If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Saturday, 30 January 2010

Davos 2010: a "cunning" plan how we will all pay for "the largest heist in history"

The current financial crisis was caused by the banks engineering and operating a massive, global pyramid scheme. As a results the banks debt and potential liabilities became too large for underlying cash reserves. Or, more technically, the Money Multiplier became too high. Effectively, banks lost liquidity.

To save such pyramid from collapse governments injected trillions of dollars to improve banks liquidity, or, more technically, to reduce the Money Multiplier. This was done in two ways: by injecting cash (and giving governments' guarantees which are as good as cash) and taking banks’ equity for that and by quantitative easing, i.e. generating additional liquidity by printing money. The former risks putting governments' debt onto unsustainable level, whilst the latter carries high risk of backfiring with hyperinflation. Despite the massive amounts injected, testing the public financing and markets to the limits, those actions did not bring about the desired results. The banks' liquidity remains dire. This is a testimony to a massive scale of the pyramid (i.e. a level of Money Multiplier) engineered and operated by the financial industry.

Nearly a year ago, Professor Nouriel Roubini suggested converting banks debt and liabilities to equity. This idea reappeared at the meeting in Davos. Banks will be allowed to issue their own shares and settle their debt with them. Whilst it may not apply to individual depositors who have government guarantees (although this is also far from being certain as it is not known how the system may be developed in the future), in practice it would mean that a depositor or a creditor may receive in return a bunch of bank's shares having demanded a payment in cash. The practicality is that such solution will not cost governments directly (i.e. it will not be reflected as a part of governments’ debt) and will not carry a risk of high inflation as no new cash will be printed.

So what are the pitfalls? Issuing new shares will dilute their value. As the size of the pyramid is massive, we really talk about massive dilution. Therefore the depositors and creditors will be paid with practically worthless shares and, on top of that, existing shareholders will lose the value of their holding. It is likely to be very similar to Zimbabwe-style hyperinflation but not of cash currency but of share value of a bank being diluted (i.e. hyperdevaluation of the share value). It is not really a concern for short-term speculative investors as they always find a way to make money on the margins of fluctuations. Apart from affecting depositors and creditors of a bank, it will affect long-term investors, cumulatively large-scale through pension funds, endowments and unit trust investments. They are mainly middle class, responsible people who took care about their financial planning, their children education and pension. They have been the pillars of the free market economy for a century. They cannot do much to escape a beating if "banks' debt to equity plan" goes ahead: their funds' shareholding of banks is substantial so even if they try to escape by selling it out, they will be punished. This appears to be another way of making taxpayers pay for the largest heist in history. This time round, rather than through governments' finances or inflation, the toxic waste will be unloaded on depositors and creditors with additional diluted worthless shares. Clever, eh?

This kind of shareholding dilution strategy has been associated with companies regarded as rather dodgy, trading on OTC or AIM in London. (No doubt other countries have their equivalents.) Some City lawyers joke that "a criminal record" is a mandatory entry on their Board Directors' CV's. Now this kind of "unorthodox" financial practices looks destined for mainstream markets with governments' blessing. Similarly to governments' stimuli and quantitative easing it will make ordinary folk who worked, saved and paid for his/her pension poorer.

Tuesday, 26 January 2010

UK bogus growth?

Today UK has been reported to have 0.1% growth in the last quarter of 2009.

The UK GDP in 2009 was, circa, £1,460 billion. 0.1% of it (i.e. growth) is £1.46 billion.

Now, let us take the quantitative easing, i.e. printing money, into account. It does not represent any growth at all. It has totalled £200 billion. Therefore, in reality unless this 0.1% growth is adjusted for the effect of quantitative easing and the reports do not mention that, there was economy contraction of £198.54 billion, i.e. shocking 13.6% of GDP. This does not take into account when money printing took place but is a good estimate nevertheless.

I hope the ministers and mainstream financial commentators explain this.


Stiglitz: ”US does not have capitalism now”

One is tempted to say: has it not been obvious, Professor Stiglitz for at least a year? You can say it again. However the fact that such a well-known and respected economist says it, confirming that the current crisis is not a failure of capitalism as we do not have capitalism, leads to conclusion that basic rules of free market were broken. A breach of such rules is at best a wrongdoing at worst a crime.

Professor Stiglitz makes also, implicitly, a very important point. Many, including top experts, pointed out to the Author of this blog, that the banks have not been operating a pyramid scheme since in a pyramid scheme the beneficiaries would normally be its originators high up its chain. Whilst this is only an intuitive argument, generally it makes sense. However the banks suffered heavy loses and were not beneficiaries at all. Therefore banks were not operating such a scheme.

Professor Stiglitz, implicitly, points out a difference, even a separation and conflict, between bankers and banks. So whilst the banks (or rather their shareholders) suffered heavy losses, bankers who run the banks and were up the pyramid chain, extracted and are still extracting their profits through remuneration and also by being "sophisticated" investors in a pyramid themselves. Banks, as institutions, were not originators of a pyramid scheme. Bankers were such originators turning the banks into their tools of running a pyramid scheme.

Monday, 25 January 2010

Financial terrorism

Traditionally terrorism has been based on asymmetry and disproportion between terrorists' demands and consequences of their actions, which were inevitable or extremely difficult to prevent, in case their demands were not met. A demand could be of a financial nature or a request for freeing of already convicted terrorists' comrades, or some political or social demands. A threatened action was typically disproportionate either by its sheer scale, or by an outrage it was designed to cause.

During the current financial crisis banks and other financial institution started playing "the terrorists' game" with the taxpayers. It all seems to have started by accident. At first, by engineering a massive global pyramid scheme, the banks were robbed of cash and were on the verge of collapse. This threat of collapse, with unimaginable consequences, pressured governments to come up with rescue packages. Effectively taxpayers started subsiding the financial industry. This is not to say that shareholders or owners benefited from this. This was not the game of the financial establishment. The beneficiaries have been the individuals, quite a large number of them, running the financial institutions: the industry "captains" and other "top financial talent". As mentioned, they engineered pyramid schemes paying themselves massive amounts of money in the process, not surprisingly almost exclusively in cash, not some kind of innovative financial instruments. It questions whether they believed in the first instance that they were legitimate financial products or they were just designed to funnel out the cash. This led to liquidity shortage resulting in near-collapse of the banking system. The erstwhile shareholders of these institutions lost some of their holdings as governments and other investors stepped in.

The financial industry "captains" continue to play this simple game with governments. They have learnt that they are considered as "too big to fail" and governments will rescue them. Now they also terrorise governments that if they do not pay themselves generously enough the so-called "talent" might leave the financial sector. Some governments seem to accept this nonsense as they feel terrorised by a thought of a prospect of the collapse of the financial system. Sometimes it even looks like a case of a Stockholm syndrome.

The truth of the matter is that the financial system appears to be operated in an illegal way. Firstly, a situation of allowing any institution of any kind (apart from rare exceptions like an army) to grow and be considered as "too big to fail" is in breach of any competition principles. Institutions that are "too big to fail" have monopolist grip on the market as they have a free insurance against failure, underwritten by taxpayers. This stifles smaller competitors, which are not "too big to fail" and creates insurmountable costs of market entry for any prospective new players. As a result productivity decreases and the industry becomes a hotbed of business pathology. It is an absolute contradiction to any free market principles and capitalism. The anti-trust case of Standard Oil looks like a child's play. The financial system resembles the communist world from its dying days.

Secondly, the financial industry became a classic form of a pyramid scheme. As a result it is impossible to ascertain whether the recently reported banks' profits are real ones or they are bogus and are the signs of yet another pyramid collapse similar to what we observed in September 2008, January 2009 and summer 2009.

Thirdly, receiving subsidies from taxpayers, to such a massive degree as the financial system got, is considered illegal under the European Union legislation. If in the US it is technically legal, one can assume that it is only the case because such taxpayers' subsidies were unthinkable in the past. Above all, public subsidies are anticompetitive and discriminatory to businesses that do not receive them on the same scale.

It is clear that taxpayers and governments must wake up to the fact that they are being terrorised by the financial establishment. The banks must be broken into much smaller businesses. The test is that each of them must be well below the mark of being "too big to fail". Each of the banks must be capitalised by holding cash reserves belonging to individual shareholders risking their loss in cash in case their bank collapses.

The financiers, with regulators and possibly some politicians, must face justice for causing the current crisis by engineering a global pyramid scheme. The prospect of having them languishing in jail and the wealth gained confiscated must be real. This would not be an act of revenge but of elementary justice. This would also be a deterrent for the "surviving" and future financiers making them less inclined to defraud the owners of smaller banks that should emerge from this crisis. As such smaller banks would not be "too big to fail", the balance will be on the owners to employ the management honest and competent enough that would not ruin a bank. If they do not, they, as the owners, may be held at ransom, terrorised. But the taxpayers will not be.

Sunday, 24 January 2010

A letter to Vice-Chairman of the US' Financial Crisis Inquiry Commission, Mr Bill Thomas

24 January 2010

To: Bill Thomas - billthomas@fcic.gov

Dear Sir

In response to your invitation to the member of the public to send questions that witnesses to the inquiry should answer, please find my questions below. The Background to these questions has been explained in detail in the evidence sent to the British Parliament House of Commons Treasury Committee that investigated the causes of the current Banking Crisis:


Further more detailed justification is on my blog:

"Financial crisis? It's a pyramid, stupid." - http://gregpytel.blogspot.com/

I trust my questions will be helpful with the Commission's work.

Yours sincerely

Greg Pytel


The current financial crisis began as a banking crisis called "credit crunch". Credit crunch was a shortage of liquidity, namely cash, i.e. one dollar real cash had to cover too many dollars of financial liabilities and there was insufficient volume of cash. A ratio how many dollars of liabilities on banks’ books one dollar cash has to cover is called Money Multiplier (MM).

With loan to deposit ratio (LTD) less than 100% Money Multiplier is constant for a constant LTD, and always finite (at the limit). I.e. if LTD = 0% then MM = 1, if LTD = 20% then MM = 1.25, if LTD = 50% then MM = 2, if LTD = 80% then MM = 5, if LTD = 90% then MM = 10, if LTD = 99% then MM = 100, if LTD = 99.9% then MM = 1000, and so on.

If LTD equals 100% then MM equals infinity at the limit, i.e. MM keeps growing without a limit linearly as a result of every multiple deposit creation cycle.

If LTD is greater than 100% then MM equals infinity at the limit, i.e. MM keeps growing without a limit exponentially (very fast) as a result of every multiple deposit creation cycle.

Therefore if LTD ratio is greater than (or equal) 100% in multiple deposit creation cycle then one dollar cash is expected to cover ever growing (technically infinite at the limit) number of dollars of liabilities on banks' balance sheets. In other words, Money Multiplier grows to infinity. In case of LTD ratio greater than 100%, it is an exponential, i.e. very fast, growth guaranteeing liquidity shortage in a finite time, i.e. the risk of credit crunch is 100%.

The exponential growth of Money Multiplier, MM, to infinity can be graphically represented and it looks like a pyramid.

Furthermore, if LTD ratio is less than 100%, the overall ratio of total loans to total deposits, on bank(s) balance sheets, gives an average LTD ratio and can be used as the reliable basis for calculating MM (for a banks, or a number of banks, or the financial system). If LTD is greater than (or equal) 100%, it is impossible to calculate a MM based on a ratio of total loans to total deposit.

The banks were using LTD ratio greater than 100% in the multiple deposit creation process (lending).

Questions to the financial executives (each of them):

Since lending with LTD ratio greater than 100% has been a standard banking practice:

1. Do you expect MM to be arbitrary high (potentially infinite) without causing a liquidity shortage (credit crunch)? The answer must be: "yes" or "no".

2. Two alternatives

2.1 If the answer is "yes", how do you expect one dollar cash to cover potentially infinite number of dollars of liabilities on the bank's balance sheets without causing liquidity shortage (credit crunch)?

2.2 If the answer is "no":

- can you advice on the maximum MM, what it should be (the answer must be a concrete figure: e.g. 5, 8, 10, 15, 20, 50, 100, etc)

- how do you expect the financial institutions to practically control and ensure that MM is never greater than that maximum.

Saturday, 16 January 2010

On BBC Newsweek Scotland with Derek Bateman

The author of this blog was interviewed on 16 January 2010 by Derek Bateman on BBC Scotland about banks profits and bankers bonuses

Thursday, 14 January 2010

"The Quiet Coup"

Simon Johnson, ex-Chief Economist of the IMF, wrote an excellent analysis, back in May 2009, "The Quiet Coup". It went by and large unreported. He stated: "(…) recovery will fail unless we break the financial oligarchy that is blocking essential reform". Readers of this blog are strongly recommended to read it.

Mr Johnson simply confirms what readers of this blog have known all along from its first article "The largest heist in history". "The financial oligarchy" controls the taxpayers in the same way as loan sharks control their "customers" (or rather victims).

Additionally, this blog, "Financial crisis? It’s a pyramid, stupid", presents technical workings of "the financial oligarchy" set-up and shows that it is a criminal enterprise even within the existing law frameworks in the civilised countries. Yet nothing is done about it. "The financial oligarchy" rules.

Friday, 1 January 2010

Angela Knight: an Arthur Scargill of the British banking

However Ms Knight does not understand that the banking is a drain on taxpayers' money in the same way as more traditional national industries had been in the past before they went under. The amounts of monies guaranteed, paid, or to be paid, by the government to rescue the banking businesses (stimulus packages, quantitative easing), £860 billion and probably much, much more, far outweighs the tax income. The banking industry must face it: it became utterly unproductive and lives off state subsidies and brings losses in the same way as steel, shipbuilding or coalmining, and so on, did in 1970's and 1980's.

Ms Knight pointed out "the UK has a record of building up great industries such as in steel, shipbuilding, engineering. It also has a history of losing them". (She does not mention however that it was with the bankers' "help" who benefited from that "loss".) Ironically she appears to have become a critic of Margaret Thatcher as she continued: "it loses industries by: taxing them wrongly; regulating them inappropriately; not investing in them; and taking actions that prevent them from being internationally competitive". Sounds like brown-nosing the New Labour (never mind the pun, Prime Minister). In the 1980's the leader of miners, Arthur Scargill, used similar arguments against the Thatcher's government stopping "supporting" coalmining industry. But Mr Scargill was arguing for decent miners’ wages, not lottery wining paycheques. Ms Knight is taking this argument to complete absurdity: the taxpayers should support millionaires. Like it or loath it, but it was Thatcher's reforms that led to the British economic revival of the 1980's. Not only does it show bankers' loss of touch with reality, but a complete loss of economic, and indeed rational, thinking. Bankers appear to believe - in the same way as until Thatcher’s era reforms steel, shipbuilding, coalmining (and some other) industries believed - that they are so great and important that they should always be rescued and supported by the taxpayers. Such thinking led to these industries downfall. It was giving state subsidies, call it "stimulus packages", in the first place that led to these industries downfall - as it effectively made them complacent disregarding the need to adapt to the changing world - not withdrawing them once the taxpayers could not bear the costs any longer. The fact that bankers repeat trade unions mistakes of the 1970's and 1980's is not a good prognosis for the future of the financial industry. And indeed it shows what kind of "top talent" banking has attracted.