FINANCE companies have been making easy, fat profits by taking a Bt450 billion government fund intended to help the ailing sector and turning it into something resembling a pyramid scheme ­ ironically creating more problems and deepening the loss of public confidence that the fund was created to restore.

Observers said a large numbers of finance executives unashamedly took advantage of The Financial Institutions Development Fund by borrowing at 13 per cent and relending it in the interfinance market the next day at more than 20 per cent.

The fund's true purpose was to aid finance companies that had liquidity problems.

''Back in March and April, when the financial crisis was taking shape, it was considered fun to make a profit this way," one observer said, ''and it looked exactly like a 'Chamoy' pyramid game, because those who borrowed 20 per cent then relent it at 22 per cent.

''Those who borrowed at 22 per cent then loaned it out at 24 or 25 per cent."

The finance executives realised that the government would not let them fall and would give further financial assistance even in a crisis. This realisation led them to alter their expectations and pursue irresponsible and risky policies, in the knowledge they would not have to pay the full cost of any mistakes.

The Bank of Thailand could not bring itself to close down the ailing finance companies, so it continued to hand out liquidity support to any firm, good or bad, that knocked on its door. The amount of money being handed out kept piling up and up until it reached a staggering Bt450 billion, more than half of the national budget.

This gigantic bailout created more problems than it set out to resolve, because it gave the broad impression that the finance sector was in extremely bad shape. Even after the central bank suspended the operations of 10 ailing companies in March and another 16 in June, it kept on giving them money.

Finance One Plc, a member of the group of 16, was reported to have a payroll burden of Bt50 million a month, but this was largely bank-rolled by the fund, which has so far handed over Bt40 billion to the company.

Another critic lashed out at the central bank for its failure to distinguish between ailing finance companies with asset or non-performing loan problems and fundamentally sound finance companies with liquidity problems.

''By failing to distinguish between good and bad finance companies, the banking authorities could not draw a line between them to prevent the crisis from widening.

''When the public, or even creditors, looked into the finance sector, they too could not differentiate between good and bad companies," he said.

''In the end, it created a loss of confidence in the finance sector. It was a failure of management at the highest level."

However, the pyramid game did not continue for long because the loss of public confidence led to a panic run on the finance companies' deposits. The companies had to borrow from the fund ­ which lends money out too easily ­ to cope.

Some finance companies, which belong to the latest group of 42 suspended firms, privately grumble that they should not be on the suspension list because they did not rely significantly on the fund's support to shore up their liquidity problems.

One criteria for suspending firms' operations was their dependence on the fund to continue operating. Ailing companies borrowed from the fund at levels of between two and 12 times their total share equity.

''The companies say they will ask for permission to reopen their doors to business because they don't know whether officials are serious about this criterion," a broker said.