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Subject: [gang8] Int'l finance as a ponzi scheme -- Bloomberg, no less
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Is Global Finance a Ponzi Scheme? Aska RussianExpert
By Leonid Bershidsky Jun 6, 2012 9:43 AM ET
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Q
What's the difference between today's global finance system and a Ponzi scheme?
This is the question that a 56-year-old veteran Russian financial scammer has
been asking his victims.
Chillingly, he almost has a point.
Sergei Mavrodi is one of the most infamous names in Russia's recent history.
Back in February 1994, amid the turmoil of the country's transition to a market
economy, the mathematician organized a Ponzi scheme called MMM. He offered
returns of 100 percent a month and advertised aggressively on national
television. Before the pyramid crashed in July 1994, it attracted as many as 10
million depositors, making it more popular than the voucher privatization
program that was supposed to give regular Russians a chance to take a stake in
formerly state-owned enterprises.
Mavrodi managed to avoid prison for nearly a decade, in part by getting elected
as a parliamentary deputy and using the status to obtain immunity from
prosecution. He ultimately served out a four-and-a-half-year sentence for
fraud. While in prison, Mavrodi wrote books and movie scripts, one of which --
PyraMMMid -- was later made into a successful film.
Now he's back with an even more audacious endeavor: the honest scam. Last year,
he announced the new project, MMM-2011, by stating boldly that it would be
another Ponzi scheme. “Even if you strictly follow all instructions, you can
still lose," he wrote on a website describing the project. "Your 'winnings' may
be withheld without any explanation or reason whatsoever.” Depositors would be
paid solely from funds invested by other depositors. There would be no attempt
to generate income in any other way. This, he said, was perfectly all right,
and no different than the way some of the largest institutions in global
finance operated, from the Russian pension fund to the U.S. Federal Reserve.
"What is money?" he wrote. "Nothing! Nihil. A phantom. … It is backed by
nothing at all and printed by the masters in any quantity, at will.”
Such a case might have been hard to make back in 1994, when Russians saw the
U.S. dollar as an unassailable store of value. But in today's
post-financial-crisis world, it's easy to see how Mavrodi's arguments could
convince an uninitiated observer. The U.S. is paying back its bondholders with
money freshly printed by the Fed. Greece is paying back investors with money
the European Union has borrowed from other investors -- or maybe some of the
same investors -- via its bailout funds. The developed world's central banks
have printed the equivalent of trillions of dollars in new money to keep their
financial systems and economies afloat.
Mavrodi's sales pitch worked. On May 31, MMM-2011 claimed 35 million
participants throughout the world. The number may be wildly inflated, but there
were certainly hundreds of thousands of people in Russia, Ukraine and other
post-Soviet nations who invested with Mavrodi. Their money allowed him to buy
outdoor advertisements (this time avoiding TV) and open up chains of
“consulting offices.”
The operation employed a structure borrowed from multi-level marketing. Early
investors recruited new ones. A member who brought ten people into the fold
could become a foreman and take a small cut from each investment by his
“clients.” The first adopters could end up running an army of 100,000 or even a
million. They offered returns from 20 percent for a one-month deposit up to 60
percent monthly for a 12-month deposit.
This time around, the mathematician was careful to mitigate the risk that he
would be accused of fraud, or of operating a financial business without a
license. MMM-2011 was not a legal entity. Money was moved strictly between
people's private bank accounts or electronic wallets. The network made
extensive use of communication technology: Potential foremen were interviewed
via Skype, and each member was required to use a Gmail account.
Authorities were nonplussed. “The law enforcement agencies have a very high
sensitivity threshold,” Russia's financial ombudsman Pavel Medvedev told
TVRain. “They worry when someone gets killed, not when fraud is being
perpetrated.” Criminal proceedings were started against Mavrodi in Novosibirsk,
where he was accused of “aiding illegal enterprise,” but no move was made to
arrest the MMM mastermind, who communicated with his followers only by posting
videos on his website.
In Ukraine, Prime Minister Nikolai Azarov promised that the government would
“check on what grounds this company started operating” and warned citizens that
“there is no such thing as a free lunch.” No decisive action was taken. Alexei
Plotnikov, a parliamentary deputy from the ruling Regions Party, argued that
action wasn't necessary: “There is a general rule that you should not stick
fingers in an electrical outlet, but there will always be people who do that,"
he said. "It's the same with Ponzi schemes and other questionable operations.
All the government should do is issue a warning.”
MMM-2011 halted payments on May 31. “Unfortunately, I have to admit that a
panic has started within the System,” Mavrodi wrote, blaming the media for
spreading malicious rumors. “This is a pyramid! If everyone rushes to withdraw
the money, there is no way there will be enough money for everybody. In fact,
it would be the same with any bank.”
Undaunted, Mavrodi launched a new pyramid, MMM-2012, saying that it would be
used to prop up MMM-2011. “Don't worry, don't be nervous, we will fix
everything, and you'll get paid in full,” Mavrodi wrote, adding immediately:
“This is not a promise, just a feeling I have.”
Experts pointed out the difference between those who lost their money to the
first MMM in 1994 and the members of Mavrodi's modernized social network.
“There is a different motivation now,” psychologist Akop Narvazyan told
Russia's Channel One. “This is a gamble: People hope they will be smarter, more
cunning than others. This is no longer mere inexperience, it's
adventure-seeking.” Yet when the pyramid collapsed, Internet forums quickly
filled with desperate pleas. “Please help me withdraw my deposit of 3.8 million
rubles ($112,000). Am willing to pay 30 percent. Can anyone help or is it all
over?” read one post. “Guys, save me, I borrowed serious money from serious
people and now my foreman won't answer!” read another. Some MMM-2011
depositors, like their predecessors in 1994, have borrowed against their
apartments to invest and are now facing homelessness.
It may all be their fault. They had been warned repeatedly by various officials
and by Mavrodi himself. It is, however, an interesting moral issue, if not a
legal one, whether governments have any obligation to protect financial
innocents from themselves. One also wonders whether the policy makers managing
the world's financial system might be able to extract some lessons for
themselves.
(Leonid Bershidsky, an editor and novelist, is Moscow and Kiev correspondent
for World View. Opinions expressed are his own.)
To contact the writer of this column: [email protected].
To contact the editor responsible for this column: Mark Whitehouse at
[email protected].
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