drinking debts. Therefore, Heidi cannot fulfill her loan
obligations and claims bankruptcy.
DRINKBOND
and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in
price after dropping by 80 %. The decreased bond asset value destroys the banks
liquidity and prevents it from issuing new loans.
The
suppliers of Heidi’s bar, having granted her generous payment extensions and
having invested in the securities are faced with writing off her debt and
losing over 80% on her bonds.. Her wine supplier claims bankruptcy, her beer
supplier is taken over by a competitor, who immediately closes the local plant
and lays off 50 workers.
The
bank and brokerage houses are saved by the Government following dramatic
round-the-clock negotiations by leaders from both political parties.
The
funds required for this bailout are obtained by a tax levied on employed
middle-class non-drinkers.
