In simple terms (a metaphor, sure, but not far from the point):
Alice is the proprietor of a bar in New York City. 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 and as a result, increasing numbers of customers flood into Alice’s bar.
Taking advantage of her customer’s freedom from immediate payment constraints, Alice increases her prices for wine and beer, the most often 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 Alice’s borrowing limit. He sees no reason for undue concern because he has the promissory notes of Alice’s customers as collateral.
At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then sold and traded on markets worldwide. Nobody understands what these abbreviations mean and how the securities are guaranteed, nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager of the bank (who is subsequently fired due to his negativity) decided that the time has come to start demanding payment from Alice for the debts incurred by the drinkers at Alice’s bar.
Unfortunately Alice’s customers can’t pay back any of their debts to Alice.
Alice can’t fulfill her loan obligations to the bank and files for bankruptcy.
DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by only 80%.
The suppliers of Alice’s Bar, having granted her generous payment terms and also having invested in the securities are faced with a new and desperate situation. Her wine supplier files for bankruptcy and 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. They came up with a rescue plan that saved the bank.
The funds required for this massive rescue are obtained by levying a new tax on all the non-drinkers.
