The press are going wild over the accusations that Bernard Madoff has allegedly been responsible for one of the biggest, if not the biggest ever, “Ponzi” scams. Madoff has, until now, been a well respected figure amongst the tight alleys around Wall Street, having apparently held such respectable positions as the Chairman of NASDAQ.
What then has caused Madoff’s reputation to come cascading down?
It appears that Madoff has allegedly created high yielding accounts which attracted investments from reputable investors, and alleged that he has been responsible for a “Ponzi” scheme of epic proportions.
The scheme has caused some of the most prestigious banks to publicly admit they have fallen victim to the “Ponzi” scam. Among these are banks such as HSBC and RBS who have had to face the press today with potential losses of circa US$1 million. It is reported that upto a staggering US$15 billion of investors wealth has potentially been lost.
What does this mean? Well it is likely to mean an even worse pension statement for some people in the near future. In Malkiel’s terminology, as explained in “A Random Walkdown Wall Street”, it appears that Madoff may have created his own “bubble”.
What is a “Ponzi” Scam?
The name “Ponzi” scam, has been created from the original exploits and con activities of Charles Ponzi in the 1920s. Ponzi tempted investors to part with their well earned cash by tempting offers such as “double your money in 90 days” and justified the return by explaining that he had found a niche in the global postal network which would harvest huge returns. Investors fell for it, invested their money, but soon found out that it was just a scam. There have been many other similar Ponzi scams since, however the name of “Ponzi” has stuck.
What Happens Next?
The next steps are for the various banks and investments to audit their accounts and to see if they have suffered from such a scam. It also raises the risk of hedge funds ever higher, as investors ponder about the chances of other hedge funds having performed a similar “Ponzi” scam on them. This is highly disturbing for anybody holding stocks and shares or an investment plan.
The Biggest “Ponzi” Scam?
There have been many “Ponzi” scams over the years, such as those allegedly performed by Minkow, Bennett, Bennett Jr, Hoffeburg, Wright, Hsu to name but a few but there is already a widening belief amongst some segments of the industry that Madoff’s “Ponzi” scam may be the biggest yet. Let’s hope not for the sake of our pensions.
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