Similar fraud cases recently emerged in other world markets as well. In Canada, for example, many farmers lost thousands of dollars to fradulent pigeon-meat businessman Arlan Galbraith. In Colombia, up to 500,000 investors face losses thanks to Ponzi schemes.
Daniel Kaufmann is the director of the World Bank’s Global Programs and Governance and writes at the “Global Governance” blog about worldwide Ponzi schemes and their relationship to the global financial crisis.
Ponzi Schemes in Russia, Colombia and the US: from Mavrodi to Murcia to Madoff
Very recently we witnessed political and social unrest in Colombia due to the implosion of the DMG pyramid scheme (named after the scammer, David Murcia Guzman). And now we got Madoff in Wall Street. These cases today show how difficult it is sometimes to learn from the past. Especially when past events are far way in space and time…
I have received articles from experts in Colombia who found parallels with the analysis I made long time ago on the Mavrodi’s MMM pyramid scheme collapse that inflicted major pain on so many Russian citizens in 1994. The focus of my old article was particularly on the MMM Russian case. But there were other such financial collapses caused by pyramid schemes at that time–including in Romania, and of course the tragic case of Albania, in which 2,000 citizens died during the civil war that ensued.
Pyramid schemes in the financial sector are known as ‘Ponzi schemes’ – after Charles Ponzi who scammed many Bostonians almost a century ago. A Ponzi scheme fraud occurs when the money of fresh investors, attracted by the promise of ‘fantastic’ dividends, is used to pay the previous investors. The first group of investors to enter the scheme gets high dividends, the word spreads about the high payoff to those early investors, fresh investors are attracted, until everything falls apart because the much broader group of latecomers cannot be compensated by the eventual cap in the number of new investors attracted into the scheme. It is literally a house of cards, with no actual investments, but based instead, on an unrealistic expectation of ever growing cadres of new ‘investor’ cohorts to pay the previous cohort. When such perennial growth fails to materialize, it becomes impossible to pay returns to the previous investors that had already joined relatively late in the game.
So the DMG debacle in Colombia is nothing new. The similarities with past events are obvious. Even in the present, Colombia does not stand alone, as we now face in the US what is arguable: the largest ‘pure’ Ponzi scheme caused by an individual. This is the case of Bernard Madoff, former chairman of Nasdaq stock market. Madoff himself seemed to have acknowledged (even bragged?) that his fraud was a Ponzi scheme (a big lie…), estimated at about US $50 billion!
That is the blatantly obvious part.
But at the same time, and much less obvious, and with little media coverage, is the issue of the link between the financial and mortgage markets disaster (that started months ago in the US), on the one side, and pyramid schemes, on the other.
Even if less obvious, some of the characteristics of the actions and schemes promoted by some of the main actors in the real estate, mortgage and financial markets contain some Ponzi scheme elements.
To read more, see the original post.
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