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The Real Secret Behind All Investment Scams

By P.J. O'Rourke

I went to Albania in 1997 to cover the complete collapse of the country's economy.

The collapse was caused by investment scams, simple pyramid "Ponzi" schemes. Scammers promised foolishly high investment returns. Foolish investors were paid off with money from more foolish investors. The more foolish were paid off with money from the more foolish yet.

The "Greater Fool" theory indicates this can go on forever. No matter how idiotic you are, you can always find bigger idiots out there.

Mathematics, however, indicates this cannot go on forever. If a pyramid scheme grows in an exponential manner – 10¹, 10², 10³, etc. – it takes just 10 layers of a pyramid to include nearly twice the population of the Earth.

The population of Albania totaled about 3.2 million people in 1997. And as far as I was able to tell, all of them invested in pyramid schemes.

We know what happens with pyramid schemes. Charles Ponzi's hoax about arbitrage of international postal coupons fizzled in 1920. Bernie Madoff's hoax about sailing above market fluctuations flopped in 2008. Ponzi's and Madoff's investors were outraged.

But not as outraged as Albanians. Violent protests erupted. When the government banned public meetings, the protests became more violent. The army was ordered to shoot. All the soldiers deserted. The soldiers had money in the pyramid schemes, too. They were as angry as anyone else.

The violent protests turned into armed rebellions. Albania's military arsenal was looted. There was a lot to loot.

Until 1992, Albania was controlled by fanatical Stalinists. Albania was as isolated and bellicose as the only other country it had diplomatic relations with, North Korea. The Albanian military was armed with 1.5 million rifles, pistols, and machine guns – all stolen by the protesters along with 10.5 billion rounds of ammunition.

Heavy weapons were also pilfered. The National Commercial Bank in the city of Gjirokaster was robbed with a tank.

Theft slipped into pillage. The railroad to Montenegro was stolen, the track torn up and sold for scrap. Pillage degenerated into vandalism. Schools, museums, and hospitals were wrecked. Vandalism reached heroic scale. Bridges were demolished, water-supply pumping stations were blown up, power lines and telephone wires were pulled down. Albania came to bits.

I got through on one of the few remaining phones to the only remaining hotel in Albania's capital, Tirana, and took the one remaining weekly flight from Italy.

The hotel sent a driver and translator, Elmaz, in an old Mercedes belonging to who knows whom. I didn't have to go through any customs formalities or security checks at the Tirana airport. How could anything or anybody come into Albania that was more dangerous than what was there already?

Albania was in pieces... but not at a standstill. The crumbling two-lane road into town was full of cars, trucks, and horse carts loaded with all sorts of things belonging to who knows whom.

More cars and trucks, crashed or abandoned, lined the road. Albania had so many wrecked and stolen cars that the horse carts were all fitted with automobile seats, some with center consoles and luxurious upholstery.

Elmaz was studying to be a veterinarian. Everything had been stolen from his school – books, drugs, lab equipment, even parts of the buildings themselves. "We are without windows, without doors," said Elmaz. "We study with only desks and walls."

The desks had been stolen, too, but the faculty found them in local flea markets and bought them back. "All the horses we had were shot," said Elmaz.

An American wire-service reporter at the hotel bar said of the locals, "They'll rob you." The moment he said that, a neophyte British television producer limped in and told us he'd just lost a car, a TV camera, and $5,000.

The first Albanian pyramid scheme was Sijdia Holdings, which offered 5% or 6% interest a month. Sijdia Holdings had some real assets. Its founder, Hadjim Sijdia, was jailed in Switzerland for fraud, but got out and somehow managed to repay his debts.

This lent credence to nine other large pyramid schemes. That, in turn, led to a plethora of mini-pyramids, some offering interest as high as 50% a month.

"My family had $2,000 in the pyramid schemes," said Elmaz. It was their entire savings.

I interviewed an Albanian newspaper editor, Ilir Nishku. He said...

The pyramid schemes created the idea that this is the free market and just four years after communism we could get rich. They created the wrong idea that this is capitalism.

Albania's economic statistics looked great: 9.6% growth in 1993, 8.3% in 1994, 13.3% in 1995, and 9.1% in 1996. That should tell us something about the gullibility... or the stupidity... or maybe, the corruption... of the people who compile economic statistics.

The "United Nations 1996 Human Development Report" declared that Albania's "progress in widespread economic well-being... has continued, forming a social basis for human development."

"Everyone was sitting in cafes," said Elmaz.

Then, in February 1997, five of the large pyramid schemes and all of the small ones failed. The remaining four quit paying interest and froze account withdrawals. An estimated $1.5 billion disappeared – half the Albanian GDP.

That's what usually happens. Even in America, where we have excellent legal and financial systems – well, excellent by Albanian standards – Madoff's investors have recouped less than $0.33 on the dollar.

Albania is different from America. Albania is more desperate, more violent, and less orderly. But those are quantitative differences. Are there qualitative differences? Is Albanians putting their money into pyramid schemes really different from Americans bankrolling Ponzi or giving their money to Madoff to manage?

I went to Albania to learn why the country had been so vulnerable to pyramid schemes. How could a whole nation be, essentially, destroyed by a chain letter?

It took me less than an hour to find out.

The first thing Elmaz did was take me to meet Nishku. The first thing I asked Nishku was: "Why were the pyramids so popular in Albania? Were people just unsophisticated about money after all those years of communist isolation?"

"No," he said. "There had been pyramid schemes already elsewhere in Eastern Europe, and they had collapsed before the Albanian ones were started. People in Albania knew about such things."

"Then how," I asked, "did so many Albanians get suckered in?"

"They knew so much money could not be made honestly," Nishku said. "They thought there was smuggling and money laundering involved to make these great profits."

Here was the lesson. The Albanians didn't believe they were victims of a scam. They believed they were the perpetrators.

Regards,

P.J. O'Rourke