Monday, December 15, 2008

Madoff's Ponzi Scheme

There is no end to bad financial news. The latest is a good old-fashioned ponzi scheme resulting in losses of about $50 billion that took place over decades. Basically a ponzi scheme is just a high rate of regular return given in order to entice new investors whose money in turn is used to pay existing investors without creating any underlying earnings for the payout. This time run by Bernard Madoff, an investment banker who formerly served as chairman of the board of directors of NASDAQ. Madoff was turned in by his own sons to the F.B.I. and charged with fraud.

The timing of Madoff's undoing could not be worse, but not surprising. Madoff's classic ponzi scheme depended on continued new investments. With the markets in turmoil, those new investors must have been impossible to bring into his venture. Today marks continued trouble for the stock market and manufacturing shows an even worsening economy. Even Apple has been downgraded to "neutral" by Goldman Sachs Group Inc. from a previous "buy" status. Add to all of this the lack of resolution concerning the prospects for the U.S. auto manufacturers.

Madoff's scheme is set to further erode investor confidence. Although we might call for increased investor due diligence, many thought that Madoff was a safe player. Many large banking institutions from around the world have announced billions in losses on the Madoff scheme already. What's to come? For starters, I suspect we will see more calls for Congressional hearings and even more calls for greater regulation of the investment community.


jim said...

I'll bet you dollars to donuts that those few investors who [conveniently] managed to bail out early, may in the end have to forfeit their earnings. The federal law may define those earnings as stolen money and attempt to reclaim it as state's evidence.

At this point in time everyone, to include the victims, are under suspicion. Common sense dictates that Madoff could not have possibly pulled this off (for decades) by himself. With Thierry de la Villehuchet's apparent suicide, one has to wonder if he was just one of the victims, a player, or both.

Anyway, good article.

Anonymous said...

I believe the entire Madoff family was in on the ponzi scheme and that the senior Madoff was selected to take the fall due to..?
Illness? The system would have a tendency to let him off easy due to his age? Or some other reason I haven't thought of. How would his sons know about the ponzi scheme unless the father told them and what sort of people are they to turn in their own father unless it was all planned ahead.

Jim Green said...

I couldn't agree more. Those with the SEC who were on watch during the time Harry Markopolos made several attempts to alert them to Madoff's fraud should have their feet held to the fire as well.

I know a couple of people who lost money because of Madoff and believe me if they could get away with it, they would take him out... in a New York minute.