Mr. Madoff and how a Ponzi scheme works

I published my thoughts on Bernard Madoff in July 2013. I recommend reading that blog first.

Now, two years later after my original  I see Madoff as the center of attention. The Madoff Chronicles: Inside the Secret World of Bernie and Ruth book by ABC investigative reporter Brian Ross, is the basis of two day TV series Madoff .

How the Ponzi scheme works

But I still ask myself, What Madoff did wrong? We call him a Ponzi schemer.
This how it works, in a an excellent video lesson from Khan Academy

Ponzi schemes: Ponzi Schemes


If you have 11 minutes time to watch this lesson, you will probably ask: "So what? Every financial institution appears to have more money than they really have in deposits. This is how a bank makes money:

From "How Things Work"

The difference between a legitimate bank and a Ponzi schemer - both appear to have more money than they really do - is in the ability of banks to pay all customer deposits in case of panic or rumor. The banking system is regulated and has various layers of protection to deliver quickly the money back to customers

Here is a list

The 11 Largest Bankruptcies In American History

PGandE, Chrysler, Lehman Bros., Enron. General Motors, PanAm, TWA and so on.

Could anyone have the ability to predict who will go bankrupt? We can try, use some logic, but no human beings can predict the exact future. No big data and no AI , which are mere tools, can do this.

And this is why we are furious at Mr. Madoff. We had faith in him, we forgot that he is human. He defrauded some maybe one thousand very rich investors, most of them - with the exception of a few tragedies -  recovered partially and continue to have substantial net worth. He did not steal the plane. He drove it to the ground, with his whole family and employees as passengers. He blew it. He was not God, as some people believed.

We should be also furious at ourselves.

The whistle blower

Here is a quote from Money magazine

Almost 16 years after Harry Markopolos initially warned the SEC in vain that Bernie Madoff was operating a massive Ponzi scheme, Markopolos says he has found three more schemes that are multi-billion dollar pyramids of fraud.

One of them, he told ABC News, is even bigger than Madoff's epic scam, estimated at fraud in the neighborhood of $65 billion.

For now, Markopolos is declining to name names, because he wants the regulatory and enforcement agencies to get the information first.

That means many billions will be lost, in other, yet undetected schemes. We did not learn much from Bernie Madoff story. It also means, if the economy would have had been booming, Mr Madoff would have been undetected and make all his investors happy.

In other recession, as severe as 1933 one, almost all financial institutions who always have - by definition - less money than they appear to have - will go belly up.

Disclosure

I don’t say anything online that I wouldn’t say in person.  What I say are exclusively my thoughts, views, opinions or understanding of a topic or issue, and not my employers'. I can be wrong even though I try hard not to be. I will admit to mistakes, correct them promptly and even apologize where it is appropriate.