Easy Explanation of the Derivatives Market

Heidi is the proprietor of a bar in Detroit. She realizes that many 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. Word gets around and customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit. She gets no resistance when, at regular intervals, she substantially increases her prices, and her gross sales volume increases even more.
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 transform these customer loans into securities and trade them on international security markets. Naive investors don't really understand the securities, but since the bond prices continuously climb, the securities soon become the hottest-selling items at some of the nation's leading brokerage houses.
One day, even though the bond prices are still 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, who then demands payment from her alcoholic patrons. When the unemployed alcoholics cannot pay back their debts, Heidi is forced into bankruptcy. The bar closes and the eleven employees lose their jobs. Overnight, the securities drop in price by 90%. The collapsed bond values destroy the bank's liquidity, preventing it from issuing new loans and freezing economic activity in the community. The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firm's pension funds in the bond securities. They find they are now faced with big layoffs. Her wine supplier 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, bailed out by a multi-billion dollar, no-strings attached, cash infusion from Washington. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.