Though my genetic makeup puts me at a serious handicap but I will still try to explain how Ponzi schemes work and what is the actual amount of money sunk in any such scheme.
Madoff, too, traded on his membership in a religious community. Many of his investors were wealthy Jewish philanthropists whom he met at charitable events or at a Palm Beach country club.
Customarily when someone invest money in any scheme (whether paying monthly profits or annually or any other way) profits disbursed are considered profits only and used accordingly with the thought in every body’s mind that the principal (the money originally invested) is safe and readily available on demand.
In Ponzi scheme the investors are paid money out of the principal itself and are classified as profit or interest. The profit is usually much higher than legal investment instrument 2-12% monthly. This generates a word-of-mouth hurricane and everybody with some savings wants to invest in such a scheme.
In the end when the scheme collapses the investors who have been living like king off the profits get to find out that they were using their own money and all their savings are gone that is the time when all start crying.
The US $159 or 167 Billion was the total amount of money invested with Bernard Madoff. Only US $ 13 Billion is the amount that is unaccounted for or has been used by Madoff for his princely living the rest has been paid off to the original investors and has been used by the investors themselves. All the hue and cry is because the investors thought during the good times that they were spending the profits earned from investment but they are now realizing that no they were wasting their own savings.
The Benefit:
A promise that the investment will achieve an above normal rate of return. The rate of return is often specified. The promised rate of return has to be high enough to be worthwhile to the investor but not so high as to be unbelievable. Ponzi Schemes are quite basic but extraordinarily powerful. The steps are as follows:
- Convince a few investors to place money into the investment.
- After the specified time return the investment money to the investors plus the specified interest rate or return.
- Pointing to the historical success of the investment, convince more investors to place their money into the system. Typically the vast majority of the earlier investors will return. Why would they not? The system has been providing them with great benefits.
- Repeat steps 1 through 3 a number of times. During step 2 at one of the cycles, break the pattern. Instead of returning the investment money and paying the promised return, escape with the money and start a new life.
The Ponzi ruse isn’t a new idea. This type of financial fraud is named for Charles Ponzi, a “confidence trickster” (the origin of the phrase con man) who fleeced New England investors in the 1920s. Before that, a similar scam was outlined in Charles Dickens’ 1857 novel, “Little Dorrit.”
One reason that Madoff was so successful was that he was a highly respected, well-established and esteemed financial expert — his reputation was bolstered by the fact that he helped found NASDAQ. What’s more, at the same time he was running his scheme, he was also running a legitimate business. He earned his investors’ trust because whenever they requested a withdrawal, Madoff’s investment company got it to them promptly. In addition, unlike other Ponzi schemers, he didn’t tempt investors with unbelievable returns. He reported moderate (albeit, suspiciously consistent) returns to his investors.
By Khursheed Khan
