Monday, December 15, 2008

Ponzi Schemes

After the alleged Madoff affair, are we going to change the name of Ponzi schemes? Will they now be called "Madoff schemes"? He has certainly, if guilty as alleged, taken the practice to hitherto unscaled heights.

It's amazing how great minds think alike. On November 24, I wrote this:
So is the main difference between a bank and a Ponzi scheme the fact that the bank actually intends to give you your money back, on demand, and the Ponzi schemer doesn't? Because in both cases, when you get money back, it isn't "your" money (in the sense that it's the same dollar bills you gave them earlier). It's money that someone else just deposited, which hasn't been loaned out yet. And when that person writes a check, the money that changes hands came from yet someone else.
And today, commenter M W (mrw2day) wrote, on the Planet Money post About that $50 Billion:
I don't understand what all the whinning [sic] is about. Mr. Madoff was conducting business exactly like a bank. Sorta a fractional reserve system of investing. If Mr. Madoff was a bank, the treasury would be bailing him out. Or is it that the banking system is just a giant ponzi scheme?
I really am getting kind of a weird feeling about the banking business from all this.

According to today's Planet Money podcast, what brought Mr. Madoff down was exactly what has brought down several large banks and a couple of brokerage houses: more of his customers wanted their money back at once than he had cash in the house to cover. If he'd been investing in actual assets for them, he could have sold some (although at a loss); since he'd just been spreading it around, so to speak, he couldn't cope.

I will never understand the state of mind that gives large amounts of money to Joe to invest, merely because Joe plays golf at the same club as the mark - sorry, investor. Or because Joe has been managing money for the investor's friend Ed and giving him really reliable returns. I've heard at least one broadcast where a fairly well known financial expert (can't recall who) had reportedly questioned Madoff's returns, because they were "too good to be true" (he effectively never reported a down year) - but nobody listened.

When it comes to money, the human race seems to be lacking a "too good to be true" detector.

1 comment:

  1. This morning on NPR, the "oversight" lady, or whatever it is her title is, said that nothing the Treasury Department had done with the 350 billion dollars had had "any effect whatsoever" upon the mortgage crisis, which was originally wheeled out as the primary problem which the Bail-Out was meant to address. The banks aren't lending the money that was given to them, and more houses and properties keep going into default. It's increasingly looking like--as I pointed out a month ago--as if this machination were simply another Bush boondoggle to rob the U.S. Treasury to pay off big contributors (in this instance, the friends and allies of Paulson & Co.). You could smell it a mile away: The fake "crisis" ("we must act NOW to prevent the complete collapse of our way of life!"), the railroaded legislation, the smarmy "excuses" when the truth began to emerge. Strikingly similar to the Iraq war build-up. Yellow-cake and aluminum tubes; the "smoking gun" etc. The War on Terror.

    Actually, it's the War on Your Pocketbook, America.