The Typology of Financial Scandals and Ponzi (Pyramid) Schemes

With a note regarding Cryptoassets

(such as Cryptocurrencies)

By: Sam Vaknin, Ph.D.

Malignant Self Love - Buy the Book - Click HERE!!!

Relationships with Abusive Narcissists - Buy the e-Books - Click HERE!!!


READ THIS: Scroll down to review a complete list of the articles - Click on the blue-coloured text!
Bookmark this Page - and SHARE IT with Others!

Tulipmania - this is the name coined for the first pyramid investment scheme in history.

In 1634, tulip bulbs were traded in a special exchange in Amsterdam. People used these bulbs as means of exchange and value store. They traded them and speculated in them. The rare black tulip bulbs were as valuable as a big mansion house. The craze lasted four years and it seemed that it would last forever. But this was not to be.

The bubble burst in 1637. In a matter of a few days, the price of tulip bulbs was slashed by 96%!

This specific pyramid investment scheme (also known as "Ponzi scheme", after a notorious swindler) was somewhat different from the ones which were to follow it in human financial history elsewhere in the world. It had no "organizing committee", no identifiable group of movers and shakers, which controlled and directed it. Also, no explicit promises were ever made concerning the profits which the investors could expect from participating in the scheme - or even that profits were forthcoming to them.

Since then, pyramid (Ponzi) schemes have evolved into intricate psychological ploys.

Modern ones have a few characteristics in common:

First, they involve ever growing numbers of people. They mushroom exponentially into proportions that usually threaten the national economy and the very fabric of society. All of them have grave political and social implications.

Hundreds of thousands of investors (in a population of less than 3.5 million souls) were deeply enmeshed in the 1983 banking crisis in Israel.

This was a classic pyramid scheme: the banks offered their own shares for sale, promising investors that the price of the shares will only go up (sometimes by 2% daily). The banks used depositors' money, their capital, their profits and money that they borrowed abroad to keep this impossible and unhealthy promise. Everyone knew what was going on and everyone was involved.

The Ministers of Finance, the Governors of the Central Bank assisted the banks in these criminal pursuits. This specific pyramid scheme - arguably, the longest in history - lasted 7 years.

On one day in October 1983, ALL the banks in Israel collapsed. The government faced such civil unrest that it was forced to compensate shareholders through an elaborate share buyback plan which lasted 9 years. The total indirect damage is hard to evaluate, but the direct damage amounted to 6 billion USD.

This specific incident highlights another important attribute of pyramid schemes: investors are promised impossibly high yields, either by way of profits or by way of interest paid. Such yields cannot be derived from the proper investment of the funds - so, the organizers resort to dirty tricks.

They use new money, invested by new investors - to pay off the old investors.

The religion of Islam forbids lenders to charge interest on the credits that they provide. This prohibition is problematic in modern day life and could bring modern finance to a complete halt.

It was against this backdrop, that a few entrepreneurs and religious figures in Egypt and in Pakistan established what they called: "Islamic banks". These banks refrained from either paying interest to depositors - or from charging their clients interest on the loans that they doled out. Instead, they have made their depositors partners in fictitious profits - and have charged their clients for fictitious losses. All would have been well had the Islamic banks stuck to healthier business practices.

But they offer impossibly high "profits" and ended the way every pyramid ends: they collapsed and dragged economies and political establishments with them.

The latest example of the price paid by whole nations due to failed pyramid schemes is, of course, Albania 1997. One third of the population was heavily involved in a series of heavily leveraged investment plans which collapsed almost simultaneously. Inept political and financial crisis management led Albania to the verge of disintegration into civil war.

But why must pyramid schemes fail? Why can't they continue forever, riding on the back of new money and keeping every investor happy, new and old?

The reason is that the number of new investors - and, therefore, the amount of new money available to the pyramid's organizers - is limited. There are just so many risk takers. The day of judgement is heralded by an ominous mismatch between overblown obligations and the trickling down of new money. When there is no more money available to pay off the old investors, panic ensues. Everyone wants to draw money at the same time. This, evidently, is never possible - some of the money is usually invested in real estate or was provided as a loan. Even the most stable and healthiest financial institutions never put aside more than 10% of the money deposited with them.

Thus, pyramids are doomed to collapse.

But, then, most of the investors in pyramids know that pyramids are scams, not schemes. They stand warned by the collapse of other pyramid schemes, sometimes in the same place and at the same time. Still, they are attracted again and again as butterflies are to the fire and with the same results.

The reason is as old as human psychology: greed, avarice. The organizers promise the investors two things:

  1. That they could draw their money anytime that they want to, and
  2. That in the meantime, they will be able to continue to receive high returns on their money.

People know that this is highly improbable and that the likelihood that they will lose all or part of their money grows with time. But they convince themselves that the high profits or interest payments that they will be able to collect before the pyramid collapses - will more than amply compensate them for the loss of their money. Some of them, hope to succeed in drawing the money before the imminent collapse, based on "warning signs". In other words, the investors believe that they can outwit the organizers of the pyramid. The investors collaborate with the organizers on the psychological level: cheated and deceiver engage in a delicate ballet leading to their mutual downfall.

This is undeniably the most dangerous of all types of financial scandals. It insidiously pervades the very fabric of human interactions. It distorts economic decisions and it ends in misery on a national scale. It is the scourge of societies in transition.

The second type of financial scandals is normally connected to the laundering of money generated in the "black economy", namely: the income not reported to the tax authorities. Such capital passes through banking channels, changes ownership a few times, so that its track is covered and the identities of the owners of the money are concealed. Money generated by drug dealings, illicit arm trade and the less exotic form of tax evasion is thus "laundered".

The financial institutions which participate in laundering operations, maintain double accounting books. One book is for the purposes of the official authorities. Those agencies and authorities that deal with taxation, bank supervision, deposit insurance and financial liquidity are given access to this set of "engineered" books. The true record is kept hidden in another set of books. These accounts reflect the real situation of the financial institution: who deposited how much, when and under which conditions - and who borrowed what, when and under which conditions.

This double standard blurs the true situation of the institution to the point of no return. Even the owners of the institution begin to lose track of its activities and misapprehend its real standing.

Is it stable? Is it liquid? Is the asset portfolio diversified enough? No one knows. The fog enshrouds even those who created it in the first place. No proper financial control and audit is possible under such circumstances.

Less scrupulous members of the management and the staff of such financial bodies usually take advantage of the situation. Embezzlements are very widespread, abuse of authority, misuse or misplacement of funds. Where no light shines, a lot of creepy creatures tend to develop.

The most famous - and biggest - financial scandal of this type in human history was the collapse of the Bank for Credit and Commerce International LTD. (BCCI) in London in 1991. For almost a decade, the management and employees of this shady bank engaged in stealing and misappropriating 10 billion (!!!) USD. The supervision department of the Bank of England, under whose scrutinizing eyes this bank was supposed to have been - was proven to be impotent and incompetent. The owners of the bank - some Arab Sheikhs - had to invest billions of dollars in compensating its depositors.

The combination of black money, shoddy financial controls, shady bank accounts and shredded documents proves to be quite elusive. It is impossible to evaluate the total damage in such cases.

The third type is the most elusive, the hardest to discover. It is very common and scandal may erupt - or never occur, depending on chance, cash flows and the intellects of those involved.

Financial institutions are subject to political pressures, forcing them to give credits to the unworthy - or to forgo diversification (to give too much credit to a single borrower). Only lately in South Korea, such politically motivated loans were discovered to have been given to the failing Hanbo conglomerate by virtually every bank in the country. The same may safely be said about banks in Japan and almost everywhere else. Very few banks would dare to refuse the Finance Minister's cronies, for instance.

Some banks would subject the review of credit applications to social considerations. They would lend to certain sectors of the economy, regardless of their financial viability. They would lend to the needy, to the affluent, to urban renewal programs, to small businesses - and all in the name of social causes which, however justified - cannot justify giving loans.

This is a private case in a more widespread phenomenon: the assets (=loan portfolios) of many a financial institution are not diversified enough. Their loans are concentrated in a single sector of the economy (agriculture, industry, construction), in a given country, or geographical region. Such exposure is detrimental to the financial health of the lending institution. Economic trends tend to develop in unison in the same sector, country, or region. When real estate in the West Coast of the USA plummets - it does so indiscriminately. A bank whose total portfolio is composed of mortgages to West Coast Realtors, would be demolished.

In 1982, Mexico defaulted on the interest payments of its international debts. Its arrears grew enormously and threatened the stability of the entire Western financial system. USA banks - which were the most exposed to the Latin American debt crisis - had to foot the bulk of the bill which amounted to tens of billions of USD. They had almost all their capital tied up in loans to Latin American countries. Financial institutions bow to fads and fashions. They are amenable to "lending trends" and display a herd-like mentality. They tend to concentrate their assets where they believe that they could get the highest yields in the shortest possible periods of time. In this sense, they are not very different from investors in pyramid investment schemes.

Financial mismanagement can also be the result of lax or flawed financial controls. The internal audit department in every financing institution - and the external audit exercised by the appropriate supervision authorities are responsible to counter the natural human propensity for gambling. The must help the financial organization re-orient itself in accordance with objective and objectively analysed data. If they fail to do this - the financial institution would tend to behave like a ship without navigation tools. Financial audit regulations (the most famous of which are the American FASBs) trail way behind the development of the modern financial marketplace. Still, their judicious and careful implementation could be of invaluable assistance in steering away from financial scandals.

Taking human psychology into account - coupled with the complexity of the modern world of finances - it is nothing less than a miracle that financial scandals are as few and far between as they are.

Cryptoassets (such as cryptocurrencies)

Cryptocurrencies and decentralized finance (De-Fi) represent a major foundational revolution whose full implications are yet to be grasped. They challenge the paradigms underlying both the central banks’ money monopoly and public digital goods. They endanger core commercial banking business.

Cryptoassets are digital goods, but they are scarce: they require “mining” and the total number of units in limited. Consequently, cryptoassets such as cryptocurrencies are rivlarous (there is a marginal cost associated with producing additional units) and excludable (access to and ownership of the cryptoasset is restricted).

Blockchain technologies are to transactions what TCP/IP is to connections: they offer distributed, redundant, and autonomous self-updating, propagated, time-stamped, linked, irreversible, consensus-driven (polled), and smart (self-executing) electronic ledgers.

Blockchain technologies present the first feasible solutions to counterfeiting, security policies, identity management, auditing, real-time transacting, mobile and micropayments, scarcity management, monetizing intangibles, crowdsourcing, record keeping, and a host of other hitherto intractable bottlenecks in business and finance. Blockchain technologies seamlessly interface across private, consortium, and public networks.

The risks are as big as the promises and the rewards: from asset bubbles to money laundering, the financing of terrorism, cryptojacking, and threatening the foundations of the financial value chain. These threats are amplified by the recent introduction of exchange-traded bitcoin derivatives (options and futures), ETFs and mutual and hedge funds which invest in cryptoassets, and sovereign cryptocurrencies (e.g. in Russia, Sweden, Venezuela), thereby granting putative future access and price-setting privileges and power to financial institutions and commodifying the underlying assets.

The technology used by first generation cryptoassets is slow because transactions are processed serially and with a block size of 1 Mb. Blockchains are far slower than relational databases. Emerging solutions such as sharding, layering, and BaaS (Blockchain as a Service) may compromise the safety of the blockchain and render it hackable. QBit (quantum computing) with a block size of 2 Mb may be the solution. These risks are also attendant upon new approaches to coinage such as minting (instead of mining) and proof of stake (instead of proof of work with a target value).

Current software is also buggy. Ethereum, for example, lacks a decimal point (for self-executing scripts). Once blockchains become mainstream, centralized control is likely to render them more hackable. Regrettably, the technology is anarchically fragmented with not a hint of impending standardization.

The main concern, though, is the fact that cryptocurrencies, though they do store value as investment vehicles, failed to become accepted means of exchange. In the absence of this crucial function, they are bound to wither and then vanish in a speculative boom and bust.

One possible solution would be to link cryptoassets to community crowdfunding as its main form of “money”. Cryptocurrencies are actually crowdsourced and the underlying blockchain technology would introduce rigorous fraud control beyond the current rather flimsy peer-review cum peer-pressure mechanisms in place in P2P financing. Decentralized Sushiswaps and YAM or Yearn financing are (wild) steps in this direction.

Staking may replace mining and, coupled with yield farming (liquidity mining: liquidity providers who contribute to a liquidity pool), it allows passive holders to generate income from their hoards.

In the wake of the collapse of cryptocurrency exchanges and the exposure of scams in the industry, blockchain technology stablecoins have been introduced. These are cryptocurrencies backed by and algorithmically linked to reserve assets such as legal tenders (fiat currencies), commodities (such as crude oil), minerals (mainly gold), and, more rarely, other cryptocurrencies.

Next Financial Crisis: Private Equity (Brussels Morning)


What have we learned from the last banking and financial crisis a mere 15 years ago? Nothing it would seem. Another meltdown is brewing in full sight and no one is batting an eyelid, possibly because a lot of slush is greasing helpful political and regulatory wheels.


The culprit this time is known as private equity. It is managed in funds by financial advisory firms. The directors of these companies – and the firms themselves - invest about 1% of the capital of the funds and hurry to retrieve their “investment” via an assortment of exorbitant fees, charges, and commissions.


Pension funds and other institutional investors are on the hook for the remaining 99% of the capital. The money is ploughed into operating businesses, but this is where the similarity to the much more sober index funds ends.


While index funds buy incremental lots of stocks over many years or decades and diversify their portfolios, private equity funds take over entire targets, lock, stock, and often sinking barrel.


Worse still, private equity funds borrow huge dollops of money to complete these dubious transactions, known as LBOs (leveraged buyouts). This is why most of them are also dubbed “buyout funds”.


While index funds are heavily regulated, shockingly, private equity funds are subject to no regulatory oversight, however cursory. Private equity advisors operate under toothless and nebulous laws such as the Investment Advisers Act in the USA.


Like venture capital and hedge funds, private equity is a cornucopia of rapacious incentive fees, usually a 2-3% management fee, regardless of how dismal the performance is plus 20% of the profits, regardless of how fictitious these are. Such fees are illegal in all other parts of the money management and investment industry.


Moreover: index funds are obligated to provide daily liquidity by redeeming their shares. Private equity funds lock capital investments for many years with no clear or promulgated exit strategy, essentially a hostage-taking situation.


Most such funds have a theoretical termination date, an obligation to liquidate in 7-12 years. But this, too, is a mirage: they simply roll over the invested capital to newly formed private equity funds (secondary or continuation buyouts). In other circles, this would fit the bill of a Ponzi scheme. 


Even worse: the very word “equity” is misleading in the context of private equity. The funds seek to offload their purchases in order to realize a profit and so are never long-term, truly committed investors. The median ownership time is 6 years. These funds actually resemble the pernicious “flippers” of Wall Street, albeit they flip their holdings more glacially.


The erstwhile exit strategies of an IPO (initial public offering) or through a sale to a public company are now rare. In effect, possession is cycled between private equity firms in kind of offshore shell game.


To believe the self-serving propaganda of these secretive firms and funds, they provide a valuable service: strategic and operational advice and an optimizing form of restructuring for a swathe of suboptimal businesses. They also afford favorable albeit somewhat incestuous access to the financial sector: banks, hedge funds, insurance companies, and other lenders.


But the truth is that most of these transactions are glorified forms of privileged insider trading. The new management is focused on enhancing the cash flow rather than on maximizing internal value, relations with stakeholders, and product or service quality. They invariably downsize brutally, axe capital investments, and cheapen product inputs.


Typically, a single firm runs multiple private equity funds in various stages of the funds’s life cycle. The implicit leverage is stratospheric and the funds cross-amplify it with their internal transactions. This is known, ominously, as a private equity complex.


The USA is always the harbinger of bad tidings such as asset bubbles. The private equity industry is no exception. About 35% of corporate equity in the States is now outside of public companies and, therefore, invisible and unregulated.


Worse still: the cancer of private equity is now metastasizing in Europe and throughout Asia and eating into more traditional pecuniary sectors and activities, such as broker-dealerships, real estate financing (including mortgages), and credit (lending).


In 2022, private equity funds in the USA alone raised 1 trillion USD and managed a whopping 12 trillion USD in assets. This is equal to 20% of total corporate equity or 5 times the ratio at the turn of this century, increasing by a compounded annual rate of 15%. The economy as a whole grew by a mere 3.6%, annually compounded. The discrepancy between these growth rates reflects, of course, leveraged debt.


The private equity industry is a nuclear timebomb primed to explode at any minute and take us all down with it. Such a conflagration will dwarf the disintegration of 2008-9. Yet, not a single politician or analyst is warning against these new excesses. Such deafening silence is enough to render one a conspiracy theorist.

Note on the Psychology of Scammers (Con Artists or Con Men) and White-collar Criminals

In December 2008, Bernard Madoff, a pillar of the Jewish community and of Wall Street, admitted to having run a 50 billion USD Ponzi (Pyramid) scheme, the biggest scam in history.

It is still debatable whether Bernard Madoff fits the profile of a classic scammer. Anti-Semites blame his ancestry, the society and culture he grew in:

To understand his psychology, you may wish to start by reading this short story I have written. It tackles in minute detail the psychodynamic processes in a con-man's mind as well as the curious bond that inevitably forms between perpetrator and victim

Madoff is, in all likelihood, a psychopathic narcissist:

For a more detailed view of pathological narcissism and Narcissistic Personality Disorder (NPD) - click on these links:

NPD (Narcissistic Personality Disorder) and AsPD (Antisocial Personality Disorder, Psychopathy, or Sociopathy)

Is Madoff malicious?

He feels immune to the consequences of his actions and reinterprets his crimes to fit an ego-syntonic narrative:

The Narcissist and Psychopath as Criminals!topic/NARCISSISTIC-PERSONALITY-DISORDER/3asm22jOtFg

The Narcissist is Above the Law!topic/NARCISSISTIC-PERSONALITY-DISORDER/fj8EEFi1I3k

The Narcissist as Liar and Con-man!topic/NARCISSISTIC-PERSONALITY-DISORDER/7thbrhhen4s

Does the Narcissist Have a Multiple Personality (Dissociative Identity Disorder)?!topic/NARCISSISTIC-PERSONALITY-DISORDER/mxA7tQxS68U

Grandiosity, Fantasies, and Narcissism!topic/NARCISSISTIC-PERSONALITY-DISORDER/gqdCHNxivRI


He blames his victims (or the Universe) for the mess (he has alloplastic defenses)!topic/NARCISSISTIC-PERSONALITY-DISORDER/XQEu10HZHMw

He loves the attention

You can download my book about financial crime here:

Watch Video

Madoff Affair I

Madoff Affair II

Also Read

The Greatest Savings Crisis in History

The Bursting Asset Bubbles

(Case Studies: The Savings and Loans Crisis, Crash of 1929, British Real Estate)

The Shadowy World of International Finance

Hawala, or the Bank that Never Was

Money Laundering in a Changed World

The Varieties of Corruption

Corruption and Transparency

Straf - Corruption in CEE

The Criminality of Transition

The Kleptocracies of the East

The Enrons of the East

Bully at Work - Interview with Tim Field

The Economics of Conspiracy Theories

The Industrious Spies

The Business of Torture

Fimaco Wouldn't Die - Russia's Missing Billions

Treasure Island Revisited - Maritime Piracy

Organ Trafficking in Eastern Europe

Begging Your Trust in Africa

Slush Funds

Copyright Notice

This material is copyrighted. Free, unrestricted use is allowed on a non commercial basis.
The author's name and a link to this Website must be incorporated in any reproduction of the material for any use and by any means.

Go Back to Home Page!

Internet: A Medium or a Message?

Malignant Self Love - Narcissism Revisited

Philosophical Musings

Write to me:  or