For those who are asking how our national economy fell into the current financial crisis or how the nation’s business leaders could not have seen it coming or how the federal government could have allowed it to happen, a study of multi-level marketing (MLM) – which attracts more than five million Americans each year with its “income opportunity” – can offer answers. MLM serves as a mirror image of the real estate/banking/Wall Street catastrophe. The basics are all the same. To understand Wall Street’s motives and tactics, therefore, we need only look into the MLM mirror.

In both scams, millions of consumers are lured with the “endless chain” trick. In one, consumers are falsely promised wealth and happiness in ever-rising home values and in the other “unlimited income” and freedom from a “home-based” business. The misguided and destructive judgments of investment bankers and brokers are eerie reflections of the misguided decisions of millions of ordinary Americans to join MLMs with “Go Diamond, Catch the Wave, and Be a Winner” dreams. Obscene CEO compensation has its exact replica in the flaunting of wealth by MLM “Top Guns” and company owners. The “exploding” mortgages that have forced millions from their homes are closely analogous to the MLM contracts, binding arbitration and comp plans that impose costs, purchase levels, fees and hours of futile effort in a program that mathematically dooms 99% to lose from the start and leaves a consumer with no recourse for restitution.

The lack of regulation over Wall Street has been perfectly mirrored in the last seven years as the Federal Trade Commission “de-regulated” MLM. Just as Wall Street bought influence with Congress to allow it to perpetrate unfair mortgages and fake securities based on bogus real estate values, so too did multi-level marketing buy political influence – orchestrated by its Washington lobbyist on K Street, the Direct Selling Association – to operate non-retail schemes that violate state and federal law.

The deluded pyramid dreams at the top end of our national economy have also been a hyped up mania among millions of American at the other end for many years. The cheering on Wall Street about an ever rising stock market and real estate values was echoed in thunderous chants at Amway rallies about freedom from jobs, early retirement and exotic vacations, all paid for by the “downline.”

In MLMs, each consumer is solicited to pay fees and to buy into the “pay plan” by purchasing MLM inventory (soap, vitamins, fruit juice, weight loss pills, skin lotion, etc.) at prescribed monthly amounts. Most of the initial investment in the “home-based business” is “inventory.” Later, it will include seminars, books, CDs, more inventory, travel, lost time and lost friendships. These investments will be paid for from savings or credit card debt.

But, the inventory, it turns out, is priced far too high to be profitably resold. So, the net value of the business is negative unless… unless new people join the “downline.” Income is based on later investors joining that program. So, more investments are made in the hopes of building that downline. Why would more people join your downline? Because they can make money by getting others to join their downline also. It has no end.

Without new people coming in later, the initial investment in MLM fees and inventory becomes a net loss. All further investments in more inventory, business expenses, seminars, training, etc., only make the losses worse. Recruiting new investors is the only option to recouping investments and making a profit.

However, the MLM consumer soon learns that the market is saturated with MLMers and very few of the millions of new recruits can recruit a large enough downline. For many to succeed, there would have to be hundreds of millions of new MLMers. There simply are not enough qualified people to “buy in.”

In the Real Estate crisis, millions of consumers bought homes that were over-priced. They were advised not to worry about the home price, because it will “go up.” How could that happen? There is only one way. There must be an increasing number of people buying in later. More people means more demand. More demand means higher prices. No need to save. Equity would grow, but only for those who “bought in.”

But soon, they found that the houses they had bought were not worth what they paid. And these homeowners discovered that more people were not buying into the housing market. The market was saturated. Prices fell.

In both cases, the “endless chain” – not adding value and not long-term savings – was held up as the model for accumulating wealth. Consumer investments were to grow when others joined the market. The prices that the consumers paid – for the house and for the MLM inventory – were grossly inflated, but it was not supposed to matter because demand (a downline/more homebuyers) would raise the value later!

The housing market collapsed because that market did not have enough new people with good credit and income to keeping pushing up prices. Long-term mortgages had been loaned out on that claim of an “endless chain” of more buyers.

In MLMs, when the consumer buys in, the market is already saturated and the MLM schemers who recruit consumers know this. There are not enough new people for any but a tiny few of the latest who join to build a downline. 99% of all who join are doomed to lose. Most will discover their inability to build a downline within a year and 60-80% will quit during their first year. They were sold a “sub-prime” opportunity.


MLM Bail-Out


But the MLM market does not collapse even though 99% of the investors lose. The MLM companies that recruited all those failed and soon-to-quit investors do not get pulled into bankruptcy. Even though the MLM company sold a false “income promise” in which 99% fail to gain a profit, no one goes to jail. Instead, the MLM is “bailed out” by the government. This is done by the FTC allowing the scheme to replace the failed investors with new ones! The MLM simply continues the predatory recruiting campaign, making the same false promises to another group of new consumers. Each new group of hopefuls replenishes the capital pool depleted by the last group of “failures” just as taxpayers will replenish the bank’s lost funds in the Wall Street meltdown. Crisis is averted. The MLM pyramid stands. The upline is saved.

In the mortgage crisis, the banks loaned money to consumers on over-priced houses. When not enough new buyers could be found to keep the prices high, the banks offered “liar loans” to other consumers who did not have credit so these unqualified consumers could buy into the real estate market and keep the prices up for a while longer. The liar loans were deceptive mortgages to unqualified buyers and interest rates that went up sharply in a year or two after the house was bought. The banks and the brokers and the insurance companies all got fat “commissions” on every transaction, even though they were leading their customers and themselves off a cliff.

The sale of over-priced houses was achieved by lying to people that the prices would always go up. The “liar loans” were extension of that lie. The damage done by the mortgage crisis spiraled upward just like the interest rates on the mortgages. Consumers were sold overpriced housing that had to eventually fall in price. The “last ones in” were destined to lose. But, then the banks piled more losses on these people with “exploding” mortgages, gouging them twice – an inflated house and an inflated mortgage.

In MLM, the mirror image of this double whammy is the infamous “tools” business. After selling consumers a fraudulent businesses proposition based on the “endless chain” income promise, perpetrators slam them again with high priced seminars, marketing and training CDs, books, bogus leads, computer fees, and other costs. They tell the consumers that these “tools” will help them succeed. The exploding mortgages caused people to lose their homes, while brokers told them they would help them become successful homeowners. In MLM the bogus “tools” cause even greater losses, while the promoters sell them as golden keys to profit.

The damages done to the public between MLM and the mortgage/Wall Street scam are different only in degree. But that difference also explains why the billions in consumer losses in the mortgage crisis are on the front page, while the billions in consumer losses in MLM each year are not even mentioned. The real estate fraud spread to banks and then to Wall Street and now to taxpayers.

MLM losses, on the other hand are suffered only by the victims. The losses deplete savings, spike credit card debt, lead to personal bankruptcies, waste valuable time, destroy jobs, and divide families. Most MLM victims are led to believe their losses were their own fault so they are left disillusioned and demoralized and silent. The corrupt political dealings of the MLM industry to stave off law enforcement never make it to the newspapers.

If losses in the real estate collapse had been confined only to the homeowners whose values plummeted, few people would learn about that fake real estate appraisals, and other frauds that pumped up the real estate pricing. The ruined homeowners would be called “failures” or fools, as the MLM victims are.

But, the losses in real estate spread to banks, insurance and Wall Street giants. The “toxic assets” were bundled with good ones so that entire markets were polluted and plunged into uncertainty. Now, everyone knows about the bad mortgages and the bogus “mortgage-backed ssecurities” because taxpayers are being forced to pay for the bail out.

Today, 9,000 homes are foreclosed every day. The banks that held the liar loans, backed by inflated housing, are failing. Insurers falter. And companies that owned the false “securities” lose value. What is at the root of the entire debacle? A false promise of an endless chain of new home buyers who would always pay more. At the bottom of the entire catastrophe was the old trick of the endless chain.

MLM companies have been selling this very same fraud for years. It is their “stock in trade.” They have learned to disguise it, hype it, cover it up, lobby to prevent regulation, and to use their lawyers to silence victims. They have unleashed dis-information to confuse and mislead consumers and journalists.

MLM perfected the model in selling bogus “home-based businesses”, based on recruiting an endless chain of new “distributors.” MLM leaders understand that the endless chain allows them to inflate the price of their “products” (ordinary vitamins, fruit juice, pills, and lotions) as much as 500% or more because the income promise is not based on “direct selling.” Consumers are not price shopping and are not even demanding their products. It understood that the “product” is only the vehicle for the money transfer. The money transfer is driven by the false “income” promise. The “profit” comes out of the inflated margins and from the transfer fees.

So too did the financial community grasp that humble abodes, our homes, could be recast as tickets to wealth. They were no longer just “housing.” Houses became “equity.” They could be changed from long term assets to tools for “flipping.” And they saw that once the consumers were led to believe that the price of the house would always go up, (based on the endless chain of new buyers), they could be induced to invest more in their houses and borrow more money against them. Every “improvement” was said to raise the value more than the cost of the work done. And “pulling out equity” was as good as cashing in dividends. Whatever you took out would be safely replaced by rising home value.

MLM has understood the power of the endless chain lure for years as it developed cult-like groups who are persuaded to buy specialized tools for “success”. Many people who fell into MLM’s trap spent more money “fixing up” and “expanding” their home based businesses, in the belief that these “investments” would yield even greater returns. In reality, all they did was compound their losses. Now, the Big Lie of an “endless chain” of new investors has become a cornerstone of Corporate America.

As pundits have noted, while homeowners, shareholders, small businesses, pensioners, employees and taxpayers were all harmed by the mortgage crisis, one group made out like bandits – CEO’s, inside traders, top brokers, and board members. With tricky bonus plans, compensation formulas, and “options” the top schemers took out billions before the collapse occurred.

The looting by promoters at the top before the collapse occurs at the bottom is standard operating procedure at MLMs. Each year, the MLM pyramids collapse. 99% of investors (salespeople who are also the “customers”) lose money. 60-80% drop out completely. The money they lose is transferred directly and immediately to the top perpetrators. Schemes like Herbalife and Nuskin transfer as much as 70% of all the “commissions” to the top 1% of recruiters. The company and its shareholders take their cuts, month after month, year after year. The money comes right out the pockets of the latest recruits who are lured on a fool’s mission to “get to the top.” At Amway, all the new recruits are urged to “go Diamond”, a level at which big money is said to be paid. The recruits don’t realize that less than 1 in 10,000 are at that level each year.

The Wall Street Debacle and the “government bailout” are being called the greatest “income transfer” in the history of America. The losses from tens of millions of Americans will be transferred to a small group of individuals and companies as “income and assets.” The transfer of money from the bottom to the top, in which the bottom suffers a net loss and the top gains extraordinary wealth with no labor and no financial risk is the standard business model of MLM. 99+% always lose; less than1% “wins” year after year. The company that manages the transfer, like the house in a casino, never loses as long as they can find new recruits. They scan the world hunting for them.

Finally, there is the role of the government. It has been well documented that Fannie Mae, Freddie Mac, the National Board of Realtors, the banking industry and the insurance industry sent an army of lobbyists to influence Congress to their benefit. The lobbyists were armed with campaign contributions, private jets, yachts, K Street offices and insider connections. Regulators were ordered to look the other way. Risky business practices, deceptive marketing, and outright fraud were treated as “legal.” When disaster struck, the taxpayers were then called upon to pay off bond holders and banks while the foreclosed homeowners were left with little or nothing. The influence buying, the neglect and and the abuse of the public are outrageous scandals.

Little has bee written about the MLM industry’s similarly extraordinary influence with Congress and the Republican Party (which was the majority from 1994 to 2006) . This influence has enabled MLM companies to run their endless scams year after year, under the disguise of “direct selling.” It has primarily been managed and financed by the Direct Selling Association on K Street and the Amway Corporation. Amway and its top promoters and owners are listed as among the very top contributors to President Bush’s campaign and to the national Republican Party. The Amway yacht is used by Republican national conventions as a lobbying meeting place.

In 2001, MLM got its biggest payoff. President Bush appointed a lawyer that worked for Amway, Timothy Muris, as chairman of the FTC. Under his leadership, FTC investigations and prosecutions of the endless chain sales schemes effectively stopped. MLM was “unregulated” and allowed to run wild.