Ponzi Pie

I recently took the time to investigate the "Madoff Scandall" I was hearing about and found myself hoping someone makes a movie out of it because it is SO interesting. This is mostly a compilation of quotes from Wikipedia entries, with my own comments and examples thrown in.

Ponzi Scheme
A "Ponzi Scheme" is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit made by legitimate investments; So basically it is just the pushing around of money. Think about how you put your money in a bank and earn interest because the bank also loans out your money to others who pay an even higher interest which gives the bank profit. But in the Ponzi scheme, it would be like you getting a little interest for putting your money in but the bank is not loaning it out and just hoarding its riches. The scheme usually offers abnormally high SHORT-TERM returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises and pays obviously requires an ever-increasing flow of money from investors in order to keep the scheme going. Of course the system is destined to collapse because the earnings, if any, are less than the payments. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi did not invent the scheme, but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted investors' money to support payments to earlier investors and Ponzi's personal wealth.


Think of how massive this scheme must be to succeed. This is what Madoff did.

To get the full impact, you must know who Madoff is... or was. He must have gone a little crazy to attempt this. Sad story (once again taken from wiki)


Bernard Lawrence Madoff
An American businessman and former chairman of the NASDAQ stock exchange. He started the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960 and was its chairman until December 11, 2008, when he was charged with perpetrating the largest investor fraud ever committed by a single individual. At 8.30 a.m. on that day, Federal Bureau of Investigation agents arrested Madoff and charged him with one count of securities fraud. On the day prior to his arrest, Madoff told senior executives at the firm, which included his sons, that the management and advisory segment of the business was "basically, a giant Ponzi scheme". Madoff was also a prominent philanthropist who served on the boards of nonprofit institutions, many of which entrusted his firm with their endowments. Madoff was arrested based on a tip-off from his sons, Andrew and Mark.


The Madoff Scheme
While the scheme was typical of a Ponzi in its structure, it differed in its pace and its marketing. Rather than offer (suspiciously) high returns to all comers, Madoff instead offered modest, but steady returns to an exclusive clientele, returns produced in both up and down markets. Madoff exploited social networks to promote it among a largely upper class Jewish clientele, with significant funds invested from educational and social charity funds directed by the clients. The slow pace and "insider" marketing enabled the scheme to survive for an unusually long time and also to grow far larger than would be expected of a common Ponzi. All worked well for Madoff until the general market downturn of 2008 motivated a larger than usual number of investors to cash out their positions. With little actual liquidity, the scheme collapsed. The scheme also differed in that even some hedge funds invested in Madoff's funds, with some investors unknowingly exposed through multiple fund investments that they believed to be diversified.



Oh Madoff, I hope you enjoyed your Ponzi Pie while it lasted, but how could you forget, "There's no such thing as a free lunch!"

Good Economic Sense

In this NY Times Op-Ed, Congressman Inglis and Aurthur Laffer suggest taxing carbon emissions but cutting income or payroll tax by the amount of revenue made from the new tax. Tax more of what we don't want (pollution) and tax less of what we do (income/jobs). It sounds so simple and policies that make great economic sense often are, but are usually blurred by politics.

http://www.nytimes.com/2008/12/28/opinion/28inglis.html?_r=1&partner=permalink&exprod=permalink