Colombian con echoes credit crunch
The Columbian government has promised to reimburse tens of thousands of its citizens who have lost their savings to a widespread con trick. The final bill could be hundreds of millions of dollars. And many of the crooks seem to have got away with it. One bunch even left a note on the door of their abandoned premises "Dear investors, thanks for trusting us and depositing your money."
The scam they used is named after Charles Ponzi who stole $10 million from thousands of Boston residents in 1920. He didn’t invent it – the Ponzi scheme could be the oldest investment con in the world. But tricks grow old because they’re good.
It works like this. You claim insider knowledge of the real value of some obscure asset and offer to invest money in it for your customers. You promise huge returns on their money. Ponzi offered 20% a month. But in Colombia up to 150% a month was promised. Greedy investors pile in and at first they do get paid. Seeing the massive returns their friends, neighbours and relatives all put money in too. Some of them get paid out for a month or two as well.
But there is no insider knowledge. No investment. And no miraculous returns. People are paid using the money deposited by new investors. Pretty soon the payments stop. The scheme collapses under its own weight. And the thieves make off with the proceeds.
If that rings a bell, consider this. A bunch of determined and clever conjurors persuade investors that mortgages have been wrongly priced. High risk loans can be turned into much more valuable low risk deals using a magic process called collateralised debt obligations. The returns are high and the conjurors get wealthy and successful. So more and more people pile in. Eventually much of the world’s banking system depends on these complex instruments doing what they promise. But the payouts are in fact being made by borrowing more and more money. And the assets the scheme is secured on start falling in value rather than rising. The machinery creaks and groans and the wooden cogs almost grind to a halt.
But the global Ponzi scheme is now so big and the potential losses so incalculable that governments around the world step in. Ordinary savers are told their money is safe. And the money that never existed is replaced with tens of hundreds of thousands of millions of dollars (more than five trillion on one estimate) borrowed from future taxpayers. The magicians are not prosecuted and keep most of the money they have creamed off.
The ghost of Charles Ponzi does not just haunt Colombia. He stalks Wall Street. And whistles in the City.
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