Greed unbound

Feb 19, 2009 Editorial

The news that Allen Stanford and three of his companies were charged with “massive ongoing fraud” must have been especially disheartening to Caribbean folks.

After all, while the tall Texan’s main victims may have been outside the region, we can be sure that whatever the outcome of the investigations, his brash intervention in West Indian cricket has come to an ignoble end.
Few would deny that the Stanford 20/20 tournament did not offer a much-needed fillip to regional cricket. In Guyana, we were all inspired by our team’s victory in the inaugural championship game.

However, we are now informed by the actions of the US Securities and Exchange Commission (SEC) that the money that Stanford threw at cricket administrations in the W.I. and England, literally in cartloads, might have been illegally obtained through a Ponzi scheme.

In this scam, named after an early Italian practitioner Charles Ponzi, investors are induced through the promise of higher-than-normal returns.

The early investors are repaid from their own money or through later investors. Most ensure that the scheme is successful by not withdrawing their total investment but rather, reinvesting it into the fund.

Since even if the money were invested the returns could not support a total payout, a Ponzi scheme is sure to collapse sooner or later – but not before the schemer may have absconded with the bulk of the deposits.
Only recently, the financial world was rocked by the news that an investment fund run by Wall Street insider, Bernie Madoff, was actually a Ponzi scheme – conducted for decades.

Madoff’s US$50 billion fraud makes the allegations of Stanford’s US$8 billion take look like small potatoes, but they are hefty potatoes for a small island like Antigua, where Stanford had not only become a citizen and a knight, but the largest investor and employer.

Ponzi schemes are normally tipped off by the incredible claims of high returns, even in times of economic decline. The Ponzi schemer typically tries to inveigle investors to the bitter end so as to keep the venture afloat.

But what makes investors plunk down millions of dollars in schemes that are so obviously too good to be true? The answer on both sides of the equation is simple – pure and unadulterated greed.

Stanford was born into money: his grandfather had made the family fortune in the depression of the 1930’s and his father had augmented that greatly in the downturn of the 1980’s. Prospering on the misfortunes of others in the midst of financial collapses may be good business but it does extract a price on the moral sensibilities of the “winners”. Stanford took over a prosperous business and was determined to continue the tradition of growth.

The era of wheeler-dealer financial operations were facilitated from the nineties by changes in the law under the Clinton administration that allowed banks to re-enter the world of investments that were subjected to much less stricter scrutiny.

The regulatory climate was loosened even farther by the neo-cons in the two Bush administrations so that the inherent greed that lies latent in all business operations were left unchecked.

The subprime mortgage crisis and the related explosion in derivative-based securities were all facilitated by the seemingly inexhaustible supply of investors that were available to keep the bubble going.

Stanford was not satisfied with his off-shore ploy to evade US regulation; he wanted to cash in on the boom back home. He over-reached.

After the Madoff scandal, the SEC, which is supposed to be the lead watchdog over the securities industry, came under severe fire resulting in the departure of one of its top officials.

They promised to tighten up on the way they regulated investment advisers and would impose more frequent inspections, tougher filing requirements and tighter custody and audit rules. The Stanford charges are evidently a result of their new-found activism.

For us in Guyana, this newspaper has already pointed out the solicitation of Certificates of Deposit (CDs) by Trust Companies with higher yields than offered by traditional banks (just as Stanford did).

We hope that our authorities are keeping a close watch on how these higher returns could be generated in an economy that has been stagnant for so long.

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