How to make 400 Million Dollars in the Public Sector
Opinion analysis by Sandro Joseph Azzam, Staff Writer
February 18th, 2021
Disclaimer: this article is based on purely fictional characters. Any similarities in this article between actual people and events is purely coincidental.
I know, the title seems way too good to be true! Let me make it even better. What if I told you that all you needed to do to make 400 million dollars was sit on your couch and do nothing for 30 years? Are you in?
Let’s start out by explaining a fundamental concept in finance: “compound interest”. The key to our 400 Million Dollar scheme lies in benefiting from this compound interest. What does it mean?
Simple. Imagine you invest 100$ in a broad index fund in the year 1993. A broad index fund such as the NASDAQ simply represents a portion of the US stock market, namely technology firms. Historically, the NASDAQ has provided a return of about 12% per year. This means that the 100$ you invested in 1993 is worth 112$ in 1994. If you then decide to reinvest your 112$ in the same NASDAQ index, how much money will you have by 1995? Well, you have your 112$ plus 10% of that 112$ meaning that you have 125$ by 1995. What about 1996? Same process here. You have your 125$ plus an additional 10% of that 125$ lump sum totaling just over 140$. By the year 1999, you’d have doubled your money. By 2005, you’d have quadrupled your money. By 2011, you’d have about 8x your initial investment of 100$ and by 2017, you’d have the impressive sum of almost 1600$, increasing your wealth by over 16 times over a 28-year time frame. Don’t believe me? Do the math! Math doesn’t lie, people do. This may seem like a get-rich-quick sort of scheme, but this is how finance works. People invest in financial markets, sit on their couch and with time they make a lot of money. The more money you invest early on, the more you’ll have later on. Simple.
Let’s now take a more concrete example, that of Iyad Alameh. Iyad Alameh worked in investment banking and brokerage during his 20-year career eventually making it to the role of Vice-President at one of Wall Street’s major banks. Iyad’s monthly wage whilst at this major bank amounted to about 120.000$. Read that sentence again. 120.000$ was his monthly wage. This is in line with traditional compensation in the financial sector. Over the course of his career along with his other investments, Iyad was able to amass a sizable sum of about 23 million dollars. Not bad, huh?
After making his career in the private sector, Iyad received a call from his home country. They were asking him to lead the country’s largest and most important financial institution! Iyad was asked to govern his country’s central bank, an honor bestowed upon the shrewdest of bankers.
Humbled by this offer, Iyad decided to take the job, leaving his high-paying private sector job for one in the public sector, taking a sizable pay cut. Iyad would go from making over 120.000$ a month to making about 500.000$ per year. Iyad thought long and hard about whether or not to take the position but ended up going for it! He invested his 23 million dollars into the NASDAQ index to make sure he’d be able to sustain himself when he retires, after all, what’s the point of working 20-hour days in your early career if not to have obscene amounts of money when you retire?
Iyad Alameh knew that he wasn’t allowed to actively manage his 23-million-dollar fortune given the banking laws of his home country. He decided to send his capital to one of his numerous friends in the financial sector so that they could manage the funds for him, whilst he remained blind to what investments his friends were making.
After Alameh took office in 1993, he was credited with maintaining financial stability in his home country and was thus reappointed multiple times to continue governing his national central bank. Iyad humbly accepted, because, after all, his wage wasn’t half bad!
Fast forward to the year 2021. A source uncovers that Iyad has over 400 million dollars sitting in a bank account in one of the planet’s numerous tax havens. Public uproar begins with thousands demanding his resignation. In front of the Central Bank’s headquarters, two protestors were having a conversation. One said: “How on earth did he amass 400 million dollars?! He must be corrupt!” to which the other responded “I know! He makes 500.000$ a year and has been in office for 28 years. If he saved all his money, he’d only have 14 million!”
Whilst the protestors’ claims would be perfectly valid for any other public servant, Iyad’s case was special. Iyad took public office sitting on a fortune of 23 million dollars. Iyad’s friends invested it for him at a 12% interest rate through the NASDAQ composite index. Now, let’s do some math and explore the wonders of compound interest! Iyad had 23 million dollars in 1993. One year later, and at a 12% yearly return, Iyad would have those same 23 million dollars as well as 12% of that lump sum in investment income bringing his 1994 net worth to just under 26 million dollars. What about 1995? In 1995, Iyad would have 26 million dollars invested providing him with a 12% return meaning that his 1996 net worth would be just about 29 million dollars. By 1999, Iyad would have around 46 million dollars with his 2005 net worth reaching about 92 million. By 2011, he’d be sitting on a fortune of 184 million dollars and by 2021, he’d have amassed over half a billion dollars, 571 million give or take a few million dollars.
The protestors didn’t see it that way, they saw his net worth as a product of his wage and his time in office. This couldn’t be further from the truth. A fundamental component to calculate net worth is wealth at the beginning of the period. In Iyad’s case, the period was 28 years and his initial worth was the already exorbitant sum of 23 million dollars.
When regulators and watchdogs spot a public servant with over half a billion dollars, they have every right to be concerned. They should freeze the person’s assets and conduct a fair investigation into where the funds came from. An honest man however has nothing to fear. If Iyad had other business interests and questionable behavior, then he should be held accountable by the judicial system but his net worth today, under the assumption that he is a clean and honest public servant, is in line with what it could reasonably be. Whether or not he is a “clean and honest public servant” is not my or your determination to make, it is the job of forensic accountants and regulatory bodies.
The moral of the story is that if a random person, say, you or me, invested 23 million dollars 28 years ago at a 12% return, that person would be sitting on over half a billion dollars today. Such is the power of compound interest…
If you’re interested in actually doing the math, you can use the formula below:
Where:
- W(t+p) represents net worth p years from the year t
- t represents the initial year (in our case 1993)
- p represents the final year (in our case 2021)
- r represents the rate at which you invest your money (in our case, 0.12 aka 12%)
- p-t represents the number of periods (in our case 2021-1993 = 28)
- W(t) represents the wealth at the initial year (in our case 23 million)
If you’re not interested in doing the math, trust me, I did it.
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