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Monday, December 15, 2008

A Scam Older than Ponzi

The longstanding Ponzi scheme of Bernard Madoff that was recently revealed has a lot of people talking.  All of the talk is for good reason.  People were shocked that such a high profile fixture of Wall Street could be running a scam that is older than Ponzi himself.

Most people are familiar with the term "Ponzi."  There are enough con-artists in the world that most people have come across a scam that involves paying old investors with funds acquired from new investors.  If you haven't been bilked by one yourself, you may know someone that has.  Being curious I looked up "Ponzi" on Wikipedia and found the father of the Ponzi scheme.  Charles Ponzi was an Italian immigrant who in 1920 bilked  investors out of millions in Boston in a much publicized scam involving the arbitrage of postal reply coupons and postage stamps.  Ponzi was not new to the business of scamming investors in 1920.  Years prior he worked in a bank in Montreal that had made some bad real estate investments.   The bank's owner, Luigi Zarossi, deceived depositors by paying interest with money from new depositors (Wikipedia.com).  So Ponzi did not invent the Ponzi scheme, it was around long before he arrived.  I am certain that there are stories of Ponzis as old as human history itself.

So if the scam is nothing new, how did some of the smartest and wealthiest people in the country (and the world) get "ponzied" by Bernard Madoff?  Con-artists have existed throughout history, because it is human nature to believe what one wants to believe.  "I believe in him because will I benefit by believing in him," is not said aloud, but more likely is a conversation of the subconscious.  Madoff was a charismatic man who had a sterling reputation.  He created an image that made people to feel privileged to give him their money.  Never mind that his touted "returns" for investors over a 20 year period were incredibly unrealistic.  Investors even paid taxes on the returns that Madoff told them they earned.  When an investor wanted their money out, he paid them with a smile (and another investor's money).  He even turned away potential investors which improved his reputation.  It wasn't until he admitted that it was a multi-billion dollar Ponzi scheme that the story has now unravelled.  

What is our lesson from all this?  Is the answer to trust no one, ever?  I suppose that is the cynic's answer.  However that sounds like a miserable way to live life to me.  I prefer Ronald Reagan's philosophy of "trust but verify."  There are some that considered doing business with Madoff, but chose not to.  JP Morgan Chase declined to do business with him because they could not "reverse engineer" his methods (CNBC, Dec 15, 2008).  On the other hand, Madoff's clients assumed that he was much smarter than they were, so they would simply trust him.

While I have never been the victim of a Ponzi scheme (I certainly am not wealthy enough to be one of Madoff's clients), I have come across them.  More often though I have been directed what to believe by others that I believed to be smarter than me.  In my case it was the corporate Kool-Aid that was being served to me and other employees which I drank with enthusiasm.  The lesson I have learned from my experience is the same lesson Madoff's clients have learned, believe what you see and not what others tell you to believe.  


3 comments:

  1. "Trust but verify" is a great motto to live by. If you follow it, then how can you be anything less than a good steward of your finances, relationships, and life? Great Blog!
    AZ Mom of Many Hats
    www.azmomofmanyhats.blogspot.com

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  2. Baldmortghebanker - Nice Blog...I look forward to reading more of your thoughts. You should enable the RSS feeds to people can subscribe.

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  3. What did Dad teach us: if it looks too good to be true, it probably is.

    Great blog!!

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