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PONZI RIDES AGAIN ON A HORSE NAMED MADOFF
Bernard Madoff and Carlo Ponzi
Bernard Madoff's gigantic 50 billion dollar Ponzi scheme is not too hard to understand when you realize what Carlo Ponzi originally did in the 1920's raking in 40,000 investors with a total take of nearly 15 million ~ and that was when hotdogs cost a nickel: Allen L Roland
As long as greed exists ~ Ponzi schemes will exist but particularly now in the world of push button daily electronic transfers of millions, if not billions, of dollars with little if any regulation or oversight. But first let's review the original Ponzi scheme courtesy of the Daily Article by Adam Young http://mises.org/story/855
" On December 26, 1919, Ponzi (in the photo with Madoff on this page) officially founded the "Security Exchange Company", that promised a 50% interest in 90 days. The investment was in the form of promissory notes, with values ranging from $10 to $50,000, the average investment being $300.
With all this money pouring in, Carlo had to figure out a plausible explanation for how he could pay 50-percent interest in ninety days when no place in the world paid that much. But Carlo's ingenuity for scams came through again. He told investors that he had a network of agents in Europe that purchased depreciated European currencies, converting the currencies into international postal coupons, which were then redeemed at face value in the United States in U.S. dollars. Carlo claimed all the high rollers were doing it ~ the Rockefellers, J.P. Morgan, Jr., everybody. But Saint Carlo instead was sharing the wealth and helping the common man (while helping himself of course). Redistributing their money was more like it.
Every day, tens of thousands of dollars were deposited with Carlo's tellers. Outside the building, crowds lined up, waiting to invest. And every day, Carlo would arrive at work in his chauffeur-driven limousine. The key to the entire scheme continued to work its magic, as the deposit counters were usually a swarm of activity, and the withdrawal counters were practically deserted. As the deposits grew and grew, Carlo even opened branch offices, eventually totaling thirty-five. He also used some of the deposits to purchase two actual businesses, Hanover Trust Co. and J.P. Poole Co. Carlo even found time in his busy schedule to buy Rose a mansion.
It wasn't long, however, before Carlo's claims attracted attention from the wrong people. In a few short months, he had transformed himself from a mere clerk to a veritable financial wizard, he and Rose were swaddled in luxury, and anyone who wanted to cash in immediately received their deposit with interest ~ no questions asked. Carlo's success invited scrutiny. The U.S. Postal authorities advised the federal government that Carlo's given explanation for how the Securities Exchange Company conducted its "investments" couldn't possibly work.
But since the federal government operates on its own concept of time, it wasn't until months later that the feds conducted an official audit of Carlo's operation. And as news of the audit hit the street, the whiff of insecurity began to work its magic, creating a run on the Securities Exchange Company. But it seemed as though Carlo had an inexhaustible supply of cash: all of the investors who that lined up to withdraw their deposit each received their cash plus 50 percent.
And as the audit progressed, the auditors were stumped. The company kept meticulous records of all deposits and withdrawals. No one was being cheated, and no law had been broken. The only thing that they couldn't find was how the company made its fantastic profits. When asked, Carlo indignantly replied that that was a company secret.
The feds responded to this by placing a restraining order on the company, prohibiting it from accepting any further deposits while the investigation was proceeding. Carlo, glimpsing impending doom, hired the well-respected William McMaster to handle public relations until the investigation blew over. This move didn't turn out so well for our friend Carlo. Shortly after being hired, McMaster issued a statement to the press that the Securities Exchange Company had never ~ not even once ~ conducted a single foreign financial transaction.
Again, investors created a run on Carlo's company, and again, Carlo appeared to weather the storm, even serving coffee and donuts to depositors as they waited. But eventually the toll of the investigation and revelations took their course, and more and more investors showed up to withdraw their money, until eventually the money ran out. On August 9, 1920, Carlo's bank issued a statement that it could no longer honor checks from the Securities Exchange Company. Two days later, Carlo's criminal record was released to the public.
Panic now gripped those investors who held back, and Carlo feared for his life. He asked for and received police protection. And one by one, his assets were seized. First to go were Rose's mansion and their three luxury cars. Then Hanover Trust and J.P. Poole. As the investigation progressed, investigators discovered that Carlo at his height had 40,000 investors, and the total take was nearly $15 million ~ and this was back when hotdogs cost a nickel."
Now substitute Bernard Madoff's investment advisory business for Carlo Ponzi's Security Exchange Company and you get the picture ~ we're talking about an ethical problem.
Madoff's investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management ~ but the highly secretive company had been insolvent for years and was trading on non existent assets.
On Dec. 10, 2008, Madoff informed the Senior Employees, in substance, that his investment advisory business was a fraud. Madoff stated that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." Madoff stated that the business was insolvent, and that it had been for years. Madoff also stated that he estimated the losses from this fraud to be at least approximately $50 billion.
Obviously the SEC, who completely missed the boat, is a toothless tiger and needs not only to be restructured but must be armed with at least subpoena power.
Liz Moyer writes in Forbes yesterday that " The SEC's coziness with Wall Street was a point raised by a former SEC investigator, Gary Aguirre, who was fired in 2005 after investigating possible insider trading by Pequot Capital. Aguirre has contended for three years that political considerations blocked him from pursuing the investigation, particularly after it involved interviewing the well-connected Wall Street chief John Mack, now of Morgan Stanley (nyse: MS - news - people ).
A joint report by the Senate judiciary and finance committees in August 2007 sided with Aguirre and sharply rebuked the SEC's failure to pursue the case. More recently the SEC's inspector general recommended disciplining senior SEC officials, but an administrative law judge ruled against him.
Aguirre, who lives in San Diego, says President-elect Obama should recreate the SEC with a completely different culture and realign it with its mission of enforcement. The failure to vigorously investigate Madoff before now "is a new low," Aguirre said Wednesday. "But it is absolutely consistent with everything that has happened this year."' http://www.forbes.com/home/2008/12/17/madoff-sec-cox-business-wallst-cx_em_bw_1217ponzi.html
Don't think for a moment that there are not any more Ponzi schemes on the street ~ for the still unregulated stock market is a virtual hotbed of electronic cash transfers, mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth ~ and, of course, greed. As such, the Madoff scandal is quite possibly just the tip of that looming iceberg.
Thomas Friedman, New York Times, captured the true essence of the problem today when he wrote that we really need an ethical bailout more than a financial bailout ~ " We need to re-establish the core balance between our markets, ethics and regulations. I don't want to kill the animal spirits that necessarily drive capitalism ~ but I don't want to be eaten by them either ."
Allen L Roland http://blogs.salon.com/0002255/2008/12/18.html
Freelance Online columnist and psychotherapist Allen L Roland is available for comments, interviews, speaking engagements and private consultations ( allen@allenroland.com )
Allen L Roland is a practicing psychotherapist, author and lecturer who also shares a daily political and social commentary on his weblog and website allenroland.com He also guest hosts a monthly national radio show TRUTHTALK
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