Isn’t it amazing how people who scam others have fabulously fitting names? Bernard Madoff “made off” with billions of dollars of other people’s money. Now we have an apparent Ponzi scheme of our own operated by a man called Tannenbaum, the German name for a Christmas tree. Well I fear there won’t be many presents under the tree this year children. Even Sir Fred (the shred) Goodwin had an appropriate surname for a man who sunk a bank and collected a fortune of shareholder’s money in return. How bad losses can lead to good wins.

The details of the local Ponzi scheme are still a little sketchy at the moment and Barry Tannenbaum has assured members of the media that this is not a Ponzi scheme but simply a case of cash flow problems. In the circumstances you wouldn’t expect him to say otherwise would you? However, in essence is what Barry Tannenbaum did any different from what the global banking system did over the past ten years? Why is toxic debt so different from a Ponzi scheme?

The principle behind a Ponzi scheme has been well explained by my learned friend Traps. It’s simplicity itself. Since most people are greedy it isn’t difficult to sell the idea of a spectacularly high return on investment in principle. The problem is that people with money are not usually stupid so the important thing with a Ponzi scheme is to come up with something so complex that it is believable. If you can do that then people’s greed generally wins over intelligence and this is clearly what we have here.

If two smart lawyers with flashy lifestyles offer you a chance to join the same exclusive club as them and earn handsome returns on your cash why would you leave your money in the equity market? What you don’t know is that the two smart lawyers are collecting a handsome commission for any cash introduced so their wealth creation is risk free. The desire to be, as Bryan Ferry once sang, “in with the in crowd” also plays a part here because there’s a snob appeal to being part of an exclusive investment club……until the whole thing is revealed as a fraud that is. So all a Ponzi scheme needs to succeed is more and more suckers.

My late father taught me at an early age about the “greater fool liquidity theory” and it has stood me in good stead throughout my life. The theory simply states that anything has a higher value until you find that nobody wants to buy it. An example….if you buy a house for R5 million it’s a great deal providing you can find a greater fool to buy it for R6 mln. If you can’t then you are the greater fool and it’s game over.

So back to toxic debt. Over the past few years some of the world’s biggest names in banking have been packaging all sorts of rubbish together and selling it to investors. It’s a process known as securitization and let’s not bother about the various names of the financial instruments traded, let’s just look at the principle. The entire global banking system decided to take a one way bet on the most illiquid market in the world, property. Providing property prices continued rising everything would be OK. This was a fallacious argument in itself because if property prices rose and everyone became a seller then property prices would have fallen anyway. However this piece of common sense didn’t occur to the finest brains to have come out of the world’s greatest business schools.

In a nutshell what happened was this. Money was lent to people who were already in debt, who didn’t have jobs, who had no hope or intention of repaying and this debt was collateralized and bundled into a pack with slightly better quality debt. It was then rated by the world’s greatest ratings agencies who pronounced it safe which meant that investment institutions could buy it for their clients. At every stage a large fee was taken by the way. When property prices fell and the world ran out of suckers nobody wanted to buy this rubbish and it soon earned the name “toxic debt”. The US government then pumped trillions of dollars into their banking system to pretend there wasn’t a problem while places like Iceland went bust. It was no different to a Ponzi scheme. If there had been more dupes around the whole smoke and mirrors world of collateral debt would have continued.

The net result thus far of all this is that some big global banks no longer exist, some are now owned by governments (taxpayer bailout in other words) and all have significantly less capital than they had three years ago. World equity markets have taken a pounding, there is economic gloom everywhere and jobs are being lost at an alarming rate. All because the Ponzi scheme of ever increasing property values came tumbling down when there weren’t enough suckers to go round.

So perhaps Barry Tannenbaum needs a new fairy at the top of his Christmas tree. After all, what he did was to help spread the wealth around just like the world’s biggest banks. It isn't the role of the courts to protect people against their own stupidity so instead of pillorying Barry for his ingenious scheme perhaps we should be demanding he receive a government rescue package. That should go down well with COSATU.