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by Julio Godoy

A Giant Ponzi Scheme

(IPS) BERLIN -- The suicide of Adolf Merckle, a leading German businessman over the last 30 years, is being seen by many as an allegorical story of the end of a brand of reckless capitalism.

Merckle, who would have been 75 in March, stepped in front of a speeding train near his house Jan. 5 after realizing that his speculative transactions with German automaker Volkswagen (VW) shares had ruined his global economic empire.

Merckle was once one of the richest men in Germany. His fortune was estimated at more than $9 billion.

But with his failed speculations, he lost control late last year over his corporate empire VEM, which includes Ratiopharma, the leading European pharmaceutical producer, Cement Heidelberg, one of the world's leading building materials suppliers, and 120 other companies. The group has an annual turnover of some $45 billion, and employs some 100,000 people around the world.

Merckle lost close to a billion euros ($1.35 billion) last year through short-selling of VW shares. In such transactions, the trader stands to gain only if prices fall.

But far from falling, the VW share price skyrocketed. In just the first week of November last year, the price went up from 200 euros to almost 1,000 euros. Merckle was forced to pay for the shares at a high price, after selling them for a fourth or fifth of it.

The VEM had other black holes in its books.

Merckle had offered shares in his enterprises as collateral for credit. The financial meltdown substantially devalued those shares. When the credit had to be paid, or renegotiated, VEM collapsed under the weight of the debts. According to local press reports, VEM has debts of up to 5 billion euros.

In an interview with the German daily Die Welt Dec. 10, Merckle dismissed his economic troubles as "merely a liquidity crisis." He also said that the banks "in this (global financial) crisis, are plagued with doubts, and behave in a manner different from before.

"It is an unforeseeable situation, that despite our collateral, we have no access to credit," he said. He made optimistic remarks. "I have endured so many stock market crashes," he boasted. But it was a cover-up for desperation; at the same time he was also asking the local government of his home state Baden Wurttemberg for a bailout for his company.

"It is hard to believe that Merckle asks the taxpayer to redress his speculative mistakes," wrote Susane Preuss of the Frankfurter Allgemeine Zeitung, the leading German financial daily. "Such a demand provokes rage. Every homeowner who cannot pay back the mortgage risks compulsory auction, regardless of whether her financial difficulties are her own fault or not."

In his successful days, Merckle had said he was a compulsive speculator. "When it comes down to dealing with shares, I am a day trader."

But in the end Merckle was engaged in difficult deals. He reached agreement with his creditors under which he would sell Ratiopharma and other companies, and relinquish control of his corporate empire to the banks in exchange for a long-term credit line.

But after signing papers for 400 million euros credit on the afternoon of Jan. 5, Merckle left his house in Blaubeuren village, some 520 km southwest of Berlin, close to the French-Swiss border. He walked to the nearby rail tracks. There, he lay down, and waited for the coming train.

A controller of the German railways company Die Deutsche Bahn found his body a couple of hours later. He had left behind a suicide note addressed to his family that said simply, "I'm sorry."

In a short statement after his death, Merckle's family said the "the economic distress of his companies, provoked by the financial crisis...and the powerlessness of not being able to do anything (to regain control of the firms) had broken him."

What broke Merckle was eventually a model of capitalism built up on a belief that it is possible to make vast amounts of money through a multiplication of projected figures, and where speculation became the quick-fix to substitute long-term investment and production.

He was not alone. Others have come to a similar end. On Dec. 22 Thierry Magon de La Villehuchet, chief executive officer of Access International Advisors, a New York based hedge fund that invested about 1.4 billion dollars in the now infamous Bernard Madoff's Ponzi scheme, was found dead in his office. Police believe he committed suicide. A Ponzi scheme is a fraudulent investment operation that promises above average high returns, and pays them to investors out of the money paid by subsequent investors rather than from profit.

In their death the market is seeing the end of such ideas of doing business, where quick multiplication has been made a substitute for actual growth.

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Albion Monitor   January 15, 2009   (

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