By: Felipe Argote
Every time I read about efficient markets, this theory based on the Austrian school of economics which assumes that people generally make wright decisions, I don’t have to see Chris Rock to laugh.
A few months ago, at the time David Murcia was take prisoner for their fraud pyramid, I was chatting with some friends. In the middle of the night two of them knowing my training, not asked me for advice but advised me to join them in an adventure that was infallible. Invest a few dollars and get the double in less than six months. A friend had invited them to a meeting where a financial expert will explain and then sold participation certificates. In trying to persuade them that there was not currently a financial transaction with that profit unless they surrendered both drug trafficking, challenged me with an innocent smile that investments were not made in Panama, that the cash were delivered to New York where they quickly reproduced as safe investments by the stock market buying and selling shares. There was no danger and that in United States there were many checks against fraud. A little more impatient assured that this was indeed a fraud and there were no guarantees that were true. They presented the example of a very serious friend who had entered the business with five thousand dollars a month ago and had received a thousand dollars of interest on his hands. In seeking to renew its approach as naive as his aide received 20% of his own money but the remaining 80% was in other hands, they bothered with mea if I were responsible for trying to kill their dream. Seeing them again a few months after they never returned to the subject, so I concluded that they were actually cheated and sorry to say ... you were right.
Not only is the case of Murcia, nor is it as many think the scams are run ignorant low academic profile. On the contrary, this fraud is repeated since the famous case of Charles Ponzi, an Italian immigrant who is granted the creation of so-called pyramids in 1919 in New York. Charles Ponzi was receiving money from investors and paid a 50% interest in 45 days. This led to almost nothing, as Charles had no wealth at the beginning, came less than a month to accumulate $ 5,000 for small investors to those who actually paid 50% interest in the term agreed, everything from new investors attracted excited by the pioneer investors. Only in May he had half a million and in July went to $ 9 million. In August, the business collapsed with heavy losses of new investors and those who have reinvested their profits. Surely not the first time applied the system; the same Ponzi confessed that he had already practiced in Canada ten years earlier.
I think people generally make decisions based on the options they have in front and in order to maximize their utility be persuaded that all is well because they wanted it that way. If not, how it is understood that after all the atrocities that made the Catholic church during the Inquisition and the colonization yet most people in this area of the planet to remain member of the catholic church.
Bernard Madoff, nearly 90 years later, developed the same pattern, only instead of promising 50% in 45 days, he paid 15% annually which is only twice the market average. So his pyramid does not last months, but last almost forty years in collapse. Because the scheme is very simple, you just have to ensure the entry of new investors to pay as much money as necessary to cover the earnings of those who came before. It's like the partnership scheme of social insurance. The new contributors pay the retirement of those who came before with the difference that those who enter are paying a portion and retirees that the pyramid and other insurance should be extended to new employees in a growing economy. Madoff was one of the most respected financial analysts to the point he was director of NASDAQ, which was one of its drivers.
But is not unlikely that a fraud of fifty billion dollars including as victims Steven Spielberg, the heiress L'Oreal, the team New York Mets, Santander Bank, BBVA and HSBC can last forty years? Well it did until it Madoff called to his luxury apartment in New York two of its senior managers of Madoff Investment Advisory Company to confess that he could not pay investors a commitment to some 7,000 million dollars. He said that figures for the investment company was a fraud and that his pyramid scheme had not entered enough new investors. That it was all a fraud. The managers called the police. Their names: Andrew and Mark Madoff, his own sons. This was in December 2008.
A few months later, in February 2009 Sir Allen Stanford, a Texan knighted by the Queen of England three years earlier, was charged with fraud. Stanford was the owner of the Stanford International Bank based in Antigua. Its advisory council was formed by Luis Gusti, former president of Petroleos de Venezuela, Peter Romero, former U.S. ambassador to Ecuador, Adolf Ogi, former Swiss President, Jorge Castaneda, former foreign minister of Mexico, Alfredo Arizaga, former Ecuador's finance minister and Lee Brown, former mayor of Houston. The pattern was the same as Fonzi, Madoff and Murcia, new investors get their money to pay the profits above 10% which yielded his investment company. According to Forbes magazine, Stanford was on number 205 among the richest in the world.
David Murcia, a cameraman living in a fourth category hotel, paying $ 7 per night in exchange for advertising on a Catholic radio in less than five years becomes a billionaire, taking the massive savings of people in Colombia , Ecuador, Venezuela and Panama. Paid between 70 and 150 percent interest in six months. He had survive longer if the authorities did not charges him of illegal money collector, just because she lacked the necessary permits to recover investment as if it were the respected Madoff and Stanford.
We know how to apply the system and survives whenever you count on new depositors with enough savings to cover the interest of the first, but as Madoff and Stanford developed a classic collection of money Murcia, in my opinion was more creative and had the complicity of many other businesses, but their high interest rates would last much less and would cause even greater disasters caused because unlike Madoff and Stanford to swipe some of the capital to millionaires and billionaires, Murcia is the mostly plucked to low and middle income people. When the Colombian government closed DMG, tens of thousands of people took to demand the return of their savings. Murcia, unlike Madoff and Stanford gave them capital in exchange for a card they could use to buy in any store or Pharmacy or any other businesses that had agreed with the scammer to accept their cards. After six months the buyer of the card, many of whom had spent their own money by using pre-paid card, received from 70% to 150% of their initial investment. Of course if you buy a hundred dollar card and you are of low income you will spent all the card in days after selling your land, your house, your car and borrow at lower interest and you have many cards you can not spend it and decide later use, but the pyramid fell before spending it and nobody will accept the cards anymore.
When officials investigated the company that supposedly verified accounting Madoff Investment, a company of fifty billion dollars, it was found that only three people, one of which was seventy years old and one was his secretary. When the researchers who analyzed the investment sought Stanford International, found he alone had access Stanford and his high school friend James Davis.
It is likely that if not stopped the operation of Murcia have happened as the greatest tragedy in Albania in 1996 and 1997. In this country, located in southeast Europe, in 1996 two companies Xapheri and Populli capture two million depositors in a country of 3 million and half people. The government did not get into the issue, the whole dumb sold or slaughtered their livestock, liquidating real estate, cars, and savings and invested in the pyramids. When the scheme collapses this level of rioting was the tens of thousands who had lost everything, then left the army to control the situation which resulted in more than two thousand dead, the fall of President Berisha and the country depleted and plunged into the deepest misery. There were savings in the pyramids for an amount almost half the GDP of Albania.