Thanks for the credit Noel ! But why was it so easy for scruffy little conspiracy theorists (somewhat like me) to figure this scheme out ? Well, here it goes, my first attempt to describe to you part of the current economic crisis in a nutshell..
Derivatives
The proprietor of a bar decides - in order to increase sales- to allow loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. He keeps track of the drinks consumed, thereby granting the customers loans.
The word gets around about this drink-now-pay-later-marketing-strategy and as a result, increasing numbers of customers flood into the bar and soon it has the largest sale volume for any bar in the city.
By providing the customers freedom from immediate payment, there is no resistance when he substantially increases the prices for wine and beer, the most consumed beverages. The sales increase massively.
A young (and perhaps naive) vice-president at the local bank recognizes these customer debts as valuable future assets and increases the borrowing limit for the bar. He sees no reason for concern since he has the debts of the alcoholics as collateral. At the banks corporate headquarters, expert traders transform these customer loans into bonds.
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 they are really the debts of unemployed alcoholics. Who cares ? 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 to his negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at the bar. The bar proprietor demands payment from the alcoholic patrons, but being unemployed they cannot pay back their drinking debts. Therefore, the bar owner cannot fulfill his loan obligations and claims bankruptcy. The bonds drop in price, massively.
The decreased bond asset value destroys the banks liquidity and prevents it from issuing new loans. The suppliers of the bar, having granted generous payment extensions and having invested in the securities are faced with writing off her debt and losing over 80% on the bonds.. The wine supplier claims bankruptcy, the 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 several political parties. The funds required for this bailout are obtained by a tax levied on employed middle-class non-drinkers.
