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Bernard Madoff’s Ponzi Scheme
By Sandy Naidu | December 16, 2008
The news about the fraudulent scheme run by Bernard Madoff sounds like a script straight out of a Hollywood movie. Around 50 billion dollars of investors has been lost. When it comes to fraudulent schemes, this is one of the worst. A lot of international banks and some of the world’s wealthiest people have exposure to Bernard Madoff’s funds and have now lost all their investment.
Bernard Madoff’s Scheme
Bernard was running a ponzi scheme. Money from new investors was used to pay returns to previous investors. So basically, it was paying off old ones with the money flowing from the new ones - and hence was dependent on getting a continuous stream of new investment. If new investment stops or if there are more redemptions (investors withdrawing money) than new investment then the scheme will fail. This whole scheme is a pyramid scheme.
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For Bernard things started to turn sour when redemptions started pouring in. The current economic conditions resulted in many of his investors needing to withdraw their funds from Bernard. |
At one stage the redemption cheques was around 7 billion dollars. Bernard could not meet the redemptions. This was the turning point and very soon everything collapsed.
Lessons One can Learn
When I first heard about this story, I was really interested in finding out more. I made myself a cup of coffee, grabbed a note pad, started scouring through dozens of articles on the internet and was making notes. I really thought that this was a complex scheme - I thought that it would take time to understand the intricacies of this scheme. I was wrong. What surprised me was how simple this scheme was. Bernard was simple fraudster - he did not use any elaborate means to steal money from his investors. His scheme was the plain old ‘Pyramid Scheme’. And to me that is scary - it was so simple but still managed to steal around 50 billion dollars - managed to fool some of the smartest people in the world.
Bernard was an ex-chairman of Nasdaq. He was a public figure, a very well known philanthropist and a simple man. He was trustworthy. All his investors got detailed statements of how well their investment was performing. His investors were very happy. They became their PR machine. Their praises about the fund brought in more new investors. It was only when they all wanted their money back, the whole thing collapsed.
A couple of lessons from this story:
1. If an investment sounds too good to be true then be cautious.
2. Don’t ever put all your money in one investment. It is amazing how many of Bernard’s investors have invested all their money with him. This collapse is going to leave them with nothing.
Share your thoughts about this story or about any other ponzi scheme you might know off…
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7 Responses to “Bernard Madoff’s Ponzi Scheme”
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December 19th, 2008 at 9:49 pm
[...] Naidu presents Bernard Madoff’s Ponzi Scheme posted at [...]
December 21st, 2008 at 12:15 am
[...] Naidu presents Bernard Madoff’s Ponzi Scheme posted at [...]
December 23rd, 2008 at 3:50 pm
[...] Naidu presents Bernard Madoff’s Ponzi Scheme posted at [...]
December 24th, 2008 at 2:11 pm
[...] Naidu presents Bernard Madoff’s Ponzi Scheme posted at [...]
December 25th, 2008 at 9:55 am
Bernard Madoff could not have performed this scam without the “help” of regulators who were sleeping on the job.
December 29th, 2008 at 7:43 am
[...] Naidu presents Bernard Madoff’s Ponzi Scheme posted at [...]
March 14th, 2009 at 4:40 am
[...] Naidu presents Bernard Madoff’s Ponzi Scheme posted at [...]