Madoff Is Deja Vu All Over Again in Albania: Celestine Bohlen
Dec. 26 (Bloomberg) -- Post-Communist capitalism was a rough business in places like Russia and Albania in the early 1990s, a Wild East where fraudsters and scam artists danced circles around the poor and the naive -- the rest of the population.
Millions of people, many of them little old ladies, or “babushki’ in Russian, were bilked of their privatization vouchers, savings accounts and whatever cash they had stashed in pillows as a hedge against annual inflation rates of 1,000 percent or more.
Now, in the post-Bernard Madoff era, it is clear that financially uneducated Russians and Albanians have a lot in common with millionaires like filmmaker Steven Spielberg, whose Wunderkinder Foundation lost money in the New York financier’s alleged pyramid scheme.
As it turns out, poverty, ignorance and isolation aren’t prerequisites for falling victim to a pyramid, or Ponzi, scheme. All you need is to believe someone when they tell you they can double your money.
Who would know better than Sergei Mavrodi, the man behind MMM, Russia’s biggest investment pyramid scheme which collapsed in 1994, costing some 2 million Russians an estimated $1.5 billion?
Interviewed on Russia Today, a TV news channel, on July 11, 2007, after his release from four years in prison, Mavrodi scoffed at the idea that his scheme never would have worked in western Europe.
“Of course, it would work not only in Russia, but in any country,” he said. “If you give money away, who is not going to take it?”
The interviewer pressed on, noting that in France, or Belgium, systems are in place to stop such things. “Let me assure you, in Belgium, it would be even easier than here,” said Mavrodi. “Here in Russia, people are illiterate; it is difficult to explain things to them. People there understand things. I managed to do it, but I don’t know why nobody there does it.”
Well, it turns out they did do it in the West, right on Park Avenue. And as Mavrodi said, it worked even better with the financially savvy than it did with people struggling to stay afloat in a transition economy. Madoff has confessed that his “giant Ponzi scheme” may have cost clients as much as $50 billion, according to a Federal Bureau of Investigations complaint.
The MMM scheme in Russia was more modest, although at its peak in 1994, it was considered the most brazen of its time. It ran an aggressive advertising campaign on television, featuring a character named Lyonya Golubkov, a bulldozer operator, who pitched the deal with a simple phrase, “Eto Prosto Yo-Moyo,” roughly translated as “It’s simply frigging awesome.”
This was a no-frills pyramid: those buying in were paying off those who were getting out, a loop that works as long as more gullible people join up.
There were dozens of such schemes, as Russians tried to figure out what to do with their privatization vouchers -- a piece of paper representing their share of the national wealth, issued in October 1991 to 150 million people at a face value of 10,000 rubles, or about $25. A voucher’s worth plummeted almost immediately, as inflation took off, eating away at the value of the ruble and at people’s trust in the new capitalist era.
So it’s no wonder people went running after MMM, and other flim-flam investment schemes with names such as Revenge, or NeftAlmazInvest, literally translated as OilDiamondInvest, which as it turned out, had no investments in either.
Sude the Gypsy
In Albania, the pyramids appeared later, with even more devastating consequences for the national economy. By 1997, the amount taken from Albanians by at least 10 separate schemes had reached almost $1 billion, roughly two-thirds of the gross domestic product.
The meltdown began in November 1997 when a fund run by a 30 year-old former worker at a shoe factory, known only as Sude the Gypsy, stopped making payments. Other funds collapsed in rapid succession, rioting broke out, and the government collapsed.
Writing in 2000, Christopher Jarvis, then a senior economist with the International Monetary Fund, attributed the appeal of Albania’s schemes to “unfamiliarity with financial markets, the deficiencies of the country’s formal financial system.”
That’s not something Madoff’s investors can claim as an excuse. “In the end the best protection is just good judgment,” says Jarvis, now an adviser at the IMF. “If someone makes an offer that sounds too good to be true, it probably is.”
The solution? Jarvis says the Madoff case, like the one in Albania, proves the need for constant vigilance and aggressive regulatory supervision.
So maybe the U.S. should check out how Albania got out of its mess.
(Celestine Bohlen is a Bloomberg News columnist. The views expressed are her own.)
To contact the reporter on this column: Celestine Bohlen at email@example.com
Last Updated: December 25, 2008 19:00 EST
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