My sister, the bankruptcy lawyer, sent me an email to explain the credit crisis. Since my brain is pea-sized, she used points of reference I understand.
John is the proprietor of a bar in Sydney. In order to increase sales, he decides to allow his loyal customers, most of whom are unemployed alcoholics, to drink now but pay later. He keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of unemployed alcoholics flood into John's bar.
Taking advantage of his customers' freedom from immediate payment constraints, John significantly increases his prices for wine and beer, the most popular drinks. His sales volume ncreases massively. A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases John'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 PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items because Lehman Bros recommended them as a good investment.
One day, although the prices are still climbing, a risk manager of the bank, (subsequently of course fired due to his negativity), decides that the time has come to demand payment of the debts incurred by the drinkers at John's bar. But of course they cannot pay back the debts.
John cannot fulfill his loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 88 %. The suppliers of John's bar, having granted her generous payment due dates, and having invested in the securities, are faced with a new situation. His wine supplier claims bankruptcy, his beer supplier is taken over by a competitor.
The bank is saved by the Federal Government following dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on the non-drinkers.
There, do you feel educated now?
That's the view from The Law Planet - Jupiter, Florida.