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Innovations for “Old for new”, method of fraud - “Backwards”

 

Several days ago, during morning brief, I heard this, interesting stuff…

l   Beijing distributors came up with some innovations in the government-led “old for new” scheme, which was design to boost home appliance sales.

l   A very common practice in Beijing is:  “Buy a new one now, give your old one to me in the future.”

l   Beijing MOC banned such practice, saying: ”Consumers should sell the old one first, then they can buy the new one at the subsidized price”.

l   “Enterprises are more interested in selling the new machines, than recycling the old ones.” 

 

The catch is that, not only a buyer can sell his old piece to the vendor in the future, he can actually buy the new one, depreciate it and wait until it’s old and sell it to the vendor. So a buyer doesn't need to have an old one to begin with. Interesting, huh.

 

It reminds me some stuff that’s quite prevalent in a method of fraud and very hard to detect. It’s called Backwards, which is the exact opposite of forwards. A forward is a contract that promise a transaction in the future with specified terms, so it’s fixed and a speculator can profit from the changes. Because in reality we don’t have magic balls, sometimes we’re wrong.

 

Is there a contact to promise a transaction in the past, so when I look backward, I know exactly what to do and make money. Unfortunately, unless the counterparty is doing charity, no one will sign a backward with you.

 

Yes, except during a fraud. The thing about derivatives is that most of them are NOT exchange traded, what we call dealer made, so anything can be written between just you can me. So when I want to transfer some wealth to you, this is an easy, namely, issue a backward.

 

It happens a lot these days, if you hear it first from me, congratulations, you’re one step near the reality in the world of financial innovations. They get innovated, so they can escape from a lot of things.