Unable to pay depositors, Ginko ceases banking operations
By Adam Reuters
SECOND LIFE, Aug 9 (Reuters) - Ginko Financial ceased banking operations on Wednesday evening after a week of financial turmoil depleted the controversial firm’s reserves and spurred a rush of depositors trying to withdraw their money.
The bank, which as of last week claimed to have 18,000 accounts worth a total of L$190 million (US$700,000), said it would issue what it called a “Ginko Perpetual Bonds,” a security on the World Stock Exchange, in an attempt to compensate depositors.
“Customers will receive one bond with a face value of L$1 for every L$1 they have deposited in Ginko Financial,” said Chief Executive Nicholas Portocarrero (real life: Andre Sanchez of San Paolo, Brazil) in a statement. “Each Ginko Perpetual Bond will yield L$0.03 or 3% of face value per quarter.”
The security was trading at about a quarter of its face value at 7:20 am Pacific on Thursday. When the bank ceased operations, it had about L$50,000,000 queued up for withdrawal.
Ginko’s high profile and extremely generous interest rates, which at times have totaled more than 40 percent per year, have long drawn critics within Second Life, who argued that the bank was a Ponzi scheme — an illegal investment vehicle that pays off old investors with money from new ones.
Ponzi schemes are dependant on an ever-larger stream of new investors because returns from invested capital cannot cover pay-outs to existing investors. The schemes are most susceptible to failure when confidence in the investment collapses.
Ginko, which moved last week to cap daily withdrawals at L$5,000 per customer, blamed the crisis on a surge of withdrawals linked to the ban on Second Life gambling “which evolved into a full blown panic.”
Linden Lab Chief Executive Philip Rosedale has been an outspoken defender of Ginko, comparing it to the Nobel Peace Prize-winning Grameen Bank of India in an interview with Reuters last year. In his Second Life office hours on Wednesday, Rosedale was asked about Ginko’s collapse.
“We haven’t created any policy thus far on bank, etc. We try very hard not to make rules we do not need to. We haven’t made any about banks,” he said, according to a transcript of the meeting by Peter Stindberg, who attended.
“I would note that there is a lot of transparency around projects like Ginko, moreso that in the real world,” Rosedale added.
