By Gary, on April 16th, 2013
If “N” is for Nutmeg and “O” is for Onion then
“P” is for Ponzi
Ever since the “swindler” was created, there have been Ponzi schemes, so named for Charles Ponzi. Mr. Ponzi was born (1882) in Italy, moved to Boston (1903) and died (1949) in Rio de Janerio, Argentina. His biographical occupation is listed as “White Collar Criminal”. Mr. Ponzi’s name is used to describe a multitude of swindlers using his three-dimensional investor pyramid to bilk an enormous amount of money out of his friends, family members and investors. Mr. Ponzi was not the originator of this scheme, but his exceeded all that preceded him.
Some of them, okay a lot of them, even happened prior to Mr. Ponzi showing up on earth.
After Ponzi, many, many, many schemers tried their luck and expertise in creating the next biggest scheme.
The most current in the news is Bernard Madoff. He a well-known penny-stock trader, chairman of the NASDAQ and founder of his own company, Bernard L. Madoff Investment Securities LLC. While in this position Mr. Madoff created, was arrested for and is serving a 150 year prison sentence for the 2nd largest Ponzi scheme in history. His scheme is estimated to have reached nearly $65 billion. Note: He was arrested based on a tip from his own sons.
Charles Ponzi and Bernard Madoff are only two of the thousands of scheme creators out there telling friends, family and any who would believe that they and they alone have a sure-fire investment scheme in which they will serve as the investor and will make them an unbelievable return on their investment.
It will look like this:
To build a Ponzi scheme successfully, they rely on an escalating number of investors.
And end up like this: Where the Ponzi scheme creator “leaves town” with the investors’ money just about the time that there is a downturn in the economy and the investors need to pull their money out of the plan. Usually the schemer pays off a few of the investors in order to buy some additional time to get away with all of the investors’ money. However, they usually get caught but your money is long gone or deeply hidden.
Unraveling of a Ponzi scheme
When a Ponzi scheme is not stopped by the authorities, it sooner or later falls apart for one of the following reasons:
- The promoter vanishes, taking all the remaining investment money (minus payouts to investors already made).
- Since the scheme requires a continual stream of investments to fund higher returns, once investment slows down, the scheme collapses as the promoter starts having problems paying the promised returns (the higher the returns, the greater the risk of the Ponzi scheme collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run.
- External market forces, such as a sharp decline in the economy (for example, the Madoff investment scandal during the market downturn of 2008), cause many investors to withdraw part or all of their funds.
1 A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors; whereas pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.