Friday, November 11, 2011

Bernie Madoff and Ponzi Schemes

 Many people who follow the news should be somewhat aware of who Bernie Madoff is. If not, let me briefly describe who Bernie Madoff is. Madoff is one of the most infamous businessman who about two years ago was sentenced to serve 150 years in a federal prison and pay up to $170 billion of restitution for ripping off hundreds of people and several well known companies. He used the money that he gained for his personal lifestyle, which included buying luxury items including four houses, six boats, four cars, and other expensive “necessities ”. (Clark, 2011)

Bernie Madoff was top of the crop when we talk about con artists. This low life scum, yes I said scum, is part of the reason why this society is corrupt. Madoff is the kind of man who does not lose sleep over his blatant criminal activity, as long as he is living the dream with other people’s money. In some sense, I would rate Madoff’s crimes just as equal to those individuals who had committed rape, robbery, aggravated assault and murder simply because of the effects he had caused to his victims. Although the effects of his crime were not as physically harmful to the victim as rape, robbery, aggravated assault and murder would have been, Madoff managed to hurt his victims mentally, maybe some more than others. According to an article in The Guardian, How did Bernie Madoff’s victims fall for his $65bn scam?, at least two suicides had been linked to his crimes (Clark, 2011).

When I talked about my experience and how I was almost scammed, I briefly mentioned how I was mentally harmed in terms of being overwhelmed by stress and depression. I was mentally hurt over a $1000 laptop that I had almost lost. Imagine the effects of Bernie Madoff’s victims when they discovered that Madoff had made off with their money. We are not talking about a 1000-dollar laptop; we are talking about millions of dollars including savings that people had entrusted to Bernie Madoff! It is unfortunate that there isn’t a much harder sentence for people like Madoff. Personally I think, considering the context of his crime, he will probably be released on parole due to the prison overcrowding we are facing in this country. There is no punishment that would bring justice to the victims or society when we consider Madoff’s crime. The fact that he will die before serving all 150 years is appalling. He is already in his 70’s and I cannot see how or when he will begin paying restitution considering that he does not have access to that kind of money and is currently serving time in a federal prison.

So what kind of scam did Bernie Madoff do? Bernie Madoff will go down in history for having committed the one of the biggest Ponzi schemes in the United States. A Ponzi scheme is not complicated to define but complicated to understand. The best way to understand how a Ponzi scheme works is by a scenario demonstration. Imagine an individual whose name is John. John has in his possession 10 dollars. John wants to invest his 10 dollars; therefore, he goes to what he thinks is a qualified investor (Bernie). Bernie promises the individual that if he invested his 10 dollars with him that he would give him back 15 dollars, a profit of 5 dollars. When John is ready for his money, Bernie gives him back 15 dollars just as he had promised John. In reality, Bernie is not a qualified investor but instead, a Ponzi schemer. John, satisfied with his investment, decides to tell his friends Curly, Larry and Moe about his 5 dollar gain. Curly, Larry and Moe go to Bernie with their 10 dollars. After time passes by, Bernie once again delivers and Curly, Larry and Moe each gain a profit of 5 dollars.

How is this a scam if these individuals are gaining a profit from their investments? The secret behind Ponzi Schemes is that behind closed doors, is a redistribution of money. There is no real investment occurring; instead, the Ponzi schemer takes money from new investors and uses it to pay off old investors. In other words, the money between old and new investors is shifted. The shifting of money creates a cycle of redistribution until finally the system collapses and can no longer be sustained due to the lack of new investors. The Ponzi scheme only works by attaining new investors. Without new investors, the Ponzi schemer can no longer pay for the old investors and therefore the scheme collapses. Many people fall for this type of scam because the Ponzi schemer gains a good reputation with investors receiving a gain. Bernie Madoff was able to pull this off because of his reputation. Bernie Madoff’s run eventually came to an end after he became exposed to the FBI. According to the Associated Press (2008), there are three ways that a Ponzi scheme comes to an end. 1. The schemers vanish along with the funds. 2. The system collapses due to the lack of new investors. 3. The schemer is exposed.

http://en.wikipedia.org/wiki/Bernard_Madoff
http://www.guardian.co.uk/business/2009/apr/02/bernard-madoff-fraud-victims-sec
http://www.youtube.com/watch?v=zRTPKcJGwe4

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