The financial scams that brought Albania to the brink of war

0:00When communism fell, there were three state-run banks that were terrible because they lacked two key functions. They didn't really take in deposits and they couldn't really lend. Okay, I'm spotting a few weaknesses here in their business model. There was no financial sophistication among Albanians at this point. I would say the vast majority were just under this illusion that this is how capitalism works.

0:34Today on the story of money, we are going to be covering what has to be one of the weirdest financial debacles of my lifetime. It was like a bizarre lab experiment carried out on an entire nation that went horribly wrong. I'm talking about Albania after the fall of communism, when the whole country got sucked into a vortex of pyramid schemes, essentially financial scams, that triggered a near civil war when they imploded. Its 1990s nightmare was huge. Relative to the size of its economy, it was the equivalent of a thousand Bernie Madoffs. And Albania's experience does have lessons for us today.

1:16It's a classic example of how human mass psychology can interact with finance in frightening ways, especially when there's a hot new thing in town. Jillian is sadly travelling today, so you're stuck just with me. I'm Robin Wigglesworth, and this is the story of money from the Financial Times.

1:39In 1898, John Nuveen had a vision to underwrite municipal bonds that would propel American infrastructure into the 20th century. More than 125 years later, that vision lives on. Today, Nuveen has grown into a leading global asset manager with expertise spanning public and private markets, still investing with a future in mind. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. Despite Gillian's absence today, I'm thankfully not alone. I'm fortunately joined by a colleague, Hortensa Aliach. She's the FT's banking editor, and probably even more importantly for us today, she's also a born and raised Albanian.

2:26Hortensa, thanks so much for being here. Thank you for having me. I'm honored to be here. Well, obviously, you know, we want you here for your banking knowledge as well. But, you know, this is also a personal story for you because, like I said, you were born in Albania. Yeah. So this is, I guess, touches on two of the key facets of my life, which is sadly banking. and gratefully being Albanian. But I was born in 1990, so about six months before communism fell later that year. And it was an equally exciting and terrifying time to be in Albania. We had this new sense of liberation and freedom after one of the most brutal communist regimes that there had been in existence.

3:13and it was an amazing time for my parents. And I still remember actually my dad wearing one of the coolest jackets I've ever seen, which was an Adidas multicolored jacket. And that was sort of the sign that, you know, the economy had opened. But aside from that, it was also a time of a lot of joy, conviviality, people were excited about what was to come next. They'd had these snippets of what life was like abroad in places like Italy and Greece. and they really thought that Albania was going to become that. I mean, a multicoloured Adidas jacket sounds like a far better signifier of Western influence than David Hasselhoff blazing out over the wall.

3:56But let's go back to 1990. So yeah, Enver Hoxha is the dictator that even for Behind the Iron Curtain, that was a fairly unusually insular, brutal dictatorship and almost more similar to North Korea than like a Poland, right? Yes, absolutely. So Enver Hoca took power in 1945. So he was there for the best part of four decades. He was famously known to be very paranoid and that paranoia led to him, you know, sort of killing a lot of allies as well as rivals, cracking down on dissidents. and one of the key things that he did was really isolate Albania. So initially Albania was aligned with the USSR.

4:44He broke with the USSR and then aligned with China. In the late 1970s also broke with China. So at this point Albania was really alone. Oh wow, okay. So yeah, not the guy to keep friends, unfortunately. So in 1990 for Albania, it must have been just an enormous shock, right? Like going from isolation, even in Eastern Europe, to suddenly the world changing. It's kind of like an alien's landing. I don't know. I think the only way I can describe it, honestly, is like someone turning the lights on. You know, they'd all been living in this really, really strict regime where you couldn't do anything without the government having oversight of you.

5:27And, you know, my grandparents own a farm in the north of Albania. All of the produce that they made would be taken, redistributed. So it was really a very hard facing regime that people were so used to, but they didn't really know what was on the other side. And then, of course, what happens is that the regime falls and all of a sudden, boom, Albania is open. And the first thing that happens, as is often the case with these regimes, is people flee abroad. So you had a lot of Albanians going to places like Greece and Italy, where they were trying to find work. All of a sudden, all this opportunity was available, right?

6:07And, you know, my father had learned Italian, for example, illegally under the communist regime, there was this real expression of, we are now part of Europe. Next to that is also mass poverty. It was, I think at the time, probably the poorest European country. And so there was this real kind of rush to get economic policy and the economic engine going as soon as possible. Yes, because I'm a massive nerd about these things, I did actually look up some of the numbers in the IMF's World Economic Outlook database. I saw the IMF estimated that that immediate shock after the wall fell and the country opened up was around 30 % of GDP.

6:51I mean, that's sort of US in Great Depression levels. But then they realized, right, that they had to do something. The new government, the authorities in Albania realized, well, we have to get something to get the country going again. or what happened? So under Hoja's regime, private property was obviously not allowed. Investment or making money from money wasn't even really a concept. And in the aftermath of 1990, there was a hyperinflation. So all of the savings that people had accumulated were effectively worthless. People genuinely stopped going to work at this point because the money that they earn isn't really worth anything.

7:32So from, I would say, about 1990 to 92, you have this horrible kind of two-year period where there's hunger and poverty and people are really, really suffering. You also have to remember that Albania had no relations with other Western democracies, so they weren't trading. The government was almost bankrupt. And no one, including the people who are in power at this point, really had any idea about what they should do. But somebody in D.C. had an idea of what they should do, right? Somebody in D.C. did have an idea about what they should do. It was called the Washington consensus. Yes. Or shock therapy is sometimes it was also called.

8:13This kind of massive package of measures that the D.C. organizations and the West basically imposed or encouraged these countries to impose. But what did it look like in Albania? Well, it meant that we were now more often seeing Western market products in Albania. Multicolored Adidas jackets, for example. Adidas jackets. Two other things dear to my heart. the Financial Times newspaper was spotted, as well as Coca-Cola bottles. You know, the cool thing in Albania was to go to someone's house in the 90s and see that they had Coca-Cola bottles or cans, and they would use them like vases. So they would put flowers in them.

8:56These were really, really precious things that we had never been allowed previously. And so as part of this Washington Consensus Initiative, they start to basically unravel all the policies that had been there during communism. So everything is privatized. Farms are given back to the people. They liberalize trade with neighboring countries. So they sort of kickstart this process of opening up the economy. But it's done very, very fast. And that's sort of what shock therapy points to. And the Washington consensus is, of course, the view that emerged as a crushing consensus really around the world in the 1990s, that free markets, democracy, less regulation, private sector involvement in all aspects of the economy were all good things.

9:44This was obviously after the West had won the Cold War, as it were. Yes, it was essentially a let the markets decide policy. But the economy did start booming around that. What was driving that then? Yeah, the funny thing was that by, I'd say by 94, 95, Albania was seen as a poster child for the Washington consensus. They were sort of like, we fixed it. This is amazing. You know, it's doing really well. GDP is growing. It's about 10 % per annum. And everyone was patting themselves on the back saying, wow, this has been one of the easiest transitions we have seen a country have from communism to capitalism.

10:22But one of the key aspects of this was the people who had fled abroad. So you had a quote-unquote brain drain. A ton of people had gone to neighbouring countries. They were working there and sending their money back home. One is savings, two to help with construction, setting up businesses, and that really started to fuel the economy. Okay, so it's driven partially or maybe even largely by remittances from all the people that fled and are sending money home. I mean, that happens obviously in many economies today are kind of supported by remittances. But what about money? You said like in Albania, they didn't really even have a concept of money to make money, as it were.

11:03This was completely new. Where did they put their money? Were there any banks in Albania? Well, the short answer is yes, but they weren't very good banks. When communism fell, there were three state-run banks that were terrible because they lacked two key functions. They didn't really take in deposits and they couldn't really lend. I'm spotting a few weaknesses here in their business model. Yes. So difficult for them to really boost the economy. No one was taking out mortgages. The joke was obviously that people would put their savings in their mattresses. or they would leave them with family members, but they certainly weren't going into the banks.

11:45So here we have now an environment for a perfect shadow banking sector to emerge, which is exactly what happened. Yeah, I mean, it does sound that way. You have this massively sclerotic, kind of not quite Soviet era, because they've kind of distanced themselves even from that, banking system that, you know, riddled with probably bad loans, the cronies of the administration, that couldn't really do anything. I think even the technology was so bad they couldn't really send money. So you had to wait for weeks. So people started to kind of set up their own little banks, as it were, in kind of very much inverted commas.

12:22But why were the authorities OK with this? I mean, I read the IMF report. The IMF did this incredible postmortem afterwards. That's really worth reading. But even the IMF admits that, look, we kind of thought this was a good thing. Why was that? I think part of it was that they were operating in this sort of gray area. You know, were they investment firms? Were they banks? Should they be allowed to take deposits? No one really knew how to regulate them. And I'm not really sure we even had the infrastructure in place to be able to regulate these kinds of companies. But not only that, some of the pyramid schemes did start out as legitimate businesses.

13:03They owned media groups and they owned hotels and they had actual real businesses. So I think the assumption was that, OK, they're also kind of going into this grey area of the market that we don't know much about. But how bad could it really be? I think from the outside perspective for the IMF, it was a sort of a case of why worry about Albania? You know, it's a tiny country. It's not really going to have an impact on anyone else. And I don't think anyone could have possibly foreseen how bad it would actually get. No, I can imagine in the IMF's almost defense that, you know, this was not a high priority in the World Bank of the IMF in the early 90s, given everything else that was going on in the world, right?

13:47Absolutely. And I guess it kind of does make sense that these businesses evolve into pseudo banks. But some of them were, I mean, there were businesses, but there were illegal businesses. There were smuggling businesses that became banks. Yeah, some of them, you know, well, the country's just opened up, right? And so people are finding creative ways to make money and where there is demand that you will find supply. And so a lot of the smuggling was things like cigarettes, household goods. To the more severe extent, you obviously had the smuggling of arms. But yeah, a lot of them were seen even privately as money laundering operations, which in a weird, perverse way offered some people who may have clocked that these were pyramid schemes.

14:38the reassurance that, well, if they're money laundering operations, criminal activity, the money is there. I'm going to get my money back. So this weird kind of psychological play of even if it's born out of illegal activity, my cash is probably not at risk. I guess also it's the revealed preference that people need banks and banking services. I mean, the IMF report, again, when it tries to explain away why it turned a blind eye to this, they said, well, the state banks were crap, basically non-functional. And these things, if you squinted at them and ignore the fact they happened in a completely unregulated way, did operate like banks.

15:17They took in deposits, they paid out interest, they made loans, they got the economy going. So look, sometimes it's, you know, don't let perfect be the enemy of good. And they thought this was probably maybe on balance a good thing. And I think we have to remember to that point, that that is probably another reason why the government turned a blind eye. You know, if you're Salib Arisha, who was in power at the time, you were thinking these companies are boosting the economy. You know, they're helping project this image of me as this guy who has turned Albania around in sort of record time. And now it's got this huge amount of growth.

15:54Would you start pulling that thread? I don't think so. Yeah. And obviously, as we're going to be discussing later, there were many reasons why they didn't really pull those threads until maybe it was too late. But first, I think we are now going into the full pyramid scheme era. I think maybe it's worth talking about what a pyramid scheme is, because really it's just a business model that revolves around recruiting new members. It's likened to a pyramid because you have to get a growing number of investors or employees or whatever at the bottom to support the people at the top that make a lot of money.

16:28But a Ponzi scheme is really the most famous version of a pyramid scheme. It's named after Charles Ponzi, an Italian con artist who in the 1920s in America basically defrauded investors of around$20 million, which was a fortune at the time. He promised them safe but fantastic to hire returns. And in reality, it was all bollocks, basically. He stole the money. He lived large. and later on he told the journalist that his whole model was and I've got a quote here my business was simple it was the old game of robbing Peter to pay Paul and I love when my charlatans and scamsers are honest but let's return to Albania in the 1990s so we're in the mid-1990s around half a dozen major Ponzi schemes pyramid schemes that are in the process of being set up.

17:21Which ones were the first to appear and how did they get started? So I think probably the first one that we would look at is Vefa, which was an actual genuine company founded by an entrepreneur called Vebi Alimujay. And it owned supermarkets, hotels, which I think was why people trusted it so much. And Albanians were used to seeing Vefa products everywhere. And the key here is that it's a confidence game. And pyramid schemes, Ponzi schemes will only exist as long as everyone believes that they're getting their money back. The moment one person thinks that actually, you know what, this could all be a scam, it starts to unravel very quickly.

18:06Vefa had this legitimacy behind it because it was this genuine business that lots of Albanians recognized. And eventually around the, I think it was 92, 93, it started offering high deposit accounts, for want of a better expression. So people put their money in and they would get 4.5%, 6%, 7 % back. And that triggered this kind of first wave of pyramid schemes in Albania. There are a few others that followed that pretended they were real businesses, but really weren't. Jalita was one of them, which had offices, had employees, People would act as its agents, go around convincing others that they should invest in it.

18:48And then there were the really later ones in sort of the 95, 96 era that were just outright scams. They didn't have offices. They didn't have buildings. They didn't have anything. They were just taking money in and paying it out. Jalitsa, that was also, to a certain extent, I mean, a large extent, a criminal enterprise as well. I mean, a real business, but mostly some smuggling and money laundering. Yeah, that was the allegation. was that Jalita was involved in illegitimate businesses. Nevertheless, people believed it because you'd meet people who worked for the company. Did your family invest in any of these pyramid schemes?

19:23No, thankfully we were too poor. So no one in my family put money in the schemes. My mum and my dad, being brilliant as they are, realised very quickly that this was probably not something that was going to end well for them. So luckily, my family was not directly affected. Well, luckily, the brains run in the family clearly as well. So how did these sort of semi-legitimate or even legitimate businesses rendering a valuable service to Albania in its transition period go from that to essentially just like being scams? Yeah, perversely, part of the problem is that the criminal activity wasn't quite as profitable as it used to be.

20:11So crime doesn't pay. Oh, God. Sometimes, yeah, because the UN lifted sanctions on Yugoslavia. And a big part of this had been that Albania was secretly sending oil to Yugoslavia and making money from it, obviously, with smuggling. Once those sanctions were lifted, that no longer was generating the same profits as the companies needed them to, having promised all of these very high interest rates. And the second issue was that you had a lot of new entrants coming to the market. And then you have this raise to the bottom or to the top, if you like, where someone says, well, we're offering 6 percent.

20:49Someone says 12, 24, 50. And you start getting to these really egregious numbers that really anyone looking at them would think this can't be real. One of them, I remember this, is he bought a football club and hired Mario Kempers, the Argentine striker, as a manager, right? Yes. Yeah, he bought KS Lushnia. I should have done my research and figured out whether this is still a football team that exists. But that was Rappos Jafiri. And that actually became one of the first sites, the football stadium where they played, of the protests that erupted after the scheme started to unravel. So you have these schemes offering increasingly wild, kind of stupid interest rates, right?

21:35That means like obviously like 100 % a year in the equivalent. And they start hoovering up everybody's savings. And, you know, it is well known that some of them, maybe a lot of them, are involved in criminal activity as well, have been. Why didn't the government then start shutting it down? Why didn't they do something? Well, this is a key question. And I think if we're being generous, people say they were asleep at the wheel. Also, you are coming out from an extremely tumultuous period where initially it was Fatos Nano, who was the prime minister of Albania. He was quickly overtaken by Sali Berisha.

22:15None of them have any financial experience. You know, Salih Barisha was known as one of the most famous cardiologists in Albania. He was a very smart, very renowned doctor, but they didn't have the financial experience to be able to sort of fully realize what was happening. Again, we're being generous here. And at this point, because the market has gotten so big, you have this problem of if we shut it down, if we say these are all insolvent, people run in to get their money and disaster ensues and people lose everything, essentially, or almost everything. If you try and keep the game going up, going a bit longer, of course it spirals, but you're sort of kicking the can down the road.

22:57And I think they were very fearful of more political instability and having a crisis on their hands. Because there was corruption and a bit of graft in the picture as well, right? Lots of politicians got money from these sort of pseudo-bank slash Ponzi schemes. Yes, this was the talk of Albania was that, well, they have very close affiliations with the government. They advertise on national TV. They advertise on national newspapers. They take pictures with our government ministers and they possibly funded some of some of their campaigns. and that, I should say, has been obviously denied by the people in power at the time.

23:37Adding to that is what we have discussed, which is Albania was seen as performing extremely well and was now this darling of the Western world. So the World Bank characterized Albania at the time as a small haven of peace and of economic growth. Well, yeah, I can understand why it's hard for a politician to fight back, especially if it's money tied to a hot new financial innovation. And this was kind of, this was like, not quite fintech, but it was kind of financial innovation in Albania. And, you know, this is what I like about it is if you're trying to sort of extrapolate how that also relates to where we are now.

24:18And I'm really not comparing Albanian pyramid schemes with what's happening in America, Silicon Valley. But the interesting thing was in articles, these guys were referred to as entrepreneurs using technology to help people. You know, these sort of familiar rhetoric that we still hear today. Yes. Let's talk about that at the end. but I love making some of these slightly hairier parallels. But we are now in the summer of 1996. England has once again not won a major football tournament and things are going a little bit mad in Albania. Neither has Efes Lushnia, Jafir's football team. Mare Kempez couldn't weave his magic.

25:03That's so sad. Okay, well, that's what happens. You better do a bit of a glory manager hire. So, okay, so these criminals have set up these schemes and the government, frankly, is not doing much about it, maybe even lending them legitimacy. What about ordinary people who got dragged into them? What was their experience? Was there any sort of sense that this was kind of a bit iffy? Or was everybody just kind of happy as Larry, cashing or collecting in theory their 100 % interest rate a year or whatever it was then? There was no financial sophistication among Albanians at this point. I would say the vast majority were just under this illusion that this is how capitalism works.

25:48And of course, we have this FOMO mentality, the fear of missing out, where you're seeing your cousin and your neighbor double their money and you're thinking, well, wait, why am I not doing the same thing? I'm sure you also had the Albanians who realised that 45 % or 50 % returns every month were unsustainable, but again, fall under this illusion that many people who fall prey to scams fall under, which is, I'll get my money out first. Yeah, but people got really kind of crazy. The IMF report talked about people literally slaughtering cows on the streets of Tirama to raise money, to put money into these schemes.

26:27Funnily enough, I read that as well. I do not remember that being a thing. I do remember people would do things like sell their properties, borrow money. And, you know, this is really sad because as much as we can laugh about certain aspects of this, this is whole families who really fell apart and who lost everything as part of these schemes. We had a parent of a child at our school who had taken the money that her brother was sending as a construction worker in Greece. And it started putting it all into these schemes, thinking that she was doing him the benefit of he would move back to Albania, no longer have to do this backbreaking work.

27:06And of course, you know, they end up losing all the money. And we heard, you know, Albania is a very, or was at the time at least a very patriarchal society. So the eldest brother would have control of the family's finances. And there were instances where they made the unilateral decision to sell the family's farm, which was feeding an entire family or their property, and put it into these schemes. So it was really a very, very devastating experience. And I think at some point, two-thirds of Albanians had some money in one of these schemes or across them. Well, I mean, some of them, was it Shafiri?

27:42How am I pronouncing that? Shafiri. Shafiri. They were offering 47 % interest a month. by the end of this, which is kind of wild. And if you don't really kind of know anything about finance, that sounds incredible. Why wouldn't you sell everything and put your money into that? Exactly. Even the more boring, serious ones were offering double-digit monthly interest rates. But it also brought into these ideas about what capitalism looked like. You know, having had no access to anything for 45 years and then seeing supermarkets full of produce, seeing people wear brands that were recognisable. They wanted access to this stuff.

28:25And you're a very poor country, and we have to remember that the economy was being fuelled by these schemes. It sort of seemed like the only way to make money. And of course, what they were doing was trying to make a quick buck. But in many cases, it sort of feels like who can blame them. So after the summer of 1996, the central bank discovers that VEFA's deposits alone are around 120 million dollars that's five percent of GDP and the finance minister is kind of warning that yeah things are getting over out of hand and this is when the IMF as well and the World Bank starts to say look very publicly these are these are pyramid schemes you should keep an eye on it this is bad but people actually adopted pyramid schemes is like a cool moniker for what was going on, right?

29:19Yeah, they reappropriated the term. Yeah, some of the companies were like, okay, well, you know, we're not a regular pyramid scheme, we're a cool pyramid scheme. And I think there was a government quote, something along the lines of our pyramid schemes are the cleanest pyramid schemes in Europe. Wow. This actually really shows you how little they wanted this game to stop. You know, at this point, they had realised it was going to be hugely detrimental to the Albanians and the economy. I still don't think they really knew how bad it was going to get. Well, we are now approaching the proverbial Minsky moment, or when the penny drops, or the Albanian lek, I guess, in this case.

30:03How did it collapse? How did the bubble burst? I'm always interested in these kind of classic turning points. And the trigger is often not quite as obvious as you'd like it to be. But in this case, it was a pretty obvious good trigger, right? It was. This is probably, this person is one of my kind of favorite parts of this story, just because it shows how outrageous it got. So a woman called Maxuda Kadena, who was a factory worker in a shoe factory, had been doing this sort of lottery at the factory. And as the pyramid schemes were starting to pick up, had turned this into a pyramid scheme, I cannot be clearer than to say there was no business.

30:46You know, it wasn't like she was investing this money. She was just literally taking money, promising these high interest rates and then giving it to that investor, taking it from another investor, as we've explained. And Maksudu Kadena became actually, weirdly, the emblem of the Albanian pyramid schemes. despite the fact that there were several others that were much bigger, had been cited much earlier, were run by men as they traditionally were. And the reason that she became so big a figure was because she famously, in 96, again, this is a story that I was told and I'm not sure how true it is, but all of these protesters start to realise that maybe they're not going to get their money back.

31:28This is November 1996. This is November 96. Yes. At this point, they're not protesters, they're investors. But they start to realize that they're not getting their money back. So there's a gathering of a few thousand people outside her very modest communist apartment. And she basically apparently comes out and says, sorry, guys, it was all a pyramid scheme. No one's getting their money back. And that's really when, for want of a better expression, when the shoe starts to drop and people realize, oh, my God, this has all been a scam. and she really triggers the sort of the end of this confidence game.

32:06And this was the moment that triggered the collapse. The collapse of the whole pyramid scheme and frankly an almighty mess for Albania and for Albania's neighbours as well for that matter. But we'll have to get to that after the break.

32:56And we are back. We have just reached the denouement of the story. It's November 19th, 1996. The first of those crazy Albanian pyramid schemes has just defaulted. It's told its investors there is no money, go home, there's nothing. And presumably, frankly, the stampede of money that's been flowing into all of these schemes is about to go into reverse. Yes. So, Ortensa, what did the government do at this stage? I think it's fair to say that it did absolutely nothing, really. I'm sensing a theme here. Yes, they made a decision that they were not going to give depositors their money back. And this was at the time called a courageous and brave decision because these investors had invested in private enterprises.

33:52and to be honest, the government didn't actually even have the money to compensate the depositors. There's two-thirds of Albania's GDP, the liabilities at the peak. So I mean, I assume it would have just completely bankrupted the country on multiple dimensions. Exactly. So there was really no other option. But the process starts of figuring out which of these companies had any type of real assets and which of these companies were just outright scams. And the process through which that happens is extremely tragic in the meantime, as Albanians start to realize that no one is going to get their money back.

34:31And it goes from a financial or economic crisis to a sort of full blown armed uprising. Yeah. Very quickly. Well, so the government, all these basic schemes default very, very quickly. And the government doesn't have the wherewithal to clean them up. Essentially, the proverbial tide has gone out and revealed that they're all swimming naked to a certain degree. The violence was quite terrible. There were around 2 ,000 people that died in the result of this. Can you tell us a bit about how that happened? Yeah, this is a period in Albania that is known as Nantesdatat, which means 97. We've given that year its own particular name.

35:15I would say it's one of the most painful periods for Albania in recent memory. We effectively came to the brink of civil war. What happened was that Jalitsa went bankrupt. That was one of the first original proper Ponzi schemes. Exactly. Yeah. And that went bankrupt in 97. And so you had this transformation into effectively an armed rebellion because in order for the government to maintain its legitimacy, it really needed the army and the police to stand by the government. But what happened was that people who were close to army officers and police officers had also lost their money. These were people who were in their community.

36:00So they very quickly started to abandon posts. And that triggered this realization amongst regular Albanians that the armories were basically, there was no one there to guard them. And if we just go slightly back in time, as I mentioned, Enver Hoxha was a very paranoid man and he was constantly paranoid that someone would invade Albania. Hence why we have very famous, Robin, you and I have talked about this, are over 700 ,000, I think, bunkers. And as part of this preparation for a possible invasion, He also had these huge armories that had AK-47s, Kalashnikovs, ammunition. He was really gearing up for a popular uprising in case someone came to take over Albania.

36:47And going back, going forward now to 97, these are stormed by people and they start playing with their new toys. They start firing them. And at this point, it becomes an absolutely terrifying time to be in Albania. There are images of people obviously clambering onto the boats in Vlor and in Doros to get to Italy, to get to safety. And there is this real sense that the country's social framework is just going to disintegrate. Some of those looted weapons, they even ended up in Kosovo, right, in the hands of the Kosovo Liberation Army, which, you know, did enable a full Nazi civil war just across the border.

37:35Exactly. And that's where we, you know, that's where we moved to. And that's where I was living with my family in the north of Albania, which is part of that region. we were first-hand witnesses to the effects of that and the war so it was a it was a very very tragic time um and i think sort of unprecedented for a european country at the time this was i mean to turn it a little bit personal now but this was when your family left albania wasn't it i left a couple of years later but we we were we were in the midst of it but i think it was you know it's an interesting time i think about this uh from my parents perspective because I now have a five-year-old and I would have been almost or just over that age when this was all happening.

38:18And they had this amazing ability to make it all seem sort of like an adventure. So, you know, you'd sleep between two corridor walls so that the bullets couldn't come through a window and hit you. But, you know, you'd also crawl on the floor. And they were young people. They were in their mid-twenties and they wanted to stay around their friends. And so they would go to these underground pool halls and play pool and really try and continue a normal life. And the nicest part of it was that for our parents to say that they were almost home or they'd reach safety, they would whistle this really beautiful tune.

38:53So you kind of had, you know, gunfire and then you'd have them whistling as they came home. What was the tune? It was an absolute smash by the Scorpions called Wind of Change. I'm sure you know it. Yes, it's a banger.

39:09Yes, I know. If we could sing better, we'd do a little duet. But I think we won't subject the listeners to that. How does this play out? I mean, the government basically resigns, collapses. There's a new government that comes in in March, I think, March 1997. They invite a UN peacekeeping force to stabilise the country, right? So how does it all play out? Yeah, so Salibarisha resigns in mid-1996. And prior to his resignation, they really can't do much about the Ponzi schemes. They can't unwind them, put them in administration. And he sort of holds that back for a while. And then Fatosnana reemerges and comes back into power.

39:55Albanian politics is extremely divisive and is controlled by two parties, one of which is Partia Demokratike, the Democratic Party, which was led by Sali Berisha. And the other one is Partia Socialista, the Socialist Party, which was led by Fatos Nano. And it's hard to describe how much of an Albanian identity is, whether you're part of the Democratic Party or part of the Socialist Party. And the two of them were sort of arch enemies, but they also had to start working together in order to figure out this crisis. So Fatos Nano comes back into power. And this is when they start working with UN peacekeeping forces.

40:33I think they're led by the Italians. So you have Italian soldiers coming into Albania to keep the peace because obviously our own army had largely abandoned posts. Yeah, I heard other European countries were literally sending special forces in to help evacuate their own citizens. Exactly. Yes. And at this point, they start to try and put these pyramid schemes into administration and figure out how much money they can actually return to investors. The problem is that it's quite late, right? So some of the people who own the pyramid schemes have fled, they've hidden their money. And also doing time for fraud in Albania in the 90s was sort of you were getting three or four years.

41:11So if you'd managed to stash your money away in the meantime, you'd come out in a few years and you could, you know, you could live in Turkey or anywhere else, really. People start to get some of their money back. They initially freeze the assets, especially of Vefa, which was, as I said, the largest one, but also had these kind of real legitimate businesses. Those assets are frozen. They start figuring out how much money can go back to investors. It's obviously nowhere near the amount of money that had initially gone into them. Yeah, they brought in some foreign auditors to look at the assets, and they got threatened, right, by some of the owners of the schemes.

41:45Yes. And with the Socialist Party coming into power, they were working very closely with international parties in order to stabilize Albania. Obviously, one of the key aspects of this was loans from the World Bank and the IMF. And those loans were predicated on the fact that they would not reimburse depositors. So it was very clear that it was going to have to go through another sort of pseudoshock therapy and that Albanians who lost their money were not going to get it back. Well, I mean, that IMF report, just to return to that quickly, I thought it was stunning. I mean, this is not an organisation that does public self-criticism.

42:26It came out in 1999 and it admits that it thought the informal lending companies, as they like to turn them, were making an important contribution to growth. but then they admitted they got it horrifically wrong. I'd love to hear your thoughts on, you know, just how naive the IMF was, whether they were right to be naive or whether they just, I mean, screwed up essentially here. I don't know if anyone has read Naomi Klein's Shock Therapy, but it's an excellent book and it shows exactly what happens when you ask these countries to put in all of these capitalist initiatives, the Washington Consensus, whatever term you may use, and then lead them to their own devices.

43:08Because had there been any sort of procedural easing in for Albania of how these economic policies were adopted and the way that the country was running its finances, I think that would have prevented them from getting to the point where everyone was putting their money in a pyramid scheme. But what happened was it gets set free from communism and then it falls under the prey of capitalism without people really knowing what that means and how this functions for them. And I think it was a complete oversight of the IMF. But I also really don't think it cared enough because I don't think Albania was on its radar in any meaningful way.

43:47It's just a very sad situation where you're sort of in a region of the world that doesn't get the same attention as, for example, Poland and obviously Germany in the fall of the Berlin Wall. You know, those are really crucial places for Europe. whereas Albania didn't quite have the same status. But throwing it into this vortex of capitalism and then seeing what happens was perhaps not the best idea. Yeah, I mean, the way you described earlier capitalism and how it was seen there, it must have seemed magic, right? Like suddenly you had Coca-Cola and all these things. And then naturally when somebody comes and says, oh, capitalism also means you can get 40 % interest rate a month from a bank.

44:30Like, again, it seems magic, but it doesn't seem out of sync with everything else you're seeing. So I can kind of see why Albania was susceptible. And also its culture, it's a very tight knit culture with family at the core of it. And these trusted networks that people use, including their distant family and or relatives, their neighbours. And so everyone sort of relied on this word of mouth. and it's tragic because again everyone just fell under the same illusion that they were going to be able to be rich and that this is how a normal society functioned because they had no idea what it actually looked like.

45:10Yeah you said earlier that trust is sort of the central part and it kind of trust is a central component of every major financial fraud. Absolutely. What kind of scars did this leave in Albania then? I mean like you say you talk about 97, 1997 is sort of a horror a year, like the Great Depression, it's just 97. What was the long lasting impact on Albanians? I think the biggest one is probably brain drain. I think Albania lost a lot of its, you know, talented young people who could have stayed and made the country better. They fled abroad for better lives. It also obviously gave a boost to certain criminal enterprises.

45:51I think it's created this narrative around Albanians over the past 20, 25 years, that they are inevitably associated with criminal activity, which is, to say the obvious, absolutely not the case. But it was a country and a people acting out of total desperation, having been abused by a really horrible regime for 45 years, and then coming out of that with hyperinflation, no money, and then experiencing that all over again within the period of six years. People felt like they had no choice. And you have a lot of talented Albanians who live around the world. And I think it goes without saying that the country has obviously become a much better and prosperous place and is often now on the top list of places to travel to.

46:40So I've started discouraging people from going there. Oh, really? It's too hot. It's too popular. Nobody goes there anymore, essentially. Yeah, exactly. Well, that's at least a nicer, happier note. But if we take your Albania hat off as well and putting your banking editor hat on, I'd love to hear what you think are modern parallels, lessons that we can learn from this disaster that are still relevant today. I think everyone talks about the shadow banking sector, and I'm not going to name any particular industries. but I would say one of the key lessons for this is about what happens when you have regulated entities because they're state-owned in the case of Albania or in other cases because they're banks and they have to be heavily regulated and you have lightly regulated or unregulated industries that crop up to serve people who cannot access those regulated industries for whatever reason you might start to get a bubble.

47:42And some of the returns that were promised by pyramid schemes are some of the returns that are promised by certain industries that we have today. And again, you can't paint everyone with the same brush. But I think it's really important to understand what's happening in the shadow banking sector, as well as in your heavily regulated, lots of both side banking sector. And the other one is on a broader level is maybe we should realize that shock therapy doesn't really work. No, no. I think, I mean, even the IMF has admitted this. It's interesting as somebody who has read an embarrassing number of IMF reports over the years, it is interesting to see how the organization is tacitly and in some cases explicitly admitting that its approach has to change.

48:29What's the takeaway for you? You mentioned crypto idea yeah i mean i i hate to sort of throw this incendiary bomb in the end i actually came across the albanian pyramid scheme disaster when i was doing research around crypto and what i thought was fascinating about about albania is that even the legitimate businesses morphed into becoming pyramid schemes and in a big crisis people don't differentiate between the good and the bad Ponzi schemes, essentially. And I've always worried about this with crypto as it's an industry where maybe there are genuine use cases. And maybe there are businesses that will emerge that are valuable and actually contribute to human advancement.

49:12I've yet to really see any, if I'm being honest. But there is clearly a lot of crime and money laundering and tax evasion and terrorism financing happening through crypto. And I think, you know, the good parts of the crypto industry doesn't understand or appreciate how eventually it can get dragged into the vortex along with everything else. And certainly when it comes to the co-option of political interests, well, we both saw how much the crypto industry donated in recent political cycles in the United States and is now reaping a fairly benign regulatory environment because of that, I think that has very scary and uncanny parallels to what we saw happen in Albania.

50:00But I'm really looking forward to all the massively angry emails and calls and death threats I'm going to be getting from people. I once made this argument in a column and to be fair, this was peak crypto bubble at the time. And instead of just being angry at me, most people just try to sell me crypto, which I thought was perfectly emblematic of that industry and possibly also how the Albanian pyramid scheme disaster played out. Well, I'm so glad you brought me on because I was just about to tell you about my new finance company that does give you 43 % returns every month if you'd like to invest.

50:37Here, take my money. Take my money. Sounds amazing. Anyway, Otensa, thanks so much for being on with us today. I'm Robin Wigglesworth and this is the story of money from the Financial Times. We'll see you here next week with Gillian.

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