What’s the biggest financial scandal of all-time?
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There were too many to choose from, so we’ve picked 7 of our favorite financial scandals of all time. Here they are:
The biggest bankruptcy case in European history belongs to Parmalat. It all started when the Italian dairy giant couldn’t make a $185 million bond payment, prompting auditors to take a closer look at the company’s finances. At the end of the day, it was found that over a 15 year period, Parmalat had faked tons of documents and simply invented assets to cover nearly $16 billion in liabilities – more than the company was worth at the time. A once thriving company that grew from humble beginnings in Italy to own 3 European football clubs and sponsor a Formula One driver, Parmalat was accused of financial fraud and money laundering.
Refco was a financial services company based out of New York. The company went public in August 2005 and by the end of their first day as a publicly traded company, they were worth $3.5 billion.
Only 2 months later, it was found that the company’s CEO and chairman, Phillip Bennett, had hidden $430 million of bad debts by paying for them with loans from Refco themselves.
- Bernie Madoff Ponzi Scheme
Starting in the 1980’s (and possibly before) Bernie Madoff created the largest Ponzi scheme of all time.
Essentially Madoff would pay incredible returns to investors, using the money that other investors had put into his investment fund. So if Adam and Karen both invest $100, then Madoff would skim $10 off Adam’s contribution and use it to pay Karen a 10% return that year.
The lure of consistent returns helped grow Madoff’s con to over $50 billion.
Eventually arrested in 2008, Madoff was given a sentence to match the massive scale of his scam: 150 years in jail and $170 billion to be paid in restitution.
After being named “America’s most Innovative Company” for 6 straight years in the 90s by Forbes magazine, the sky was the limit for energy company Enron. What people didn’t know was that the company was cooking their books the whole time.
In what is one of the largest accounting fraud scandals of all time, Enron would go bust in 2001 after it was found to be inflating its earnings by several hundred million dollars. Enron shares would collapse from a high of $90.75 to just $0.67.
Also in 2001, telecommunications giant WorldCom settled for bankruptcy, becoming the third largest bankruptcy case of all time. Like Enron, WorldCom was involved in copious amounts of marketing fraud.
In the years leading up to bankruptcy, the company had gone through a period of intense growth but as the new millennium approached the telecommunications industry was in decline. Instead of trying to weather the storm, WorldCom instead turned to cooking the books. All told, there would be $7 billion in “accounting errors”.
- Bear Sterns, Lehman Brothers, AIG and Washington Mutual – The Financial Crash of 2008
In 2008, the stock market collapsed and with it went several huge financial institutions.
The unscrupulous lending ways of these giant financial institutions greatly contributed to the recession of 2008. They packaged and sold huge amounts of toxic financial products to unwitting consumers, enabled by crooked ratings agencies.
It turned out that 80% of so-called AAA-debt would be downgraded to junk status before the end of the crisis. That means that the vast majority of these financial products being sold and marketed as high-quality debt were actually complete trash.
Trillions of dollars were lost, and we still haven’t fully recovered.
The Libor rate is an interest rate used by banks and financial institutions all over the world. It’s a global interest rate and it affects $350 trillion worth of assets. That’s 20 times the size of the U.S. economy.
The scandal involved the illegal fixing of this rate. Banks would over or under-report the rate so as to benefit them – making tons of cash in the process. Raise the rate a few basis points, and suddenly you’ve made an extra $200 million dollars in two minutes. It’s estimated that Libor fixing has cost various U.S. governmental entities at least $6 billion.
It can make for grim reading, but it is important that we take away lessons from the financial scandals of the past. Always do your homework when you get into investing, and don’t take anything for granted.
For more check out article 3 Wall Street Scams That Will Totally Ruin Your Life