What the newspapers didn't mention on Genneva -> Financial Ruin for some.

I've been following this Genneva thing for years... as a student of Economics, I always felt it was educational to watch a Ponzi scheme all the way from the good times all the way to collapse, instead of merely doing case studies "in hindsight" (while actually most famous economists are only really good at hindsight analysis lol)
Along the way, I tried to advise against putting money in, and I was cursed, ridiculed, and jeered at. Which is pretty normal for the "returns being given" phase of any Ponzi scheme.

Anyhow, the newspapers only mentioned that investors will lose a source of monthly revenue, and also that they stand to lose the 20%-30% markup they paid for their purchased gold.
So, someone who had RM1,000,000 in the bank, and bought RM800,000 worth of gold with it stands to lose RM200,000, right? Not good, but still survivable, right?

Not for some.

For some, the scenario is much MUCH worse, thanks to many Genneva clients taking stupid advice from the Genneva agents to "leverage" their income. Because the suggested method was through Islamic Banking quasi loans with the gold as collateral. Let me give an example of what happens using the same above ex-millionaire.

Bob starts with RM1,000,000.
He goes to Genneva, pays RM1m, gets 800k worth of gold. Genneva promises him an income stream of 2% ie RM20k per month. They promise to buy the gold back at RM1m upon maturity.

NOW, under his agent's advice, he goes to Al-Rajhi bank and gets an "Islamic loan", which is similiar to a normal loan but with worse terms. Basically, they take the 800k worth of gold as collateral, and give him 75% on it, RM600,000. BUT, the interest (they call it a protection fee for storing the gold) is based on the 800k, and they charge 1% per month!

So, now Bob has RM600k in his pocket, 600k debt, and 800k being held as collateral.
The 800k is an asset, but a quasi asset, as people who have failed to service their loans would know!
He also has a promise from Genneva that they will buy his 800k gold for RM1m.
He also has incoming 20k per month from Genneva and -8k a month from Al-Rajhi. Sounds good so far, right?

So Bob follows his agent's advice and further "leverages" himself.
He goes to Genneva, gives them 600k, and gets back 480k worth of gold.
He goes to Al-Rajhi (AR) and gives gold, gets 360k.

Current Status:
360k in pocket, 960k debt,  1280k gold held as collateral (gc) and an option to sell the gold back (goldoption) for RM1.6m.
Income stream 32k Genneva, -12.8k Al Rajhi.

He does it again.
-RM360k, + 288k gold.
-288k gold, + RM216k.

Status:
RM216 pocket, RM1.176m debt, 1.568m gc, goldoption 1.96m.
Income 39.8k Genneva, -15.68k AR

Let's stop here even though this could continue a few more rounds.

Anyhow, *IF* Genneva honors the agreement, at the end of 1 year, Bob redeems everything, and his status is now:
1960k (since he sells the gold, the 1.568m no longer comes into play)+216k-1176k +(39.8k x 12) - (15.68k x 12)
=RM 1m (his initial bank account) +477.6k -188.16k (the income streams)
=RM 1,289,440.
Bob makes a nice 29% profit in one year! He is happy!

BUT
If Genneva does not honor the agreement? For example, if the company ceased operations? Bob's status BEFORE HE GOES TO REDEEM HIS GOLD FROM AR is:

216k - (15.68k x 12)   (he has had to pay AR the monthly interest/ protection fee still!)

=  27.84k in his pocket!

And now, there are 2 possibilities at this point, actually. Cause in case you didn't notice, Bob only has RM27.84k in his pocket, and his debt is RM1176k. He can't get back his collateral unless he finds someone to lend him the money to get back his collateral!

Case A, someone lends the money to Bob:
Bob redeems his loan, get's back his gold.
Bob now has 27.84k in his pocket, RM1.176k debt to whoever gave him this new loan, and he has RM1.568k worth of gold.
He now has to figure out what to do with that gold!
If he manages to sell it for RM1.568k, his situation is not so bad.... that means that after squaring his debt, he now has 1568-1176+27.84= 419.84k.  This is a pretty bad drop, from RM1m, but Bob can still survive it.

However, if gold price has dropped, OR if he can only sell his gold for a lower price (VERY likely, gold shops and banks and other people who buy gold will take their share of the profit), Bob will lose even more. If he loses 10% when selling the gold, he now has 263k. If he loses 20%, he only has RM106k. Bob is now looking at some VERY serious lifestyle changes if he lost 90% of his savings.

How about Case B, where Bob cannot get anyone to lend him money?

Well, his situation is then that he has 27,84k in his pocket, and he's completely at the mercy of Al-Rajhi bank! I have no idea what happens in the case of default in this scenario, I need an expert in Islamic Banking Syariah law to explain this scenario to me.
But as far as I know, AR is still holding onto the gold, and therefore they are still charging him 15,680 per month as protection money, so AFAIK, Bob goes bankrupt in 2 months...

...

And don't get me started on the people who didn't have RM1m in the first place, like Bob above.
I've heard of plenty of people who took out loans to buy their initial "investment" in the first place... those people are now in EVEN WORSE TROUBLE than Bob in scenario B... they are ALREADY bankrupt, and have loan payments that they CANNOT MEET.

...

Makes the 20%-30% losses described in the newspaper look absolutely pleasant by comparison, doesn't it?