Unfortunately, like the financial rescue package, it is not a simple thing to explain.

Probably the most accessible way to understand it is to compare it to a mortgage. Without the ability to borrow money for a home, most people could not afford to own one. With the median cost of a US home just over $210 thousand, most of us would be renters if mortgage loans weren't available. To some extent, the same thing is true for business.

Publicly owned companies raise money through the stock market. They publish information about their business, and investors buy a portion of that business through purchase of stock in its initial public offering. After investment bankers take their fees, the company uses that money for a variety of purposes, including expansion, research and development, facilities and equipment. In addition, such companies often borrow money for a period of time through the credit markets. The total of its outstanding stock and borrowings is called the company's capitalization.

Long term borrowing is facilitated through the sale of bonds, and shorter term cash needs, through more expensive commercial loans, or very short term commercial paper. These borrowing mechanisms allow companies to weather short term cash requirements caused by seasonality, economic slow-downs and a myriad of other reasons.

Most businesses have some degree of debt. The reason for that is, again, easiest to explain by comparing it to a mortgage. Let's say you buy a $350 thousand home with 20% ($70 thousand) down. Seven years later, you sell the home for $430 thousand. After paying off your mortgage (now $255 thousand), you will receive about $175 thousand.

• Original price - $350,000 - $70,000 = $280,000
• 7 years reduction in loan balance = $ 25,000
• Loan balance after seven years = $255,000
• Sales price = $430,000
• Less loan balance = $255,000
• Gross profit = $175,000
• Original investment = $ 70,000
• Return on investment 14%

If you had not borrowed any money, and bought your house for $350 thousand in cash and sold it seven years later for $430 thousand, you would have made $80 thousand on an investment of $350 thousand, or 3% annual return.

This borrowing, or "leverage" as it is referred to in business, increased the return on the sale of this home by 11% per year over seven years. Businesses use borrowing, or leverage, for the same reason - to increase the return on investment for their shareholders.

Conservative business analysts usually recommend no more than a 30% debt ratio (total debt as a percentage of debt plus stock) for a business.

Again, this 30% debt ratio is similar to that recommended for comparing housing costs to gross income when considering lending money to a person for a home loan. That allows for a sufficient "cushion" for most people to continue making their loan payments without difficulty. Some leverage is good. Too much debt, though, is bad. That is true for both businesses and people.

Borrowing is an important part of the economy. For people, and businesses that need shorter term loans, it's made possible by commercial banks by taking in deposits and loaning out a percentage of those deposits to borrowers. Their assets are loans.

Over the last few years, in addition to loans, many banks held securities on their books that contained hundreds of mortgage loans that were sliced up into pieces and sold. As everyone who hasn't been under a rock for the last year knows, many of these loans were made to people who couldn't afford them. Most are good, but some are not. So, until we know just how many are bad, these securities that are made up of these loans are hard to sell. What are they worth? How many of the loans they contain are bad?

Nobody knows. So, banks had assets on their books to which they couldn't assign a price. And, when your assets are loans, and you are in the business of making loans, selling those loans, getting money from that sale to make more loans . . . well, you get the picture. So, to shore up their balance sheets, banks hung on to their cash. Need a loan? No lenders. Everybody's holding on to their money, so the FDIC won't force a "marriage" of their bank that has assets that can't be priced, with a bigger bank (at a fire sale price).

Businesses, like car dealers, furniture sellers, clothiers, etc., who rely on banks for financing their inventories were about to face the prospect of being unable to borrow because no lenders were lending. And, their customers couldn't get credit for their purchases either.

We saw automobile manufacturers close their leasing operations. Credit had already begun to dry up. There was a crisis of confidence.

The entire financial system is based upon belief. Money is a symbol. It's not worth anything if the belief is suspended. It can be as small as bankers reducing the available amount on your credit card if they don't believe you'll pay them back, to as large as banks not lending money to each other because they don't know how many sub-prime loans are in their mortgage backed securities. If we all stop believing, the economy grinds to a halt. Jobs are cut. Those of us whose jobs aren't cut stop spending because we believe our jobs may be cut.

We've talked about how the Treasury is buying $700 billion of mortgage backed securities that are on the books of our banks to get the economy rolling again. http://www.bizcovering.com/Investing/700-Billion-Bailout-What-It-Means.280179

That money is the shot in the arm that banks need to get lending again. Like it is when we come to a full stop on the freeway, we won't be at full speed immediately. But this will get us moving again, slowly at first; then back to full speed.

There was a liquidity crisis. But, to put this into perspective, the US economy continues to be the most resilient in the world, and though this problem is severe, we will weather this as we have many other financial crises.

A bet against the US economy has always been, and continues to be unwise. This, too, shall pass.

1. Technical analysis:

   Like the name suggests it is the study of the stock markets over a period of time to predict how they will behave in the coming days. Meant strictly for the experts the charts use complicated mathematical analysis to sense a possible trend. Once the trend is spotted, assuming it will continue over the next few days, you have the ability to predict the market.

2. Fundamental Analysis:

   Again a mathematical method, it seeks fundamental value of stocks hidden in the stock market. Also known as quantitative analysis, this method involves gaining insight into the company's current performance to predict the future. Fundamental analysts look at revenue, expenses, assets, liabilities and all the other financial aspects of a company to derive at the companys intrinsic value and how it will perform in the future.

3. Follow your instinct:

   This works! And works pretty well in many cases. Millionaires have been made simply because they had the guts to listen to their gut feeling and take the right decision. If you are an experienced player, over a period of time you tend to understand how the market works, what the factors that influence the markets are and how to spot a trend. That's right. You don't have to be a technical analyst to understand trends. You need to be smart. You need to understand the factors that will cause a particular stock to rally in a falling market and vice versa. Read as much financial news as you can and listen to your heart.

4. Consult your neighborhood astrologer:

   If nothing else works, get to the nearest astrologer or tarot card reader and he will be able to predict the market for you!
   
   No amount of analysis will help you if you do not know how to use that information. Do not get into the part of predicting the market but get into making the most of your investment. Understand group psychology and know how people think when faced with volatile markets. Have patience and stand firm on what you have decided upon. When the whole world was against the greatest investor of all times, he had the guts to stand firm and have patience to reap the fruits of his investments. Do not follow investments without ample study. Understand the stock you plan to buy, the financials of the company, it's values and it's plans for the future.

Just follow the simple rules above and you will never feel the need to predict the market; you will be content reaping the benefits!

President Bush announced his intention to see a $700bn (£378bn) rescue package through congress as fast as possible. Similar plans have been adopted in the UK and elsewhere as panic remains paramount at major stock exchanges.

Many tax payers where however disappointed by the decision, and it appears this is a widespread feeling, particularly in America where economic intervention by the state has notably lost popularity since the New Deal was introduced. After all, this style of capitalism has been operating for decades in Italy.

For more than a century Fiat, the giant car maker and one of Italy's biggest industries, regularly profited by buoyant markets; however, as soon as sales slowed or were in the red, the Italian state (regardless of the party politics of the time) would intervene to subsidize and job loss. Little wonder then that the current Prime Minister, Silvio Berlusconi, also is the biggest industrialist of the country.

This situation is only vaguely reminiscent of the USA. Republicans are generally well funded by big lobbies, and Bush's connections with several industries has long been documented. What was not foreseen was the decision to use public funds to keep the irrecoverable institutions alive. Americans generally don't like a strong Federal government to intervene in to their lives as much as in the global economy, and though they may appreciate the need for something to be done urgently, their patience might be running thin.

   After a turbulent weekend of pessimistic activity, Lehman Brothers -America’s fourth largest investment bank- began the week by filing for chapter eleven bankruptcy protection to the American central bank (The Federal Reserve). ‘chapter eleven’ specifies a certain type of bankruptcy plan, where a failed business is allowed the time to work something out with those it owes money, in order to pay what it can afford over an extended period of time (The whole process being scrutinised by government officials to ensure fair play).

   Secondly and almost as alarmingly, Merrill Lynch –another of America’s struggling investment banks- announced that it has accepted a deal to be bought by the Bank of America at a fairly cheap price, considering the bank’s size. This takeover has created the largest financial service bank in the world.

   If you add those two recent problems to the now distant Bear Stearns incident, you will quite quickly begin to paint a picture of economic crisis, involving three of America’s top five investment banks, painted in the blood of many a Washington politician I would expect.

If you live in the States this is all old news to you and I am simply rubbing salt in that wallet sized wound you have there in your pocket, but if like me you come from Europe, Asia or anywhere else for that matter, you may well be thinking to yourself, ‘but how does this effect us all the way over here? I’ve never heard of these banks before, so why should I care?’

   These investment banks are less well heard of than your average ‘high street bank’ (The likes of Barclays or Santander), but they effect us all precisely because they are investment banks.

   An investment bank works a lot like a building society, but on a totally different scale. Big businesses will feed millions of dollars in to these great financial behemoths, who will then use this money to invest in stock markets -amongst other things- around the world. When this is done well the interest gained from investment can be very rewarding indeed, many times above inflation (far greater than your building society at any rate).

   Although these giant finance institutions are American, because they have billions of dollars invested in shares around the world, when the banks go bust billions of dollars are ripped out of the stock markets around the world (reflected by significant falls in share values, particularly ones held by the failed bank).

On the day that Lehman Brothers went in to bankruptcy the Dow Jones -The Wall Street Stock Market- fell by over three hundred points (a drop of 2.7%) whilst the UK’s FTSE100 share index –the index of Great Britain’s largest one hundred companies- fell by more than two hundred points (a drop of 3.9%).  The UK bank HBOS (The result of a merger between Halifax and the Bank of Scotland) was particularly badly effected, losing 17% of its share value in a single day. All in all, a bad day at the office.

   As well as the economic hammer blows, in the UK five thousand Lehman Brothers employees found themselves abruptly unemployed. This the British part of a twenty five thousand worldwide staff, now seeking new work. As if that wasn’t enough, these previously employed investors, secretaries and the like are not likely to receive any part of the wages that they have already worked for this month. The administrators for the British part of the company -an accountancy firm called Pricewaterhousecoopers (Or PWC for short)- revealed that there was absolutely no money left within the business at all.

So why did Lehman Brothers go bankrupt? After all, it’s not every day that a company this big collapses. As with every financial institution we hear about being in trouble these days, it seems to be because of risky investment and bad economic performance. Big risks used to mean big money but these days, with such a poor economic outlook all big risks mean are big problems. Unfortunately, old habits die hard and some investment institutions continue to eye up the large potential returns that line their pockets.

   When these investments fail and continue to fail then you lose money. When we’re talking about billions of dollars of failed investment, we start talking bankruptcy.

   Quite often it is preferred to keep business’ afloat rather than let them go bankrupt (Think of Northern Rock or Bear Stearns), but the American treasury decided that this time public money would not be best spent propping up this fallen bank. Additionally, rescue plans by the Bank of America and Barclays Bank failed to conclude in any meaningful way, leaving Lehman Brothers very few options.

What’s next then? It’s hard to say really, but I think that one quote that has been thrown around sums it up to me really, “Expect more of the same”

   This view is certainly well supported with a wealth of evidence. For one, the insurance company AIG (once the world’s largest insurer) has been taking steps to raise cash and has applied to the Federal Reserve for forty billion dollars of emergency funding to keep it afloat. Acts of a clearly struggling company.

   Secondly are the pessimistic actions of the central banks of Europe and the United Kingdom, injecting thirty billion Euros and five billion pounds respectively to oil the straining cogs of the financial machine.

   Finally there is news that the previously mentioned Bear Stearns, who were kept afloat thanks to intervention from the American government earlier this year, are to be bought for mere peanuts by the financial giant JP Morgan in March.

   I would love to say to you now, ‘Alas, but it’s not all that bad’. However, the fact remains that the economic future seems very bleak, and the banking future bleaker still. If you live in the UK like myself, or someplace outside the USA, all I can give you is but one crumb of comfort. At least we won’t be hit anywhere near as badly as America will. The economic slump that we might feel will be nothing compared to the looming recession that America will likely suffer. Doom and gloom all round really, for the moment at least.

Picture source

The world is in crisis. World leaders are panicking and the everyday Joe in the street is left picking up the pieces.

Banks are collapsing but Joe and his co workers will work extra hours to build financial strength again, he/she will do overtime to pay the bills and replace the funding they have lost. They will look for new jobs 24/7 as the one they had dissolved in front of their very eyes, on finding said job they will work all the hours on offer and shore up the old bank with a new name. They will pay their taxes again.

They will get back on their feet and buy a new car, well second hand but as they sold the old one to feed the kids, they will be better off. They will put fuel in the car, so the oil price will rise as it has been noticed there is a need again.

Food prices rose when the world crisis kicked but that doesn’t matter, they can rise again as the cost of transporting the goods has now risen and the giant super market has to pay wages to Joe and his colleagues.

Clothing is necessity and no longer a luxury, Joe and friends shop for cheaper brands, these gradually rise in price as they become popular and then they too are luxury items. Clothing is now handed down and revamped.  The fashion store on the corner can no longer buy in the cheap clothing, therefore they will be forced to close, and one of Joe’s friends is out of work again.

Furniture gets cared for a little more in the home as there is no money for new, the furniture store closes because of lack of demand, one of Joe’s friends is out of work again.

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Joe gets promoted; there is an increase in salary, his wife has a job now working around the children’s school hours, it is hard getting to and from A to B so now there is extra cash a small run-around is purchased on credit.

One of Joe’s friends has opened his own branch of a lending company, he gives Joe a good deal, Joe uses him regularly now to replace what he lost in the recession and lay off period.

Joe’s friend has need of staff now as his business is growing rapidly; Joe has friends who are already trained in this area and recommends them to Bill. Bill employs a loyal team and they soon have Bill back on his feet, they all enjoy higher salaries and a better lifestyle. Joe has risen in his new career area; he has a new mortgage, car and now enjoys a holiday home on the coast, they all pay their taxes, thanks to Bill.

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All the time this is happening, the world leaders are discussing world problems, war is inevitable and funding required, the cost to the economy is great. Joe, Bill and friends work hard, play happily and have a good life; oblivious of what is going on, just reaping the rewards of their good work.

The world leaders are still in the same jobs, they just reshuffled a bit during the previous crisis, but they still have the luxuries of knowing their homes and contents can be renewed if required. They work long hours but they earn good salaries and enjoy a comfortable lifestyle.

Bill gets a little concerned as war is declared, the market is a little unstable and a small loss is noticed in the incomings section of the accounts book, it is a little higher than expected, a member of staff will have to be laid off, one of Joe’s friends is out of work. This continues until Bill collapses financially, he has now covered the whole of the country with his franchises and they have all suffered the same, he invested into the big banks and has warned them of the inevitable crisis looming. All of Joe’s friends are now out of work and have lost all of their invested earnings.

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Joe notices the slow down in the economy, he has lost his home by the coast, Bill warns him of the inevitable, the supermarket closes, Joe is out of work.

The big banks realise Bill was right, Joe and his friends have no money to put back to pay for the lending out to others. The Bank collapses.

The world leaders are still in the same jobs, they just reshuffled a bit during the previous crisis and will do so again, but they still have the luxuries of knowing their homes and contents can be renewed if required. They work long hours but they earn good salaries and enjoy a comfortable lifestyle.

 The world is in crisis. World leaders are panicking and the everyday Joe in the street is left picking up the pieces.

 

There are thousands of houses in Nepal and they have computers and internet connections but unfortunately they can't enjoy the facilities of the sites which issue paid memberships, for Paypal is not functional in Nepal and other major credit cards hard to get because they are issued to Big Businessmen and companies which export goods.

Most of the writing sites and educational sites charge about 2 to 4 dollars a month and I believe most of the students of college level can afford to pay that amount which is equal to about 150 to 300 Nepalese rupees a month but unfortunately they can't do so in the absence of proper system of sending money.

It would be a divine gift to them and it would bring them closer to the knowledge which the Western World has if they were allowed to pay the amount in the local banks in their own currency. I would be delighted if some kind people looked into it and did something constructive.

All they have is Nepalese currency and Indian currency and they can pay the amount wanted by the Western companies in these currencies without any hassle but the process should be easy and simple.

I have about 10,000 students who are very well known to me and they all want to join certain educational sites and writing sites and many of them want to take part in writing contests but unfortunately they are handicapped.

At present their computers are only surfing machines and a way to the free sites to join a club or a group to exchange photos, letters, or videos which I think is really ridiculous.
It would be a very kind gesture if some gentlemen from the western world began to think seriously about it. I am sure that their business will further flourish and in the process, the Nepalese students will gain the knowledge and ideas which are almost alien to them.

• Files all property tax forms with the state and federal government.
• Helps you properly set up your business in the beginning.
• Ensures you're allocating your expenses correctly.
• Correctly handles the depreciation schedule.
• Assists with the disbursement if you have partners or investors involved.
• Writes off repairs and depreciates the major improvements.
• Knows your long-term plans for each investment property.

Like anyone else you hire, request clients' names and telephone numbers so that you can call for references. One of the most important things is that you feel comfortable with his or her approach, background, and ability to take care of the accounting of and taxes for your rental properties.

The Russian Federation experienced an increase in crime, capital flight, banking crises, and destabilization of the ruble during the transition into a capitalist economy. In money laundered related capital flight, Russia lost an estimated $133 billion between 1992 and 1997. To help stabilize the region, Russia and other Central and Eastern European countries received diverse aid packages from the international community. The aid included multinational financial aid, such as loans from the World Bank and International Monetary Fund (IMF), bilateral assistance from nongovernmental organizations (NGOs), and financial and technical support from various governmental agencies and corporations. Russia was plagued with corruption and criminals who fleeced the county.

In 1999, a scandal broke involving Russia, misdirected IMF funds, Western banks, and money laundering. The U.S. Congress began investigating the money laundering allegations and misuse of IMF funding. Oligarchs, businessmen, officials, and criminals moved money and IMF funds out of Russia via money laundering techniques, the Central Bank of the Russian Federation, Western banks, and offshore and private investment firms. Russia provided easy entry ports for illegally gained funds, and the banks reaped profits from the accounts. The siphoned funds and capital flight totaled in the billions. The American bank most associated with the laundered funds from Russia was the Bank of New York; however, there were many other American and Western banks involved, including Citibank, a division of Citigroup.

International Monetary Fund (IMF)

The purpose of the IMF loans was to stabilize the Russian ruble, lessen the effects of the economic crisis, enhance infrastructures, and subsidize the government to make up for tax collections shortages. The Central Bank received the aid and then distributed it to the government, Russian banks, and accounts at the Central Bank's offshore firm Fimaco. In 1996, Russia hid part of its currency reserves in Fimaco to mislead the IMF and secure more loans.

The Central Bank issued special licenses to politically connected Russian banks so that the banks and their clients could participate in international banking activities and the distribution of the IMF loans. Many of these banks had substantial ties to organized crime, such as Mikhail Khodorkovsky's Bank Menatep. Three multimillion transfers, marked as a payment for improvements to Russia's automotive industry infrastructure, originated from Bank Menatep and were deposited into American bank accounts. Additionally, Semyon Mogilevich, known as the Godfather of Russian organized crime, used banks in Russia and the northeastern United States to move hundreds of millions of dollars, including funds linked to Russian “quasi-governmental” organizations.

Russia had lax accounting procedures, and IMF loans could not be tracked after the money was transferred to the Central Bank; therefore, conclusively determining whether specific wire transfers from Russian to American banks contained IMF funds is difficult. Additionally, the Yeltsin administration and the Duma were reluctant to pass anti-money laundering laws, thus making the IMF loans vulnerable. As early as 1993, American intelligence believed that the KGB, oligarchs, and corrupt government officials were laundering Western aid and loan money out of Russia as soon as it entered the country by converting it to hard currency and then shipping it to foreign and offshore accounts.

The Central Bank used very little of the financial aid to support the ruble, pay salaries, improve the world's confidence in Russia, or improve infrastructures. Instead, funds were used to help finance President Yeltsin's campaign (linked to corruption and criminals) and were transferred to overseas accounts; at least $2.9 billion of IMF loans may be housed in offshore banks, and a former Russian prosecutor general alleged that $3.9 billion of a 1998 $4.8 billion IMF bailout never reached Russia. Representatives from the IMF and the World Bank could account for 2 to 3 billion rubles that were used to support Russian agriculture. Less than 10 percent of a 1998 $4.4 billion dollar payment was used to support the ruble. The Central Bank transferred the bulk of the $4.4 billion to Russian banks so that the banks could convert short-term loans known as GKOs (for Gosudarstvennoe Kratkosrochnoe Obyazatelstvo, “state treasury bonds”) to hard currency before the government defaulted on the GKO. At one point the GKO market, characterized as a pyramid scheme, had a rate of return of almost 300 percent and was covered by IMF loans.

More than $10 billion passed through the Bank of New York, and $1.4 billion passed through Citibank of New York and Commercial Bank of San Francisco. After the 1998 bank crisis, IMF lending, in its current form, was suspended. Nevertheless, the IMF stated that there was no evidence to support claims that IMF's loan disbursements, made during the 1998 crisis, were diverted.

Irakly Kaveladze and Citibank

In 1991 Irakly Kaveladze, a Georgian-born businessman, immigrated to the United States and established International Business Creations (IBC). A few years later, Kaveladze created Euro-American Corporate Services, Inc., located in Delaware, to form more than 2,000 corporations for Russian and other Eastern European brokers. Kaveladze charged his clients $350 for each incorporation and $450 to open a bank account. As a formality, employees of IBC/Euro-American visited the Delaware office once every three months. IBC had all phone calls and mail forwarded to an office in New York. From 1991 until 2000, Kaveladze opened approximately 136 accounts for himself or clients of IBC/Euro-American and assisted 50 nonresident aliens to open credit card accounts at Citibank of New York. The addresses listed on the bank and credit card accounts were IBC/Euro-American's business address. The accounts yielded more than $300,000 in profits for Citibank. Kaveladze opened an additional 100 accounts at Commercial Bank of San Francisco for his clients.

The president of IBC/Euro-American stated the purpose of the accounts at Citibank of New York and Commercial Bank of San Francisco was to move money out of Russia. From 1991 to 2000, more than $800 million passed through IBC/Euro-American related accounts at Citibank of New York. Four of IBC/Euro-American's Citibank accounts processed approximately $280 million alone. The funds originated in foreign countries, including Russia, they were deposited into the accounts at Citibank through wire transfers, and then over 70 percent of the funds were transferred out of the U.S. banking system to foreign countries and money laundering havens.

Citibank's Actions and Responses

Citibank agreed to open the questionable accounts based on the assurance that Kaveladze knew the officers of the Russian companies and that they would appear in person to provide the required documents within thirty days of opening the account. Account holders are required to present two forms of identification and incorporation papers when they open the accounts, and financial institutions are to perform background checks on account holders and verify the legality of the funds. IBC/Euro-American had supposedly performed background checks, when required by law, on the companies and the officers. Citibank of New York accepted the word of IBC/Euro-American and did not perform due diligence. The accounts were fully functional, including international wire transfer capabilities, during the 30-day grace period. Moreover, Citibank did not close any of the accounts within four months when account holders failed to appear with the required documentation.

John Reed, then Co-Chief Executive of Citibank, acknowledged that the bank was slow to take appropriate actions, had weak controls, and did not follow their policy to know more about their wealthier clients. Citibank also acknowledged that a U.S. branch allowed $725 million of questionable Russian funds to flow through the accounts associated with Kaveladze. In 1996, the bank's compliance unit detected questionable transactions to or from offshore, high risk jurisdictions and monitored the credit card accounts. The compliance unit closed the credit card accounts. However, Citibank of New York resisted the recommendation of closing most of the bank accounts for four more years.

Citibank failed to conduct due diligence on the IBC/Euro-American accounts, did not follow “know your customer” policies, and violated money laundering provisions of the Bank Secrecy Act, which requires banks to identify and report suspicious activities. Citibank conceded that oversights, such as relying on Kaveladze's word concerning client's background checks, allowing account holders to fail to appear in person, not questioning the large number of the accounts at one address, and not closing the accounts when their own compliance unit advised the closures, occurred in the IBC/Euro-American case. The U.S. Congress had investigated Citibank for similar violations prior to the bank's actions with the Russian and Kaveladze accounts.

Citibank's Additional Russian Activities

Beyond opening accounts in the United States, Citibank was involved in several other activities in Russia. In 1994, Citibank opened the first fully foreign-owned commercial bank in Russia, offering Russian businesses investment banking, financial advisory, financing, and other services. Citibank, along with other major American banks and the U.S. Federal Reserve, provided technical support and had an advisory role with its participation in the Russian-American Bankers Forum. The Forum's purpose was to help with the restructuring of Russia's financial system. Like many other Western banks, Citibank invested in Russia's GKO market. When the market collapsed in 1998, Citibank lost hundreds of millions of dollars. Citibank also participated in nonresident, “S-special” accounts and purchased 4.8 million shares of LUKoil's stock for 1 billion rubles. In order to circumvent tighter controls on limiting capital flight, Russian companies, including companies involved in the controversial loans-for-shares program, would sell shares of their companies, in rubles, to foreign companies and banks. Then the Russian company would buy the same shares back in hard currencies. The funds would remain in overseas, S-Special accounts. The transactions allowed companies to have sizable accounts in foreign banks and to participate in the proliferation of capital flight.

Citibank Private Bank and Its Other Customers

In 1999, Citibank Private Bank had 40,000 clients and accounted for approximately 2.5 percent of Citigroup's business. Private Banks are usually banks within larger banks and offer a one-on-one private banker to manage the assets within the account and provide a variety of services. Clients included honest wealthy individuals, but also corrupt politicians and criminals. Many of the larger and more notorious cases of money laundering and capital flight were through accounts in Private Banks.

The private banking industry is competitive, and returns on the accounts are lucrative. Generally, the accounts usually have more than $1 million in assets ($3 million or more for Citibank Private Bank), which can include property, stocks, arts, or valuables as well as money. The services offered to the client include private trusts, estate planning, tax assistance, financial advice, loans, international wire transfers, offshore accounts, shell companies (known as private investment corporations), secret accounts, and code names. Secrecy and privacy are of paramount importance. Private banking can also conceal the source, routing, and destination of funds that may have been gained through illegal activity. In the United States, banks are forbidden to handle the proceeds of drug trafficking, kidnapping, bank fraud, and other criminal activities. Private banking allows wealthy and powerful clients to conduct business in ways that are permissible abroad and offshore but prohibited in the United States. After the Bank of New York scandal, and after billions of dollars were siphoned out of Russia, the U.S. Senate's Permanent Subcommittee on Investigations and the House's General Accounting Office (GAO) investigated American banks and private banks, in particular Citibank Private Bank, to determine whether they are susceptible to money laundering and whether they may not have failed to report suspicious activities.

Citibank Private Bank has approximately 350 clients that are officials and their families. More notable clients include Asif Ali Zardari, the former Prime Minister of Pakistan's spouse, imprisoned for kickbacks and money laundering; Omar Bongo, President of Gabon, investigated for bribery; Mohammed and Ibrahim Abacha, sons of the former military leader of Nigeria, one of whom was imprisoned for murder and investigated in two countries for money laundering; the daughters of Radon Suharto, the former President of Indonesia who allegedly looted billions of dollars from Indonesia; former Chilean dictator Augusto Pinochet and his family, who had 63 accounts at Citibank New York and Citibank Miami; and Raul Salinas, brother to the former President of Mexico, who, with other members of his family, moved between $80 to $100 million through accounts at Citibank Mexico, Citibank New York, Cititrust (Cayman Islands), Citibank London, and Citibank Switzerland. Citibank assisted Salinas and his wife in setting up an offshore private investigation company, allowed Salinas and his wife to use aliases in Mexico, and wired funds from Citibank Mexico to Citibank New York before moving the funds offshore. Additionally, Citibank failed to generate a financial and banking profile, in accordance to its own “know your customer” policy.

Only the CEO can optimize the company for fraud. He has it invest in assets that have no clear market value. Professionals evaluate such assets-allowing the CEO to hire ones who will inflate values. Rapid growth (as in a Ponzi scheme) extends the fraud and increases the “take.” S&Ls optimized accounting fraud by loaning to uncreditworthy and criminal borrowers (who promised to pay the highest rates and fees because they did not intend to repay, but the promise sufficed for the auditors to permit booking the profits). The CEO extends the fraud through “sales” of the troubled assets to “straws” that transmute losses into profits. Accounting fraud produced guaranteed record profits-and losses.

CEOs have the unique ability to convert company assets into personal funds through normal corporate mechanisms. Accounting fraud causes stock prices to rise. The CEO sells shares and profits. The successful CEO receives raises, bonuses, perks, and options and gains in status and reputation. Audacious CEOs use political contributions to influence the external environment to aid fraud by fending off the regulators. Charitable contributions aid the firm's legitimacy and the CEO's status. S&L CEOs were able to loot the assets of large, rapidly growing organizations for many years. They used accounting fraud to mimic legitimate firms, and the markets did not spot the fraud. The steps that maximized their accounting profits maximized their losses, which dwarfed all other forms of property crimes combined.

While agreeing that the S&L served as both a “weapon” and a “shield,” control fraud theory cast doubt on those metaphors. Weapons and shields are visible; fraud is deceitful. The better metaphors would be camouflage, or a virus. Control fraud theorists rejected the economists' metaphor, “gambling for resurrection” (honest but unlucky risk takers). Gambling cannotexplain why control fraud was invariably present at the typical large failure. There were over 1,000 felony convictions of senior S&L insiders. Accounting fraud made control fraud a sure thing-not a gamble. Control fraud theory predicts the pattern of record profits and catastrophic failure and the business pattern of deliberately making bad loans. Both patterns are inconsistent with honest gambling.

The identification of the S&L “high fliers” as control frauds and understanding that they were Ponzi schemes relying on accounting fraud led to effective regulatory strategies against the wave of S&L frauds. The Federal Home Loan Bank Board reregulated the industry, curbing growth (a Ponzi scheme's Achilles heel) while the control frauds were still reporting record profits and were praised by top economists.

The second use of control fraud theory was to analyze the structures that produced criminogenic environments that led to waves of control fraud. Deregulation and desupervision of the S&L industry, combined with the industry's mass insolvency, optimized accounting fraud and made “systems capacity” limitations critical. The mass insolvency maximized “reactive” control fraud, and the deregulation, desupervision, and mass insolvency maximized entry into the industry by “opportunistic” control frauds.

Fraud waves can cause financial bubbles to hyperinflate (e.g., Texas real estate during the debacle) and cause regional or systemic injury (e.g., during Russia's “shock therapy,” the failures of “the Washington consensus,” and the U.S. high-tech bubble). Control frauds cause indirect losses by corrupting politicians and professionals and betraying trust. When control fraud becomes endemic, it can lock nations in long-term poverty.

Control fraud theory poses a fundamental challenge to the core models of finance and economics. The efficient markets (and contracts) hypothesis requires that markets be able to identify and exclude control frauds, and the dominant law and economics model asserts that they do so effectively and quickly. This claim is largely premised on the view that no top-tier audit firm would give a clean opinion to a control fraud. Control frauds have consistently falsified this claim. Deposit insurance was not the key to S&L control fraud. Control frauds deceive “creditors at risk.” High reported profits allow them to grow rapidly by borrowing and issuing stock.

To date, most of the work in control fraud discusses looting by the CEO. However, it also exists in government when the head of state uses the government to defraud. It can be used to defraud customers (e.g., “lemons” scams, in which quality or quantity is misrepresented, or cartels) and the public (e.g., tax fraud or a toxic waste firm that gains a cost advantage by dumping in the stream). These forms of control fraud create real profits and, absent effective enforcement, create a dynamic that causes fraud to spread. Systems capacity problems can lead to endemic control fraud in an industry.