The Financial Tale of a Ruthless Predator |
Weekly Ramblings of an Australian Stock Trader - incorporating
Random header image... Refresh for more!

The Financial Tale of a Ruthless Predator.

Allen Stanford is a bad man.

A US court this week sentenced him to 110 years in prison for running a USD$7 billion Ponzi scheme.

Just how bad is he?
According to the US District Court, Southern District of Texas, Houston Division, it recommended an even heavier sentence:

‘Robert Allen Stanford is a ruthless predator responsible for one of the most egregious frauds in history, and he should be sentenced to the statutory maximum sentence of 230 years’ imprisonment.’

But what did he do that was so bad?

We’ll get to that in a moment. Before we do, in yesterday’s Money Morning we missed out a key part of a quote that renders the quote meaningless. The missing piece was in a quote from Bank of England governor, Mervyn King’s speech in 2007.

To read the full article again, including the missing section, click here…


Jets and Boats

Back to Stanford. Where do we start…? Put simply, Stanford operated a bank that, like most banks, sought to attract savers. Savers deposited cash and were told they would get a 3-4% return on their money.

This return was higher than other banks ‘supposedly because of low taxes and the bank’s low overhead.’

According to court files, Stanford claimed his bank ‘invested in highly liquid, safe, conservative stocks, bonds and precious metals; made no loans unless they were secured by an equal amount in cash, and therefore incurred no credit risk.’

But what actually happened to investor money is completely different. And it led the US District Court to call him a ‘ruthless predator’.

According to the court files…

‘Prior to 1990, Stanford began diverting depositor funds into various speculative real estate ventures he personally owned. By late 1990, at least half the bank’s reported assets did not exist… ‘By February 2009, Stanford had sunk over $2 billion in depositor funds into various failing businesses he owned, including, among other things: restaurants, regional airlines, a newspaper, and a host of companies which were not even actual businesses but which existed solely to hold title for tax purposes to Standford’s fleet of jets and boats.’

The files continue…

‘By 2008, Stanford was stealing $1 million a day from the bank to keep his failing personal businesses open.’


‘When a potential depositor wanted to confirm the existence of the purported issuer of the insurance policy, Stanford admitted to Davis that the policy was fake and had Davis fly to London for a day to fax a false confirmation of the insurance company’s existence from a cubicle which Stanford rented.’

What else did Stanford do with the money he stole? The court files state…

‘He purchased suits from Bijan, a private Beverly Hills clothier that advertised itself as the world’s “most expensive” mens clothing store…He used his planes to fly a tailor from Bergdorf Goodman to his Miami and Antigua homes for measurements, regularly flew bottled artesian water to his home in St. Croix, flew fish for his koi pond… ‘In Antigua, he became a one-man stimulus package, eventually becoming the largest employer after the government. He developed a massive complex adjacent to the airport, constructing large, impressive buildings to headquarter his various businesses, complete with their own water treatment facility. Stanford also became a leading patron of cricket, building an enormous stadium and sponsoring the Stanford 20/20 cricket tournament with a $20 million prize.’

The list goes on. And you get the idea.

They Nearly Got Away With It

The thing is, like Bernie Madoff, if it wasn’t for the 2008 financial meltdown and investors redeeming investments for the safety of cash, Stanford’s Ponzi scheme wouldn’t have unravelled.

And they would probably still be taking investor money now.

If the court files are right, Stanford started swiping money from investors in 1990. So he had gotten away with it for 18 years before he was rumbled.

But this is more than just a crook taking savings from innocent people. It’s an extreme example of how any large deposit-taking institution works.

Look, we’re not saying the banks take your savings and use it to line their own pockets. That they buy private jets, boats and $10,000 suits with your savings.

But at the heart of the Stanford Ponzi scheme is one incontestable fact: investors couldn’t get their hands on their money when they asked for it.

And that’s no different to any large bank anywhere in the world. If too many customers try to withdraw their savings, the bank will run out of cash, simply because the money won’t be there…

Where Has Your Bank Invested Your Money?

Banks take deposits, create new money and then lend it out so borrowers can buy a house, car, boat or expensive suit.

But when it comes down to it, a typical bank holds less than 5% of its depositors’ obligations in the form of cash or cash-like instruments. In other words, if savers try to withdraw in cash 6% of the total savings held by a bank, the bank would have to close its doors.

The bank wouldn’t have the cash to cover its obligations.

So, even though we agree that Stanford is a crook for swiping $7 billion of savers money to fritter away on trinkets, we still can’t help think that Stanford’s business model isn’t a million miles away from most banks’ business models…

Luring investors with higher interest rates and then divvying the cash out to those who would like to spend it. In Stanford’s case, he divvied it out to himself…in the case of banks, the cash goes to the millions of borrowers, with no guarantee the loans will ever be repaid.

Madoff and Stanford were caught out because investors wanted more safety for their money. As the markets remain volatile and the solvency of financial institutions is questioned worldwide, it’s only a matter of time before more mainstream banks go to the wall.

You’re seeing that happen in Europe right now. And if there are a string of bank collapses there, it could have a knock-on effect and put a question mark over the entire global banking system.

Don’t assume your money is safe in any bank when that happens. So make sure you hold assets outside the banking system if you want to avoid a complete wipe-out when the global financial system breaks down.

Kris Sayce.

This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.