Go here for details, but this is the full story:
Once upon a time, there was a blameless girl called Consumerella, who didn’t have enough money to buy all the lovely things she wanted. She went to her Fairy Godmother, who called a man called Rumpelstiltskin who lived on Wall Street and claimed to be able to spin straw into gold. Rumpelstiltskin sent the Fairy Godmother the recipe for this magic spell. It was written in tiny, tiny writing, so she did not read it but hoped the Sorcerers’ Exchange Commission had checked it.
The Fairy Godmother carried away armfuls of glistening straw-derivative at a bargain price. Emboldened by the deal, she lent Consumerella – who had a big party to go to – 125 per cent of the money she needed. Consumerella bought a bling-bedizened gown, a palace and a Mercedes – and spent the rest on champagne. The first payment was due at midnight.
At midnight, Consumerella missed the first payment on her loan. (The result of overindulgence, although some blamed the pronouncements of the Toastmaster, a man called Peston.) Consumerella’s credit rating turned into a pumpkin and Rumpelstiltskin’s spell was broken. He and the Fairy Godmother discovered that their vaults were not full of gold, but ordinary straw.
All seemed lost until Santa Claus and his helpers, men with implausible fairy-tale names such as Darling and Bernanke, began handing out presents. It was only in January that Consumerella’s credit card statement arrived and she discovered that Santa Claus had paid for the gifts by taking out a loan in her name. They all lived miserably ever after. The End.
Bonus: Explaining CDS is slightly harder, but I think that’s the real point of the story 🙂
Billy wants to buy a pack of baseball cards. However, baseball cards are a dollar and Billy doesn’t have a dollar. So Billy goes to his best friend Jamie and says, can I borrow a dollar? Jamie says, sure, but only if you pay me a dollar and a nickel back. Billy says okay, because he plans to sell the cards for two dollars. Jamie writes an IOU because he only has a quarter.
Jamie isn’t sure that Billy can pay him back, so he decides to sell a credit default swap. Jamie goes to Sally and says, I owe Billy a dollar and Billy owes me a dollar and a nickel back. Can I give you a penny a day in exchange for you signing your name on the IOU I gave Billy? Sally doesn’t know Billy, so to her this proposal looks like a bargain. Besides, Sally just got ten dollars for her birthday so even if Billy can’t pay back she can easily cover Billy’s debt. Repeat this process 70 trillion times.”