Mary, a well-known, small-town moonshiner, decided to expand her enterprise and drive her competitor, Jane the moonshiner, out of business. In order to achieve this, Mary started selling moonshine to her customers in town on credit. Drinkers started coming from all over town, and the volume of sales skyrocketed, since after all, it was on credit!
But Mary was no fool – she kept receipts of every sale including the customer’s full legal name, driver’s license or passport number, and the payment due date. Her customers were also required to sign a contractual agreement.
To make things even better, Mary’s nephew was working for a bank at the time. As soon as he saw the pile of futures, he immediately got Mary a loan at the bank. Mary stocked up on sugar, and her business took off!
The bank had no problems giving her a loan, because the loan was securely guaranteed – if Mary couldn’t repay, her customers would have to pay up. But suddenly, the bank got an even better idea: they sorted the receipts according to their payment due date, issued bonds, and sold them to foreigners. Thus, the bank issued alcohol bonds guaranteed by the receipts, and brought in a flow of international capital. Happy foreigners started selling these bonds to one another, and their price went up. Nobody knew what the bonds represented, but since they were guaranteed by the bank and their value kept rising, people wanted to have them.
This would have continued, but since the bonds had almost matured, the bank was reminded that it was time to collect the money from either Mary or her customers. Obviously, her customers, the drunks, couldn’t pay, so Mary had to declare bankruptcy. Even the store that supplied Mary with sugar went out of business because of the sudden drop in sales. The cost of alcohol bonds on the stock exchange dropped by 95%, and the bank needed immediate rescuing at the expense of the non-drinkers.
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