Albanian Pyramid Schemes

The results of the collapse

• Major short-term economic impact

• Inflation rose more than 40% in 1997

• Output fell by 7%

• The most damaging result of collapse was the nation-wide civil disorder

• violence

• Major long-term impact

• Thousands impoverished,

Collapse of the Ponzi Schemes

• World's confidence in Albania gone

• the government ignored the Pyramid schemes for the most part. They set up a committee to investigate the schemes by the end of 1996, but it was already too late

• November 19, Sude defaulted on its payments, and the collapse began.

• This discouraged the general public and people stopped investing in firms throughout Albania

• Not even lowering rates to 5% could gain new investors

• In January 1997, Sude and Gjallica declared bankruptcy, triggering riots.

• The government would not reimburse the people who lost money in the schemes

Works Cited

• But it did freeze the accounts of some firms such as Xhafferi and Polluli (which amounted to $250 million-- 10% of the GDP)

• http://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm

• By June, the country was consumed by CHAOS

• Interim government

• http://www.time.com/time/specials/packages/article/0,28804,2104982_2104983_2104998,00.html

• http://www.crimes-of-persuasion.com/Crimes/InPerson/MajorPerson/albania_ponzi.htm

The beginning of the end: 1996

• http://www.buyandhold.com/bh/en/education/history/2010/ponzi_scheme.html

• At the end of 1995, the UN suspended sanctions against the Federal Republic of Yugslavia, and smuggling could no longer gain these companies any profit

• http://en.wikipedia.org/wiki/Pyramid_schemes_in_Albania

• January, 1996 the top companies began increasing their interest rates (about 4~6% a month)

• This caused inflation to rise greatly

• This is almost 100% annually

• parliament elections in May led to a further increase of rates and more Pyramid schemes were created

• Some companies, such as Sude, had interest rates of 12~19% a month

Albanian Pyramid Schemes

....continued

By: Daniel Weltman & Heather Lent

• The prominence of pyramid schemes led to an increase of depositers

• VEFA had the largest liabilities yet only 85,000 depositors

• Xhafferi and Populli between them attracted about 2 million depositors within a few months

How it all began......

• The population of Albania at the time was around 3.5 million

Historical Context: Shortly after the collapse of communism in the USSR

• Firms continued to increase their rates as the months went by

• economy transitioning from being State-owned, to privatized

• By November, the face value of the schemes' liabilities totaled $1.2 billion

• Years of isolation and general ignorance of markets led to plethora of Ponzi Schemes

Pyramid Schemes in Albania....

• Due to lack of banks, the private sector's demand for credit could not be met

• Albanians sold their houses to invest in the schemes; farmers sold their livestock. People sold whatever they had.

• This lead to an unofficial system of granting credit through informal lending companies and deposit-taking companies that invested on their own behalf, instead of taking loans

• Some opperated exactly as described

• Such companies were the beginning of the soon-to-be ubiquitous Pyramid Schemes

• Others such as VEFA, Gjallica, and Kamberi had some real investments, however were involved in criminal activities such as smuggling goods into the former Yugoslavia

• Over 2/3rds of Albanians invested in Pyramid Schemes

• These were not regulated by the government

• Even firms that did not begin as Pyramid Schemes transformed into one by 1996

• When they collapsed, it was evident that their liabilities massively outweighted their assets.

"What is a Pyramid Scheme?"

• a nonsustainable business model

• Based on exponential growth

• Example: An individual recruits 5 people. Each of those people recruite another 5 people, and so on....

• Eventually there are a multitude of people paying upwards, and the greatest benefactor is the man at the top

"What is a Ponzi Scheme?"

• An individual pays investors with either

• their own money

• or money from subsequent investors

• NOT from profit earned by the organization/individual

• Thus, it needs a continuous source of investors in order to sustain itself

• It attracts people because it promises higher returns than other invests, however ITS A SCAM.

• Inevitably, the high rates arouse suspicion OR the scheme cannot pay interest payments. Investors try to pull their money out, which reveals the true nature of the scheme. Most often followed by a switf withdrawll of all the money by the scheme operater (theft!!!!)