The Typology 
of Financial Scandals

In 1634, tulip bulbs were traded in a special exchange in Amsterdam. People used these bulbs as means of exchange and value store. They traded them and speculated in them. The rare black tulip bulbs were as valuable as a big mansion house. The craze lasted four years and it seemed that it would last forever. But this was not to be.

The bubble burst in 1637. In a matter of a few days, the price of tulip bulbs was slashed by 96% !

This specific pyramid investment scheme was somewhat different from the ones which were to follow it in human financial history elsewhere in the world. It had no "organizing committee", no identifiable group of movers and shakers, which controlled and directed it. Also, no explicit promises were ever made concerning the profits which the investors could expect from participating in the scheme - or even that profits were forthcoming to them.

Since then, pyramid schemes have evolved into intricate psychological ploys.

Modern ones have a few characteristics in common :

First, they involve ever growing numbers of people. They mushroom exponentially into proportions that usually threaten the national economy and the very fabric of society. All of them have grave political and social implications.

Hundreds of thousands of investors (in a population of less than 3.5 million souls) were deeply enmeshed in the 1983 banking crisis in Israel.

This was a classic pyramid scheme : the banks offered their own shares for sale, promising investors that the price of the shares will only go up (sometimes by 2% daily). The banks used depositors' money, their capital, their profits and money that they borrowed abroad to keep this impossible and unhealthy promise. Everyone knew what was going on and everyone was involved.

The Ministers of Finance, the Governors of the Central Bank assisted the banks in these criminal pursuits. This specific pyramid scheme - arguably, the longest in history - lasted 7 years.

On one day in October 1983, ALL the banks in Israel collapsed. The government faced such civil unrest that it was forced to compensate shareholders through an elaborate share buyback plan which lasted 9 years. The total indirect damage is hard to evaluate, but the direct damage amounted to 6 billion USD.

This specific incident highlights another important attribute of pyramid schemes : investors are promised impossibly high yields, either by way of profits or by way of interest paid. Such yields cannot be derived from the proper investment of the funds - so, the organizers resort to dirty tricks.

They use new money, invested by new investors - to pay off the old investors.

The religion of Islam forbids lenders to charge interest on the credits that they provide. This prohibition is problematic in modern day life and could bring modern finance to a complete halt.

It was against this backdrop, that a few entrepreneurs and religious figures in Egypt and in Pakistan established what they called : "Islamic banks". These banks refrained from either paying interest to depositors - or from charging their clients interest on the loans that they doled out. Instead, they have made their depositors partners in fictitious profits - and have charged their clients for fictitious losses. All would have been well had the Islamic banks stuck to healthier business practices.

But they offer impossibly high "profits" and ended the way every pyramid ends : they collapsed and dragged economies and political establishments with them.

The latest example of the price paid by whole nations due to failed pyramid schemes is, of course, Albania 1997. One third of the population was heavily involved in a series of heavily leveraged investment plans which collapsed almost simultaneously. Inept political and financial crisis management led Albania to the verge of disintegration into civil war.

But why must pyramid schemes fail ? Why can't they continue forever, riding on the back of new money and keeping every investor happy, new and old ?

The reason is that the number of new investors - and, therefore, the amount of new money available to the pyramid's organizers - is limited. There are just so many risk takers. The day of judgment is heralded by an ominous mismatch between overblown obligations and the trickling down of new money. When there is no more money available to pay off the old investors, panic ensues. Everyone wants to draw money at the same time. This, evidently, is never possible - some of the money is usually invested in real estate or was provided as a loan. Even the most stable and healthiest financial institutions never put aside more than 10% of the money deposited with them.

Thus, pyramids are doomed to collapse.

The reason is as old as human psychology : greed, avarice.

The organizers promise the investors two things :

1. that they could draw their money anytime that they want to 
2. and that in the meantime, they will be able to continue to receive high returns on their money.

People know that this is highly improbable and that the likelihood that they will lose all or part of their money grows with time. But they convince themselves that the high profits or interest payments that they will be able to collect before the pyramid collapses - will more than amply compensate them for the loss of their money. Some of them, hope to succeed in drawing the money before the imminent collapse, based on "warning signs". In other words, the investors believe that they can outwit the organizers of the pyramid. The investors collaborate with the organizers on the psychological level : cheated and deceiver engage in a delicate ballet leading to their mutual downfall.

This is undeniably the most dangerous of all types of financial scandals. It insidiously pervades the very fabric of human interactions. It distorts economic decisions and it ends in misery on a national scale. It is the scourge of societies in transition.

The second type of financial scandals is normally connected to the laundering of capital generated in the "black economy", namely : the income not reported to the tax authorities. Such money passes through banking channels, changes ownership a few times, so that its track is covered and the identities of the owners of the money are concealed. Money generated by drug dealings, illicit arm trade and the less exotic form of tax evasion is thus "laundered".

The financial institutions which participate in laundering operations, maintain double accounting books. One book is for the purposes of the official authorities. Those agencies and authorities that deal with taxation, bank supervision, deposit insurance and financial liquidity are given access to this set of "engineered" books. The true record is kept hidden in another set of books. These accounts reflect the real situation of the financial institution : who deposited how much, when and under which conditions - and who borrowed what, when and under which conditions.

This double standard blurs the true situation of the institution to the point of no return. Even the owners of the institution begin to lose track of its activities and misapprehend its real standing.

Is it stable ? Is it liquid ? Is the asset portfolio diversified enough ? No one knows. The fog enshrouds even those who created it in the first place. No proper financial control and audit is possible under such circumstances.

Less scrupulous members of the management and the staff of such financial bodies usually take advantage of the situation. Embezzlements are very widespread, abuse of authority, misuse or misplacement of funds. Where no light shines, a lot of creepy creatures tend to develop.

The most famous - and biggest - financial scandal of this type in human history was the collapse of the Bank for Credit and Commerce International LTD. (BCCI) in London in 1991. For almost a decade, the management and employees of this shady bank engaged in stealing and misappropriating 10 billion (!!!) USD. The supervision department of the Bank of England, under whose scrutinizing eyes this bank was supposed to have been - was proven to be impotent and incompetent. The owners of the bank - some Arab Sheikhs - had to invest billions of dollars in compensating its depositors.

The combination of black money, shoddy financial controls, shady bank accounts and shredded documents proves to be quite elusive. It is impossible to evaluate the total damage in such cases.

The third type is the most elusive, the hardest to discover. It is very common and scandal may erupt - or never occur, depending on chance, cash flows and the intellects of those involved.

Financial institutions are subject to political pressures, forcing them to give credits to the unworthy - or to forgo diversification (to give too much credit to a single borrower). Only lately in South Korea, such politically motivated loans were discovered to have been given to the failing Hanbo conglomerate by virtually every bank in the country. The same may safely be said about banks in Japan and almost everywhere else. Very few banks would dare to refuse the Finance Minister's cronies, for instance.

Some banks would subject the review of credit applications to social considerations. They would lend to certain sectors of the economy, regardless of their financial viability. They would lend to the needy, to the affluent, to urban renewal programs, to small businesses - and all in the name of social causes which, however justified - cannot justify giving loans.

This is a private case in a more widespread phenomenon : the assets (=loan portfolios) of many a financial institution are not diversified enough. Their loans are concentrated in a single sector of the economy (agriculture, industry, construction), in a given country, or geographical region. Such exposure is detrimental to the financial health of the lending institution. Economic trends tend to develop in unison in the same sector, country, or region. When real estate in the West Coast of the USA plummets - it does so indiscriminately. A bank whose total portfolio is composed of mortgages to West Coast Realtors, would be demolished.

In 1982, Mexico defaulted on the interest payments of its international debts. Its arrears grew enormously and threatened the stability of the entire Western financial system. USA banks - which were the most exposed to the Latin American debt crisis - had to foot the bulk of the bill which amounted to tens of billions of USD. They had almost all their capital tied up in loans to Latin American countries. Financial institutions bow to fads and fashions. 

They are amenable to "lending trends" and display a herd-like mentality. They tend to concentrate their assets where they believe that they could get the highest yields in the shortest possible periods of time. In this sense, they are not very different from investors in pyramid investment schemes.

And then, we have these essays in the GENERAL ESSAYS category which don't seem to fit anywhere in particular:

By Reason Alone..  That Roosevelt can do no wrong is Burroughs’s opinion; and that Burroughs is always right is Roosevelt’s opinion.  Both are agreed that animals do not reason.  They assert that all animals below man are automatons and perform actions only of two sorts—mechanical and reflex—and that in such actions no reasoning enters at all.  They believe that man is the only animal capable of reasoning and that ever does reason.

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No man is an island, is an old saying that was meant to say that no man stood alone, but needed help from others, and gave strength to others.  But, here is the story of an island that was a man.  In the short history of time, there was one island that was a monument to a single man.  It starts out like a fairy tale.. Once upon a time there was a barren island.    This almost insignificant little man was sent off to this barren island and turned it into a mirror of his soul and the fulfillment of his vision.  One stick at a time he turned his barren island into a work of lasting, world-renowned beauty and peace, an island where the nightingales sang songs of singular wonder ne'er found elsewhere since this little man set down roots on a barren island, and bloomed. 

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Most of man's dreams are based on false assumptions. We dream of loping free with the wolves, but really don't like fleas. We dream of the security that lambs must feel, but don't want to be sheared. We dream of being lions, but gag at eating raw meat. We dream of being loved, but can't see the way or take the time to make ourselves lovable.

Was There EVER A Man On The Moon?  How far can reason alone take us from the beaten path of acknowledged history?

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RIGHT CLICK on this one.  LIVES ON THE LINE, Americans can be proud of today's soldiers.

A Definition Of History by Leo Tolstoy gives us yet another peg to hang our ratiocinations upon.

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Definition of Art?

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Charity never faileth, especially when our hearts fill to overflowing with charity.

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Global Warming freezes thermometers 

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Man, the Meanie of the Planet.  This is a high resolution pdf document so you can print it out and hang it on the wall.  Be sure to RIGHT Click the link, and save it to your computer.

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Are we forever Doomed?  An essayic poem by Rudyard Kipling

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I see Grandpa. He's calling out for me.

God Does Not Fit  -- by Lance Nalley

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SOCIALISM, Slavery and Tyranny by R. J. Harris

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Deliberate Fraud:  Evolutionists resort to the lowest forms of fraud in order to gain more believers.

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When Theories fail.. Petty science teachers can rage until doomsday that no two snowflakes are identical, but until every snowflake that has ever fallen or ever shall fall is matched against every other snowflake that has already fallen or ever shall try to fall -- the identical snowflake theory remains just a theory resting in lolly-gagging land.

That first day of school  

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A Break From Boredom  --  by Lance Nalley

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INVICTUS... Out of the night that covers me, Black as the Pit, from pole to pole 

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The gods and Heroes of the Ancient World 

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Staunch, steadfast, loyal and true.  What better friend can a man have?

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Friendship, by Ralph Waldo Emerson.  A ruddy drop of manly blood The surging sea outweighs, The world uncertain comes and goes, The lover rooted stays. I fancied he was fled, And, after many a year, Glowed unexhausted kindliness Like daily sunrise there. My careful heart was free again, -- O friend, my bosom said, Through thee alone the sky is arched, Through thee the rose is red, All things through thee take nobler form, And look beyond the earth, And is the mill-round of our fate A sun-path in thy worth. Me too thy nobleness has taught To master my despair; The fountains of my hidden life Are through thy friendship fair.

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This Web is MY Web  

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A thing of beauty is a joy forever:
Its loveliness increases; it will never
Pass into nothingness; but still will keep
A bower quiet for us, and a sleep
Full of sweet dreams, and health, and quiet breathing.

The Moon on Six Pence Uncle Bob was an unforgettable character who traveled the world on bargain rates and golden smiles!

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The Almost Good Housekeeping monograph is a good excuse for the harried homemaker to put off until tomorrow all those burdens of yesteryear, and quit trying so hard.

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Sex before the Sax:  The first thing I learned about Lois was she had a label for being froward.  Kids at school said she had had sex with Alfred.  Not long after I arrived, another boy came forward to admit he had made a score at her door.

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Old Rattler, and the King Snake. 

Down and Dirty with Darwin  Evolutionists are now feeling so battered that university professors advise their students not to discuss this theory with non-believers.  "Sounds like a religious cult to me," say some.

Pleasures of the open fire: The Fireplace Revisited.

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