(photo from animalmakers.com)
Below is an explanation of Derivatives, Credit Default Swaps, and Mortgage Backed Securities:
Chuck moved to Texas and bought a Donkey from a farmer for $100.
The farmer agreed to deliver the Donkey the next day.
The next day he drove up and said, 'Sorry son, but I have some bad news, the donkey died.'
Chuck replied, 'Well, then just give me my money back.'
The farmer said, 'Can't do that. I went and spent it already.'
Chuck said, 'Ok, then, just bring me the dead donkey.'
The farmer asked, 'What ya gonna do with him?'
Chuck said, 'I'm going to raffle him off.'
The farmer said, 'You can't raffle off a dead donkey!'
Chuck said, 'Sure I can. Watch me. I just won't tell anybody he's dead.'
A month later, the farmer met up with Chuck and asked, 'What happened with that dead donkey?'
Chuck said, 'I raffled him off.
I sold 500 tickets at two dollars a piece and made a profit of $998.'
The farmer said, 'Didn't anyone complain?'
Chuck said, 'Just the guy who won. So I gave him his two dollars back.'
Chuck now works for Goldman Sachs.