Trump's save by Russian Gangster

At a meeting in front of bankers, Trumps appeared highly confident. He rhetorically cornered them in order to reschedule his debt settlement of USD 1.5 billion. In the fall of 1992, they accepted with a note. Trumps must sell all of his personal assets, including luxury yachts and private jets. He is also prohibited from being directly involved in the day-to-day management of his company. This means that the company is under the supervision of bank creditors. After that Trumps threw a big party for himself in Atlantic City to announce his comeback. At that time the name Trumps was very famous. His name is aligned with the celebrity world star. Party guests were given sticks with Trump's face glued to them so they could be photographed posing as famous real estate moguls. As the theme music from the Rocky movie filled the room, a host shouted, "Let's hear it for the king!" and Trump, wearing red boxing gloves and a cape, broke through the paper screens. One of his casino executives announced that his boss had returned as a "winner."

But that's just acting. Actually Trump is bankrupt. No more business community wants to do business with him. Bankers have blacklisted him. Because many times Trumps threatened them. He will take refuge from Chapter 11 of the bankruptcy law. Once a banker feels threatened it is bad news for others. Besides, in front of his big family his reputation is bad. Since the early 1990s, he has used up part of his father Fred's fortune on a series of frivolous business decisions. Two of its businesses have declared bankruptcy, the Trump Taj Mahal Casino in Atlantic City and the Plaza Hotel in New York, and the money pit which is the Trump Shuttle went bankrupt in 1992.

During the rest of the 90s, the plagued Trump did little to launch any major new business ventures (with a few exceptions, such as the Trump World Tower across from the United Nations, which began construction in 1999 and was financed by two German lenders, Deutsche Bank. and Bayerische Hypo- und Vereinsbank). “He took about 10 years off, and really like licking his wound and trying to recover. Until 2003, Trump urged his brothers to sell his late father's property. Even though it is very contrary to his father's message. After that the business continued to fail: In 2004, Trump Hotels and Casino Resorts filed for bankruptcy with $ 1.8 billion in debt.

But Trump eventually made a comeback, and according to several sources with knowledge of Trump’s business, foreign money played a large role in reviving his fortunes, in particular investment by wealthy people from Russia and the former Soviet republics. This conclusion is buttressed by a growing body of evidence amassed by news organizations, as well as what is reportedly being investigated by Special Counsel Robert Mueller and the Southern District of New York. It is a conclusion that even Trump’s eldest son, Donald Trump Jr., has appeared to confirm, saying in 2008—after the Trump Organization was prospering again—that “Russians make up a pretty disproportionate cross-section of a lot of our assets.” "

Former Trump longtime architect Alan Lapidus said that based on what he knows from the inner workings of the organization, following Trump's previous financial troubles, “he can't ask anyone in the United States to lend him anything. It's all out of Russia. His involvement with Russia is deeper than he admits. "

The foreign money initially came in the form of new real-estate partnerships and the purchase of many of Trump's condos, said Trump's former real estate partner who witnessed the transformation of the years and was then disappointed in Trump. "I think part of that is him poisoning the bank. I think he might also find out that personal guarantees [on loans] are not a brilliant idea either, "said a former business partner. “So he was saying to himself, ‘What else could I do in the world? I’ll just convince people to buy my brand.’ And the only people who were willing to buy it were tasteless Russians, people who like the absurd, ostentatious gold-leaf lifestyle he has. You’re not going to sell that brand to blue bloods in Greenwich, Connecticut.”

Or as another Trump biographer Gwenda Blair put it: “Trump is on the Titanic going down. Everyone drowns around him. … Suddenly he was saved. It is almost like a spaceship landing right next to its place in the water. "

Clearstream offers

Hong Kong dollar, Japanese yen and Australian dollar follow Singapore dollar/ Service helps customers to reduce funding costs. Clearstream, the International Central Securities Depositary (ICSD) part of Deutsche Bцrse Group, is the first ICSD to offer same day currency deadlines for leading Asian Pacific currencies: the Singapore dollar (SGD), the Hong Kong dollar (HKD), the Japanese Yen (JPY) and the Australian dollar (AUD). This means customers managing balances in these currencies will benefit from deadlines close to their local market deadlines. Clearstream has offered a same day currency deadlines in the Singapore Dollar since December 2008. The same day service has been extended to the Hong Kong Dollar on 2 March and will be extended to the Australian Dollar and the Japanese Yen on  March 2009.

This move is part of a drive by Clearstream to provide customers with Asia Pacific market settlement solutions as efficient as those offered in US Dollars, Euros and other major currencies and to materially reduce their funding costs. Due to time zone differences, Asia Pacific customers have been historically disadvantaged by the need to pre-fund or finance their settlement operations in advance of their normal cash management activities in Asia Pacific currencies.

Clearstream will complement the enhancements to its currency deadlines with the roll out of a same day settlement service in the Asia Pacific securities markets within the coming year. With the enhancement, Clearstream aims to make available the full range of its ICSD services throughout the Asia Pacific business day. The scope of services benefiting from the new environment include not only settlement itself, but also instruction validation, matching, domestic market instruction handling and feedback, instruction sequencing, provisioning, collateral allocation and substitution and customer reporting. These changes will enable Clearstream to significantly strengthen its commitment to the Asia Pacific markets where the company has been present since 1992.

Philippe Metoudi, a Hong Kong-based Clearstream Board member who is responsible for Clearstream’s Asia, Pacific, Middle East and African business said; “Serving Asia and serving our Asian customers are key priorities for Clearstream and we are constantly evaluating ways to strengthen our commitment to the region. Since we opened in Asia in 1992, the region has generated significant growth for Clearstream. With these changes, our aim is to complement our presence in Singapore, Hong Kong and Tokyo with an offering that makes all our services available throughout the local business day”.

Details of the currency deadline changes:
The customer deadlines for pre-advices and withdrawal of funds in HKD, JPY and AUD have been considerably improved. For these currencies it was previously 15:00 central European time the day before the transaction. For HKD, it is now 07:00 central European time (CET) of the day of the transaction. The equivalent local Hong Kong time is 14:00 during European winter time and 13:00 during European summer time. For JPY, it is now 4:30 (CET) of the day of the transaction. The equivalent local Japanese time is 12:30 during European winter time and 11:30 during European summer time. For AUD, it is now 5:00 central European time (CET) of the day of the transaction. The equivalent local Australian time is 15:00 during European winter time and 13:00 during European summer time.

Clearstream

Clearstream is an international central securities depositary (ICSD) headquartered in Luxembourg and is an integral part of Deutsche Bцrse Group, the world’s largest exchange organization when measured by sales revenues. Clearstream offers settlement and custody services for bonds, equities and investment funds to more than 2,500 banks and financial institutions worldwide. Clearstream currently holds Ђ 10 trillion in assets under custody. Clearstream Banking S.A. has long-term credit rating from Standard & Poor’s and Fitch of AA

stimulus package ?

Imagine this: A group of community organizers, aided by mesmerizing rhetoric and calls for equality, fraternity and hope, remove the privileged from power. But the government they inherit is heavily in debt to the tune of a third of the GDP. The debt comes due, the government can't pay, so the economy tanks.

What to do? Taxes are out - the taxpayers have fled (or are broke). The ingenious solution: Print more money as a stimulus package! What about interest on the printed stimulus? Piffle. Just print it also!

This is not the United States in 2009 - at least not yet. It is France, 1789, right after the French Revolution.

Why mention this history? For three reasons: First, because it is an obvious equivalent to what is happening today; second, because its ending could provide a clue to how today's events could end; and third, because a book I recently read about that period changed my thinking and made me into a semi-reluctant gold bug.

The book is Fiat Money, Inflation in France, written 50 years ago by Andrew Dickson White (a co-founder of Cornell University). I was handed the book last week when I went to visit a friend at a brokerage company, leafed through the book on the subway back, then got caught up in the narrative and finished it that day. It was delightful and terrible: Delightful, because it was written in the elegant plain style no longer in use today, and terrible, because it was so reminiscent of current events that, if the present unfolds as the past did, hard times lie ahead.

What evidence is there that today resembles that particular past so much that the ending is bound to be similar? First, in 1789, power shifted from those who had money to those who mostly didn't - similar to today. Second, the revolutionary French government tried to pay the debt racked up by the deposed regime with freshly printed money - again like today. Third, any dissenting voices in the National Assembly were shouted down with dire warnings of a "catastrophe" if the stimulus package were not approved - once more, like today.

But fourth and worst, as soon as the freshly printed money was used, the cry arose that it was not enough - and so more was printed. Then more, more and more. That last part is not yet in evidence today. However, once the recently approved U.S. stimulus is used up, more will be demanded of Congress, just as it was in 18th century France - you can bet on it.

In France, many assembly members had been bribed by debtors, and by others who benefited from the new spending - just as in U.S. Congress, where there are many who are alleged to sell their vote. And what of differences between then and now? Of course there are some. First, revolutionary France was violent, and those who refused to take the newly printed assignats - the currency of the day - or insisted on payment in gold, were arrested or guillotined.

Second, in revolutionary France, the massive printing caused inflation immediately. This is not yet the case, since the economy is so stagnant. Isn't this, then, a flaw in the argument? Not really. In 18th century France, that first money-printing caused a brief economic revival, before the inevitable slide began. Seven years later, the French economy was in ruins and Napoleon appeared, to sop up the unemployed and their anger in a continental war.

If the same scenario follows today, we are about to experience the first flush of false spring, as the first massive stimulus wends its way through the economy; but then the economy would falter, and there'd be demands for more stimulus, which would rekindle inflation and make gold rise - same as in France, more than two centuries ago.

Yes. I know I opined before that short-term gold may decline. It hasn't, though it still might. But longer term, it would likely benefit, as more and more paper money is printed. (I told you the book converted me.) Benefit until when? Until the inevitable squeeze is instituted to purge the economy of inflation - the kind of interest rate hike that Paul Volcker performed in 1982 that killed inflation, but also tanked gold.

But we are still a few years away from it, and a war to go through first, as U.S. President Barack Obama sends more divisions into Afghanistan, sopping up some unemployment, even as the Russians, Pakistanis and Iranians unite to block their supply routes and, together with China, work (out of pure national interest) to push the U.S. out of Central Asia.

So: Inflation, economic decline, an escalating war, a Volckerish purge at the end - what's a good investment in such a scenario? Treasury inflation-protected securities, gold and cash - plus a stack of good, first-edition volumes on economic history to keep you well informed.
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Crisis 2008

There is a long list of professions that failed to see the financial crisis brewing. Wall Street bankers and deal-makers top it, but banking regulators are on it as well, along with the Federal Reserve. Politicians and journalists have shared the blame, as have mortgage lenders and even real estate agents. But what about economists? Of all the experts, weren’t they the best equipped to see around the corners and warn of impending disaster?

Indeed, a sense that they missed the call has led to soul searching among many economists. While some did warn that home prices were forming a bubble, others confess to a widespread failure to foresee the damage the bubble would cause when it burst. Some economists are harsher, arguing that a free-market bias in the profession, coupled with outmoded and simplistic analytical tools, blinded many of their colleagues to the danger.

“It’s not just that they missed it, they positively denied that it would happen,” says Wharton finance professor Franklin Allen, arguing that many economists used mathematical models that failed to account for the critical roles that banks and other financial institutions play in the economy. “Even a lot of the central banks in the world use these models,” Allen said. “That’s a large part of the issue. They simply didn’t believe the banks were important.”

Over the past 30 years or so, economics has been dominated by an “academic orthodoxy” which says economic cycles are driven by players in the “real economy” — producers and consumers of goods and services — while banks and other financial institutions have been assigned little importance, Allen says. “In many of the major economics departments, graduate students wouldn’t learn anything about banking in any of the courses.”

But it was the financial institutions that fomented the current crisis, by creating risky products, encouraging excessive borrowing among consumers and engaging in high-risk behavior themselves, like amassing huge positions in mortgage-backed securities, Allen says.

As computers have grown more powerful, academics have come to rely on mathematical models to figure how various economic forces will interact. But many of those models simply dispense with certain variables that stand in the way of clear conclusions, says Wharton management professor Sidney G. Winter. Commonly missing are hard-to-measure factors like human psychology and people’s expectations about the future, he notes.

Among the most damning examples of the blind spot this created, Winter says, was the failure by many economists and business people to acknowledge the common-sense fact that home prices could not continue rising faster than household incomes. Says Winter: “The most remarkable fact is that serious people were willing to commit, both intellectually and financially, to the idea that housing prices would rise indefinitely, a really bizarre idea.”

Although many economists did spot the housing bubble, they failed to fully understand the implications, says Richard J. Herring, professor of international banking at Wharton. Among those were dangers building in the repo market, where securities backed by mortgages and other assets are used as collateral for loans. Because of the collateralization, these loans were thought to be safe, but the securities turned out to be riskier than borrowers and lenders had thought.

The Dahlem Report

In a highly critical paper titled, “The Financial Crisis and the Systemic Failure of Academic Economists,” eight American and European economists argue that academic economists were too disconnected from the real world to see the crisis forming. The authors are David Colander, Middlebury College; Hans Follmer, Humboldt University; Armin Haas, Potsdam Institute for Climate Impact Research; Michael Goldberg, University of New Hampshire; Katarina Juselius, University of Copenhagen; Alan Kirman, University d’Aix-Marseille; Thomas Lux, University of Kiel; and Brigitte Sloth, University of Southern Denmark.

“The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold,” they write. “In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real world markets.”

The paper, generally referred to as the Dahlem report, condemns a growing reliance over the past three decades on mathematical models that improperly assume markets and economies are inherently stable, and which disregard influences like differences in the way various economic players make decisions, revise their forecasting methods and are influenced by social factors. Standard analysis also failed, in part, because of the widespread use of new financial products that were poorly understood, and because economists did not firmly grasp the workings of the increasingly interconnected global financial system, the authors say.

One result of this, argues Winter, who is not one of the authors but agrees with much of what they say, is to build into models an assumption that all market participants — bankers, lenders, borrowers and consumers — behave rationally at all times, as if they were economists making the most financially favorable choices. Clearly, he says, rational behavior is not that dependable, or else people would not do self-destructive things like taking out mortgages they could not afford, a key factor in the financial crisis. Nor would completely rational executives at financial firms invest in securities backed by those risky mortgages, which they did.

By relying so heavily on the view of humans as rational, the paper’s authors argue, economists ignore evidence of irrational behavior that is well documented in other disciplines like psychology and sociology. Even if an individual does act rationally, economists are wrong to assume that large groups of people will react to given conditions as an individual would, because they often do not. “Economic modeling has to be compatible with insights from other branches of science on human behavior,” they write. “It is highly problematic to insist on a specific view of humans in economic settings that is irreconcilable with evidence.”

The authors say economists badly underestimated the risks of new types of derivatives, which are financial instruments whose value fluctuates, often to extremes, according to the changing values of underlying securities. Traditional derivatives such as stock options and commodities futures are well understood. But exotic derivatives devised in recent years, including securities built upon pools of mortgages, turned out to be poorly understood, the authors say. Credit default swaps, a form of derivative used to insure against a borrower’s failure to repay a loan, played a key role in the collapse of American International Group.

Rather than accurately analyzing the risks posed by new derivatives, many economists simply fell back on faith that creating new financial products is good, the authors write. According to this belief, which was promoted by former Federal Reserve chairman Alan Greenspan, a wider variety of financial products allows market participants to place ever more refined bets, so the markets as a whole better reflect the combined wisdom of all the players. But because there was not enough historical data to put into models used to price these new derivatives, risk and return assessments turned out to be wrong, the authors argue. These securities are now the “toxic assets” polluting the balance sheets of the nation’s largest banks.

“While the economic argument in favor of ever new derivatives is more one of persuasion rather than evidence, important negative effects have been neglected,” they write. “The idea that the system was made less risky with the development of more derivatives led to financial actors taking positions with extreme degrees of leverage, and the danger of this has not been emphasized enough.”

‘Control Illusion’

When certain price and risk models came into widespread use, they led many players to place the same kinds of bets, the authors continue. The market thus lost the benefit of having many participants, since there was no longer a variety of views offsetting one another. The same effect, the authors say, occurs if one player becomes dominant in one aspect of the market. The problem is exacerbated by the “control illusion,” an unjustified confidence based on the model’s apparent mathematical precision, the authors say. This problem is especially acute among people who use models they have not developed themselves, as they may be unaware of the models’ flaws, like reliance on uncertain assumptions.

Much of the financial crisis can be blamed on an overreliance on ratings agencies, which gave complex securities a seal of approval, says Wharton finance professor Marshall E. Blume. “The ratings agencies, of course, use models” which “grossly underestimated” risks.

“Any model is an abstraction of the world,” Blume adds. “The value of a model is to provide the essence of what is happening with a limited number of variables. If you think a variable is important, you include it, but you can’t have every variable in the world…. The models may not have had the right variables.”

The false security created by asset-pricing models led banks and hedge funds to use excessive leverage, borrowing money so they could make bigger bets, and laying the groundwork for bigger losses when bets went bad, according to the Dahlem report authors. At the time, few people knew that major financial institutions had become so heavily leveraged in real estate-related assets, says Wharton finance professor Jeremy J. Siegel. “Had they not been in that situation, we would not have had the crisis,” he says. “We may not even have had a recession…. Macro economists really hadn’t talked about it because these structured financial products were relatively new,” he adds, arguing that economists will have to scrutinize the balance sheets of major financial institutions more closely to detect mushrooming risks.

Lessons Not Learned

Prior to the latest crisis, there were two well-known occasions when exotic bets, leverage and inadequate modeling combined to create crises, the paper’s authors say, arguing that economists should therefore have known what could happen. The first case, the stock market crash of 1987, began with a small drop in prices which triggered an avalanche of sell orders in computerized trading programs, causing a further price decline that triggered more automatic sales.

The second case was the 1998 collapse of the Long-Term Capital Management (LTCM) hedge fund. It had built up a huge position in government bonds from the U.S. and other countries, and was forced into a wave of selling after a Russian government bond default knocked bond prices down.

“When there’s a default in one kind of bond, it causes reassessment of all the risks,” says Wharton economics professor Richard Marston. “I don’t think we have really fully learned from the LTCM crisis, or from other crises, the extent to which things are illiquid.” These crises have shown that market participants can rely too heavily on the belief they can quickly unload securities that decline in price, he says. In fact, the downward spiral can be so rapid that it leaves investors with losses far larger than they had thought possible.

In the current crisis, he says, economists “should get blamed for the overall unwillingness to take into account liquidity risk. And I think it’s going to force us to reassess that.”

Academics also are beginning to reassess business-school curricula. Wharton management professor Stephen J. Kobrin recently moderated a faculty panel that talked about a wide range of possible responses to the crisis. Among the issues discussed, he says, was whether Wharton’s curriculum should include more on regulation and risk management, as well as executive education programs for regulators and other government officials.

Kobrin said he believes many academics share “an ideological fixation with free markets and lack of regulation” that should be reexamined. “Obviously, people missed the boat on a lot of the risks that a lot of financial instruments entailed,” he says. “We need to think about what changes are needed in the curriculum.”

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Fraud...

The US Securities and Exchange Commission charged Bernard Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm. Madoff is a former chairman of the Nasdaq Stock Exchange. Madoff is claimed to have told his sons that the fraud could amount to $50 billion.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff on Wednesday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

"We are alleging a massive fraud — both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."
Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "Our complaint alleges a stunning fraud that appears to be of epic proportions."

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of Nasdaq Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. On December 10, 2008, Madoff informed the Senior Employees, in substance, that his investment advisory business was a fraud. He also stated that in approximately one week, he planned to surrender to authorities, but before he did that, he had approximately $200-300 million left, and he planned to use that money to make payments to certain selected employees, family, and friends.

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Pozy

The office door bore an impressive name—the Securities Exchange Company—and during the first seven months of 1920, it made the Niles Building at 27 School Street one of the busiest addresses in Boston. A steady stream of people turned up with wads of cash, convinced they would soon strike it rich.

They were scrambling to invest in something few of them had ever heard of, let alone seen—international postal reply coupons, slips of paper that post offices would exchange for stamps. These certificates enabled someone sending a letter to include return postage when seeking a response from a recipient in another country. Currency exchange rates were in flux after the Great War, and the founder of the Securities Exchange Company claimed enormous profits could be made when coupons purchased with undervalued liras or francs were redeemed in the United States.

How much profit? Investors were assured they would double their money in just 90 days. The notion of such quick and lucrative returns was as ridiculous then as it sounds now, but thousands of people—from poor immigrants to businessmen who should have known better—collectively poured millions of dollars into the scheme. Bostonians felt blessed to have a financial wizard in their midst, a man who knew how to make easy money and was willing to share the secret with the masses. A charming, slick-talking man named Charles Ponzi.

A century ago this month, Ponzi’s house of cards collapsed when the Boston Post revealed he was a convicted forger and the U.S. Postal Service confirmed that no one was exchanging postal reply coupons in the massive volumes needed to generate his promised, sky-high profits. Ponzi had been using the money pouring in from new investors to pay interest to earlier investors, and the revelations cut off the cash flow needed to keep the scheme afloat. He was charged with theft and mail fraud. Much of the money he had raked in—at least $10 million, almost $100 million US today—had vanished.

Ponzi’s “financial alchemy,” notes his biographer, Mitchell Zuckoff, “would mark the first roar of the 1920s,” a decade of investor-mania and stock market gambling hurtling toward the Wall Street crash of 1929. He was not the first con artist to use the rob-Peter-to-pay-Paul scam. But his audacious fraud gave it a new name.

*   *   *

The man whose name has become synonymous with fraud was born in Italy in 1882 and emigrated to the U.S. when he was twenty-one. He bounced from job to job—everything from washing dishes to repairing sewing machines—before landing a job as a clerk at a bank in Montreal. Caught forging a check, he served a 20-month term in a Canadian prison. While crossing back into the U.S. after his release in 1910, he was charged with trying to smuggle in a group of undocumented Italians and sentenced to two more years behind bars. He finally settled down in Boston, found work as a clerk and married. But Ponzi wanted more—cursed, his wife later lamented, with “the tastes of the millionaire,” he was determined to find a way to make a fortune.

He began selling a directory that promoted local merchants and one day in 1919, while checking his mail, he spotted a coupon he had been sent to cover return postage to Spain. He thought about the exchange rate and an idea “fell in my lap like a ripe apple,” he noted in his memoirs, a “shortcut to some easy money … it took me less than five minutes of figuring on a scratchpad to realize its possibilities.”

When a bank balked at loaning him money to back his dubious scheme, he set up his company and began selling shares. Early customers turned a quick profit, boasted about their good fortune to friends, and word spread quickly. Ponzi hired salesmen and opened branch offices from Maine to New Jersey. Many customers were Italian immigrants who entrusted their countryman with their lifesavings. Three-quarters of Boston’s police officers, it was said, were investors. A banker from Kansas ponied up $10,000. In late July 1920, at the height of the frenzy, Ponzi raked in a jaw-dropping $1 million in a single day. And he lived a millionaire’s lifestyle, driving into town from his suburban mansion in the back of a chauffeured limousine.

Doubters soon burst Ponzi’s bubble. How could this upstart deliver a 400-percent annual return at a time when banks typically offered depositors a modest—and far more realistic—five percent interest a year? Ponzi was not about to reveal his secret. “I told just enough to whet people’s greed and curiosity,” he recalled. “Nothing more.” Massachusetts officials and newspapermen began to question his claims; the knock-out punch was a front-page Boston Post story, published on August 11th, revealing his criminal record for fraud. Investors panicked and demanded their money back. Two days later—fittingly, Friday the thirteenth—Boston’s financial wizard was behind bars.

Ponzi’s scheme was nothing new. Decades before him, swindlers were touting high-yield, sure-thing investments to reel in the suckers, then looting the money flowing in to pay interest and create the illusion of profit. The scams stayed afloat for as long as the con artist could keep enough new investors pumping in new money.

In 1878 Bostonian Sarah Howe opened a private bank, promised to pay interest of eight percent a month, and enticed more than a thousand women to deposit their savings. The former fortune teller-turned-banker took in a half-million dollars and lived well on the proceeds until the scheme collapsed. A few years later, Chicago promoters offered huge profits to investors in their mysteriously named “Fund W,” paid back some of the money as interest and absconded with the rest.

Then it was bookkeeper William Franklin Miller’s turn. In 1899 he launched the Brooklyn-based Franklin Syndicate and claimed to have discovered insider secrets for playing the stock market. Investors would earn a whopping 10 percent on their investments every week, more than quintupling their money within a year. The outlandish claim worked and the man who became known as “520 Percent” Miller was soon pocketing an average of $80,000 a week. He fled to Canada with $2 million but returned to face charges, and was sentenced to ten years in prison.

But none of these early peddlers of fake investments could match the imagination and chutzpah of Leo Koretz, a Chicago lawyer who ran a succession of schemes, each one paying interest using fresh investments, for almost two decades. He sold fake mortgages, then claimed to be making a killing in Arkansas rice farms. But his masterpiece was the Bayano Syndicate. Koretz dreamed up this shadowy group of millionaires in 1911, claimed they controlled valuable timberland in a remote corner of Panama, and began selling shares in this tropical bonanza. By the early 1920s investors were earning an astounding 60-percent annual return on their investments. When Koretz needed more money to meet the hefty interest payments, he simply announced that the Syndicate had struck oil on its land and would soon be one of the largest petroleum companies on the planet; a flood of new investors begged him to take their money.

Not even Ponzi’s spectacular flame-out in 1920 could shake the confidence of Koretz’s loyal followers—they began calling him “Our Ponzi,” unaware the joke was really on them. As much as $400 million, in today’s terms, flowed into Koretz’s various schemes before he skipped town in 1923. And his success, combined with Ponzi’s notoriety, inspired future generations of imitators. Wikipedia lists dozens of major Ponzi schemes that have been exposed since 1980, culminating in Wall Street fund manager Bernie Madoff’s spectacular $65-billion default in 2008. American securities regulators uncovered 60 of the schemes in 2019 alone, funded by a staggering $3.25 billion from investors.

Why do so many people—including many with experience in business or investing—continue to fall for Ponzi schemes? Tamar Frankel, a law professor in Ponzi’s hometown of Boston, has studied the schemes and identified patterns. Promoters offer high returns, no matter how implausible (one 2011 scheme she cites promised to double investors’ money every month) to catch a potential victim’s attention. The investment itself is touted as something new and lucrative—one scam featured synthetic rubies, for instance, while another was based on a cheaper process for refining gold. Canadian authorities recently exposed the failed cryptocurrency trading company QuadrigaCX as a classic Ponzi scheme that cost investors $125 million. Bitcoins supposedly stored in online “wallets” proved to be as fleeting as postal reply coupon profits and pipe-dreams of Panamanian oil.

Once a client is hooked, the swindler’s powers of persuasion—and the victim’s urge to get in on the ground floor of a sure-thing—can be irresistible. “Warnings against fraud and lists of red flags,” notes Frankel, “seem to offer little protection against treacherous charmers.” Investors who jump in early enough reap the promised returns and may even recoup their investment, and their success offers a further inducement to latecomers. But the pool of potential investors is bound to dry up at some point, no matter how skilled the swindler or alluring the investment, leaving most victims in the red. By the time Ponzi’s scheme collapsed, two-thirds of the money invested was gone.

Unlike a traditional, short-lived con game, where the fraudster finds a dupe, grabs the money and runs, Ponzi schemes take time to build and come with a best-before date. “The fatal weakness of the scheme is that you cannot stop,” journalist Garet Garrett noted in the 1930s. “When new creditors fail to present themselves faster than the old creditors demand to be paid off, the bubble bursts. Then you go to jail.” As did Ponzi (who eventually took a stab at selling worthless Florida swampland) and Koretz, captured in 1924 after a year on the lam in Canada.

A century later, Ponzi’s name—and the fraud he made famous—lives on. And the reason is not only the endless supply of con artists who can conjure up new ways to tease money out of pockets. What keeps the same time-worn scheme popping up, in new guises, is the folly and greed of the people it targets. “We are all gamblers,” Ponzi himself once noted. “We all crave easy money. And plenty of it. If we didn’t, no get-rich-quick scheme could be successful.”

Solution...

The fundamental cause of the global financial crisis now manifesting itself in various ways is a banking system which:-a) creates money out of nothing) adds interest (as distinct from administration cost)c) directs it at anything except the development and spreading of the ownership of productive (and the associated consuming) capacity so as to achieve a Say’s Theorem balance of supply and demand with producers and consumers being the same people while, at the same time, forwarding social and economic justice.

Because only enough money is created for the principal of a debt but not for the interest which must be paid, more and more interest-bearing debt must be created if the system is not to collapse. But, as the amount of interest-bearing debt continually rises, not only is the debt hugely increased (with consequent massive systemic instability) but inflation is continuously created.

The instability is compounded by the newly-created money not being put into the development and spreading of productive capacity. Thus the USA, putting the interest-bearing money into anything except productive capacity, has in practice hollowed out its economy which, of course, exacerbates the effect of the huge, mind-boggling, debts.
The solution can be summarised as the issue of national bank-issued interest-free loans (administered by the banking system) for the development and spreading of productive (and the associated purchasing) capacity to all individuals in the population. All environmental capital projects, all governmental capital projects, micro-credit, small business, student loans and the private sector if wide ownership is involved are covered by the solution.

At the same time as the national bank loans are issued, the banking system must be curtailed in its present ability to create money out of nothing and lend it for any purpose except the development and spreading of productive capacity. The curtailment can be done by a rise to 100% banking reserves.

At the core of the solution is the use of interest-free loans issued by the national bank for the purpose of productive capacity. Such loans cannot be inflationary, indeed, they are counter-inflationary ─ when the loans are repaid, they are cancelled leaving behind in the economy productive, income-generating capital assets. Thus productive assets always back the currency.

Crucially, the loans originate with the national bank. By originating the money with the national bank (rather than the banking system) society’s ownership of the money supply is established and so the money can be interest-free and focused on the purposes of productive capacity and the real economy so as to achieve a Say’s Theorem balance of supply and demand while, at the same time, forwarding social and economic justice.
Thus it is proposed that a country’s national bank should create interest-free loans. On repayment, the loans (like the principal of normal bank loans) are cancelled leaving the capital projects in existence. The money for repayment of loans is collected and repaid as it is at present except that the capital projects would cost, roughly, half, even a quarter or less of what they cost today.

The collateral for the loan would be similar to that today e.g., either secured on the project itself or on the repaying power of the government and its administrative systems. Essentially, the government would be repaying itself thereby removing creative liquidity which has fulfilled its function.

In the past the mechanism has been successfully used for public capital projects in Canada, New Zealand, China and Guernsey and is believed to be being used in Malaysia today for some big public capital projects. Gradually, over time, the banking system (by an increase in required reserves) would be increasingly restricted in its own creation of money unless such creation demonstrably spreads productive capacity and assists sustainable development.

While the supply of interest-free loans (originating with the national bank) increases, there needs to be, at the same time, a decrease in the present ability of the banking system to create money out of nothing. This would be done by, over time, a gradual rise eventually to 100% banking reserves (which effectively ends the ability of the system to create money out of nothing). The banking system would, of course, still be able to lend its own capital and (with permission) the deposits of customers.