Financial Crisis Explained In Simple Terms

*Wendy is the proprietor of a bar in Washington. 

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 in a ledger, thereby granting the customers loans.

Word gets around, and as a result increasing numbers of customers flood into Wendy's bar.

Taking advantage of her customers' freedom from immediate payment constraints, Wendy increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Wendy's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and BOOZEBONDS.

These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed; nevertheless, their prices continuously climb, and the securities become top-selling items.

One day, although the prices are still climbing, a risk manager of the bank (subsequently fired due to his negativity) decides that the time has come to demand payment of the debts incurred by the drinkers at Wendy's bar.

But the drinkers cannot pay off their debts -- they're unemployed and they're alcoholics!

Wendy in turn can't fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. BOOZEBOND performs better, stabilizing in price after dropping by 80%.

The suppliers of Wendy's bar, having granted her generous payment due dates and having invested in the securities, are faced with a new situation: they must write off her accounts as uncollectable and suffer the loss of their investments. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties. Wendy, her suppliers, and all the investors who bought DRINKBONDs, ALKBONDs and BOOZEBONDs are left holding the bag.

The funds required for saving the bank - here's the good part! - are obtained by a tax levied on all non-drinkers.

Now do you understand?