| Tulipmania - this is the name coined for
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| | decisions and it ends in misery on a
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| the first pyramid investment scheme in
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| | national scale. It is the scourge of
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| history.In 1634, tulip bulbs were traded
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| | societies in transition.The second type
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| in a special exchange in Amsterdam.
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| | of financial scandals is normally
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| People used these bulbs as means of
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| | connected to the laundering of capital
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| exchange and value store. They traded
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| | generated in the "black economy", namely:
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| them and speculated in them. The rare
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| | the income not reported to the tax
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| black tulip bulbs were as valuable as a
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| | authorities. Such money passes through
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| big mansion house. The craze lasted four
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| | banking channels, changes ownership a few
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| years and it seemed that it would last
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| | times, so that its track is covered and
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| forever. But this was not to be.The
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| | the identities of the owners of the money
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| bubble burst in 1637. In a matter of a
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| | are concealed. Money generated by drug
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| few days, the price of tulip bulbs was
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| | dealings, illicit arm trade and the less
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| slashed by 96%!This specific pyramid
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| | exotic form of tax evasion is thus
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| investment scheme was somewhat different
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| | "laundered".The financial institutions
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| from the ones which were to follow it in
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| | which participate in laundering
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| human financial history elsewhere in the
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| | operations, maintain double accounting
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| world. It had no "organizing committee",
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| | books. One book is for the purposes of
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| no identifiable group of movers and
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| | the official authorities. Those agencies
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| shakers, which controlled and directed
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| | and authorities that deal with taxation,
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| it. Also, no explicit promises were ever
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| | bank supervision, deposit insurance and
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| made concerning the profits which the
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| | financial liquidity are given access to
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| investors could expect from participating
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| | this set of "engineered" books. The true
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| in the scheme - or even that profits were
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| | record is kept hidden in another set of
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| forthcoming to them.Since then, pyramid
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| | books. These accounts reflect the real
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| schemes have evolved into intricate
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| | situation of the financial institution:
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| psychological ploys.Modern ones have a
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| | who deposited how much, when and under
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| few characteristics in common:First, they
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| | which conditions - and who borrowed what,
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| involve ever growing numbers of people.
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| | when and under which conditions.This
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| They mushroom exponentially into
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| | double standard blurs the true situation
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| proportions that usually threaten the
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| | of the institution to the point of no
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| national economy and the very fabric of
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| | return. Even the owners of the
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| society. All of them have grave political
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| | institution begin to lose track of its
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| and social implications.Hundreds of
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| | activities and misapprehend its real
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| thousands of investors (in a population
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| | standing.Is it stable? Is it liquid? Is
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| of less than 3.5 million souls) were
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| | the asset portfolio diversified enough?
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| deeply enmeshed in the 1983 banking
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| | No one knows. The fog enshrouds even
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| crisis in Israel.This was a classic
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| | those who created it in the first place.
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| pyramid scheme: the banks offered their
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| | No proper financial control and audit is
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| own shares for sale, promising investors
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| | possible under such circumstances.Less
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| that the price of the shares will only go
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| | scrupulous members of the management and
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| up (sometimes by 2% daily). The banks
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| | the staff of such financial bodies
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| used depositors' money, their capital,
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| | usually take advantage of the situation.
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| their profits and money that they
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| | Embezzlements are very widespread, abuse
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| borrowed abroad to keep this impossible
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| | of authority, misuse or misplacement of
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| and unhealthy promise. Everyone knew what
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| | funds. Where no light shines, a lot of
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| was going on and everyone was
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| | creepy creatures tend to develop.The most
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| involved.The Ministers of Finance, the
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| | famous - and biggest - financial scandal
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| Governors of the Central Bank assisted
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| | of this type in human history was the
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| the banks in these criminal pursuits.
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| | collapse of the Bank for Credit and
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| This specific pyramid scheme - arguably,
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| | Commerce International LTD. (BCCI) in
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| the longest in history - lasted 7
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| | London in 1991. For almost a decade, the
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| years.On one day in October 1983, ALL the
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| | management and employees of this shady
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| banks in Israel collapsed. The government
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| | bank engaged in stealing and
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| faced such civil unrest that it was
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| | misappropriating 10 billion (!!!) USD.
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| forced to compensate shareholders through
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| | The supervision department of the Bank of
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| an elaborate share buyback plan which
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| | England, under whose scrutinizing eyes
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| lasted 9 years. The total indirect damage
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| | this bank was supposed to have been - was
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| is hard to evaluate, but the direct
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| | proven to be impotent and incompetent.
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| damage amounted to 6 billion USD.This
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| | The owners of the bank - some Arab
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| specific incident highlights another
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| | Sheikhs - had to invest billions of
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| important attribute of pyramid schemes:
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| | dollars in compensating its
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| investors are promised impossibly high
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| | depositors.The combination of black
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| yields, either by way of profits or by
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| | money, shoddy financial controls, shady
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| way of interest paid. Such yields cannot
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| | bank accounts and shredded documents
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| be derived from the proper investment of
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| | proves to be quite elusive. It is
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| the funds - so, the organizers resort to
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| | impossible to evaluate the total damage
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| dirty tricks.They use new money, invested
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| | in such cases.The third type is the most
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| by new investors - to pay off the old
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| | elusive, the hardest to discover. It is
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| investors.The religion of Islam forbids
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| | very common and scandal may erupt - or
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| lenders to charge interest on the credits
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| | never occur, depending on chance, cash
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| that they provide. This prohibition is
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| | flows and the intellects of those
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| problematic in modern day life and could
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| | involved.Financial institutions are
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| bring modern finance to a complete
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| | subject to political pressures, forcing
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| halt.It was against this backdrop, that a
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| | them to give credits to the unworthy - or
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| few entrepreneurs and religious figures
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| | to forgo diversification (to give too
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| in Egypt and in Pakistan established what
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| | much credit to a single borrower). Only
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| they called: "Islamic banks". These banks
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| | lately in South Korea, such politically
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| refrained from either paying interest to
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| | motivated loans were discovered to have
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| depositors - or from charging their
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| | been given to the failing Hanbo
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| clients interest on the loans that they
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| | conglomerate by virtually every bank in
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| doled out. Instead, they have made their
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| | the country. The same may safely be said
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| depositors partners in fictitious profits
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| | about banks in Japan and almost
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| - and have charged their clients for
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| | everywhere else. Very few banks would
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| fictitious losses. All would have been
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| | dare to refuse the Finance Minister's
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| well had the Islamic banks stuck to
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| | cronies, for instance.Some banks would
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| healthier business practices.But they
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| | subject the review of credit applications
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| offer impossibly high "profits" and ended
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| | to social considerations. They would lend
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| the way every pyramid ends: they
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| | to certain sectors of the economy,
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| collapsed and dragged economies and
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| | regardless of their financial viability.
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| political establishments with them.The
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| | They would lend to the needy, to the
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| latest example of the price paid by whole
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| | affluent, to urban renewal programs, to
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| nations due to failed pyramid schemes is,
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| | small businesses - and all in the name of
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| of course, Albania 1997. One third of the
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| | social causes which, however justified -
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| population was heavily involved in a
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| | cannot justify giving loans.This is a
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| series of heavily leveraged investment
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| | private case in a more widespread
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| plans which collapsed almost
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| | phenomenon: the assets (=loan portfolios)
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| simultaneously. Inept political and
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| | of many a financial institution are not
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| financial crisis management led Albania
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| | diversified enough. Their loans are
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| to the verge of disintegration into civil
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| | concentrated in a single sector of the
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| war.But why must pyramid schemes fail?
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| | economy (agriculture, industry,
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| Why can't they continue forever, riding
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| | construction), in a given country, or
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| on the back of new money and keeping
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| | geographical region. Such exposure is
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| every investor happy, new and old?The
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| | detrimental to the financial health of
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| reason is that the number of new
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| | the lending institution. Economic trends
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| investors - and, therefore, the amount of
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| | tend to develop in unison in the same
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| new money available to the pyramid's
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| | sector, country, or region. When real
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| organizers - is limited. There are just
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| | estate in the West Coast of the USA
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| so many risk takers. The day of judgement
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| | plummets - it does so indiscriminately. A
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| is heralded by an ominous mismatch
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| | bank whose total portfolio is composed of
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| between overblown obligations and the
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| | mortgages to West Coast Realtors, would
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| trickling down of new money. When there
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| | be demolished.In 1982, Mexico defaulted
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| is no more money available to pay off the
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| | on the interest payments of its
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| old investors, panic ensues. Everyone
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| | international debts. Its arrears grew
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| wants to draw money at the same time.
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| | enormously and threatened the stability
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| This, evidently, is never possible - some
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| | of the entire Western financial system.
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| of the money is usually invested in real
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| | USA banks - which were the most exposed
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| estate or was provided as a loan. Even
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| | to the Latin American debt crisis - had
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| the most stable and healthiest financial
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| | to foot the bulk of the bill which
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| institutions never put aside more than
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| | amounted to tens of billions of USD. They
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| 10% of the money deposited with
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| | had almost all their capital tied up in
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| them.Thus, pyramids are doomed to
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| | loans to Latin American countries.
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| collapse.But, then, most of the investors
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| | Financial institutions bow to fads and
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| in pyramids know that pyramids are scams,
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| | fashions. They are amenable to "lending
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| not schemes. They stand warned by the
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| | trends" and display a herd-like
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| collapse of other pyramid schemes,
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| | mentality. They tend to concentrate their
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| sometimes in the same place and at the
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| | assets where they believe that they could
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| same time. Still, they are attracted
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| | get the highest yields in the shortest
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| again and again as butterflies are to the
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| | possible periods of time. In this sense,
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| fire and with the same results.The reason
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| | they are not very different from
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| is as old as human psychology: greed,
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| | investors in pyramid investment
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| avarice. The organizers promise the
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| | schemes.Financial mismanagement can also
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| investors two things:that they could draw
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| | be the result of lax or flawed financial
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| their money anytime that they want to
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| | controls. The internal audit department
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| andthat in the meantime, they will be
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| | in every financing institution - and the
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| able to continue to receive high returns
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| | external audit exercised by the
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| on their money.People know that this is
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| | appropriate supervision authorities are
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| highly improbable and that the likelihood
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| | responsible to counter the natural human
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| that they will lose all or part of their
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| | propensity for gambling. The must help
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| money grows with time. But they convince
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| | the financial organization re-orient
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| themselves that the high profits or
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| | itself in accordance with objective and
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| interest payments that they will be able
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| | objectively analysed data. If they fail
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| to collect before the pyramid collapses -
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| | to do this - the financial institution
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| will more than amply compensate them for
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| | would tend to behave like a ship without
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| the loss of their money. Some of them,
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| | navigation tools. Financial audit
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| hope to succeed in drawing the money
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| | regulations (the most famous of which are
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| before the imminent collapse, based on
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| | the American FASBs) trail way behind the
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| "warning signs". In other words, the
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| | development of the modern financial
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| investors believe that they can outwit
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| | marketplace. Still, their judicious and
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| the organizers of the pyramid. The
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| | careful implementation could be of
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| investors collaborate with the organizers
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| | invaluable assistance in steering away
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| on the psychological level: cheated and
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| | from financial scandals.Taking human
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| deceiver engage in a delicate ballet
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| | psychology into account - coupled with
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| leading to their mutual downfall.This is
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| | the complexity of the modern world of
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| undeniably the most dangerous of all
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| | finances - it is nothing less than a
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| types of financial scandals. It
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| | miracle that financial scandals are as
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| insidiously pervades the very fabric of
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| | few and far between as they are.
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| human interactions. It distorts economic
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