Let's say we have three banks A, B and C. And a broker X. And obviously, the government.
the banks want to make as much profit as they can by using the money
just the way they want. And the government wants to regulate them by
making it compulsory for them to invest some of the money in Government
bonds. So the government puts a simple rule that at the end of every
day, A,B and C have to show them a balance sheet and a minimum amount
has to be invested in bonds.
The banks do it for some time but
they ask the government for some kind of relaxation. So a new rule comes
where you need to show the balance sheet only on Fridays. The average
amount per day in the bonds has to be over the fixed amount, however,
there is no such limit on the daily amount now.
Now X comes into
the scenario. Since A would sell some bonds to invest elsewhere and B
may buy some bonds as well, the banks will now have different amounts of
money invested in bonds everyday and some will have less while some
will have more. But all of them need to have that minimum amount on
Friday, so the banks with lesser amounts, i.e, A in this case, would
need to buy the bonds to keep up with the average.
So what does A do? It contacts X to get it some bonds from either B or C.
is a trusted broker and all the banks know him pretty well. So X tells A
that he'll get the bonds but right now he isn't sure that from whom
will the bonds come, B or C. So instead of making the cheque on the
bank's name, A should sign the cheque for X. (Which was illegal, BTW).
A does that. Now X goes to B and ask for the bonds and using the power
of trust, X tells B that he'll pay the money the next day to which B
agrees because he also offered a good return on the money. See, bonds
are important, money may come later too.
Using this trick, X makes sure he always has some money with him.
comes part two. The money he had, he invested heavily in the stock
market to create a turmoil, specifically for a few companies like ACC.
The market saw a huge run like never before and share prices of ACC and
some others went over the tops.
Once he knew the market was at a
peak, he started profit making and markets crashed. The bank people who
were involved with him in the illegal acts panicked and one of them
even committed suicide.