On Friday, June 19, 2009, Texas billionaire Sir Allen Stanford, who was knighted by Antigua in 2006, was indicted by a federal grand jury in Houston for allegedly attempting to defraud investors through his Antiguan-based Stanford International Bank (SIB).

In what the SEC has called a "massive Ponzi scheme", Stanford is alleged to have "misused and misappropriated most of" the $8 billion entrusted to him by SIB's 5,000 to 6,000 investors, including more than $1.6 billion that went to Stanford himself in the form of personal loans, the indictment asserts. (For background reading, see The Biggest Stock Scams Of All Time.)

Not surprisingly, Stanford has denied any misconduct. In a tearful and sometimes defiant interview with Brian Ross of ABC News that aired April 6, the financier promised to fight what were then just allegations "with everything in me."

"I will die and go to Hell if it's a Ponzi scheme," Stanford told Ross. "It's no Ponzi scheme. If it's a Ponzi scheme, why are they finding billions and billions of dollars all over the place?"

Shut up; just shut up, Sir Allen. You had me at "I will die and go to Hell."

The Blame Game
Seriously, as egregious as Stanford's crimes are purported to be, how different was his organization from many of today's more, uh, "traditional" banks? According to that same ABC report, government officials claim they have "found only $500 million of the missing $8 billion in the alleged scheme." If I'm doing my math correctly (and if I'm not, I'm sure I could still find work as an SIB accountant), that amounts to a $7.5 billion shortfall - far less than the $33.9 billion that Bank of America (NYSE:BAC) was required to raise as part of the Fed's "stress test" back in early May.

The sad truth is, not since the blundering Uncle Billy nearly busted Bailey Savings & Loan in the classic 1946 film "It's A Wonderful Life" have financial institutions been so careless with their customers' money. If, in fact, a Ponzi scheme simply entails paying investors with other people's money, rather than profits, haven't some of our nation's largest banks been just as culpable as SIB?

After all, Washington Mutual (OTC:WAMUQ) was still cashing checks when it was losing money hand over fist, wasn't it? Yeah, the company was eventually shut down, but no one accused former CEOs Kerry Killinger and Alan Fishman of any wrongdoing. Yet, in 2007, while Killinger was taking home a $14 million salary, WAMU was taking a $67 million hit to its bottom line, thanks in large part to Killinger's aggressive - dare I say "irresponsible"? - lending strategies. Worse yet, according to The New York Times, Killinger and other WAMU executives "were excluding mortgage losses from the computation of their bonuses." (For related reading, see Executive Compensation: How Much Is Too Much?)

And how about Fishman? In less time than it would've taken WAMU shareholders to put their hands over their heads and lay face down on the bank's cold, tile floor, he was in and out as the company's chief executive officer. Nonetheless, for just 17 days of work, Fishman was paid approximately $20 million, according to FoxNews.com.

Someone Else's Money

Of course, WAMU wasn't the first bank to spend money it didn't have, and it probably won't be the last. For years, bank reserves, the amount of liquid assets some countries (like the U.S.) require financial institutions to keep on hand for withdrawals, have been dwindling. In an April 2008 blog entitled "Myths About The Monetary Base And Bank Reserves", Swedish economist Stefan Karlsson notes that "bank reserves in early 1990 were $60 billion as compared to $42 billion now."

At least in the United States, this practice of fractional-reserve banking continues to flourish, undoubtedly because the U.S. government continues to insure deposits - now for up to $250,000 - thanks to legislation signed by President Barack Obama on May 20. With such guarantees in place, is it any wonder that banks are lending depositors' money to practically anyone with a pulse? (For more on FDIC insurance, see Are Your Bank Deposits Insured?)

Heck, in Ohio, you don't even need a functioning ticker to get a loan. In March of 2007, Ohio mortgage brokers Mark S. Edwards and Mark D. Musselman were both convicted of 48 felony counts of mortgage fraud, which included using the "identities of recently deceased individuals to purchase properties," court documents revealed.

The Bank of the U.S. Government
Such abuses have led some to question the government's role in the banking industry.

"I believe the government needs to exit both the both banking and monetary arenas," said Douglas French, president of the Ludwig von Mises Institute, the self-described "world center" of Austrian economics. "Deposit insurance should be abolished."

In a June 11 post on the Mises Web site, French argues that "there is no incentive for bank depositors to go to the trouble of determining a bank's soundness if the government is going to guarantee deposits."

To bolster his point, the Mises Institute president cited a recent column by Forbes.com contributor Bernard Condon entitled "The Reverse Bank Run." In the piece, Condon notes that "in a curious twist to the traditional bank run, Americans seeking high yields on their money are causing deposits at struggling banks to mount in seeming lockstep with their troubles." (To read more about this debate, see The Government And Risk: A Love-Hate Relationship.)

"The problem is," Condon explains, "it's the banks in bad shape that often offer the highest rates on deposits."

Somewhere, Charles Ponzi has got to be smiling.

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