I am stunned by the Bernard Madoff scandal – I am surely not alone there. How someone can steal and hide an estimated US$65 billion is difficult to know and the complexity of the scheme is such that we may never know. The former head of the NASDAQ had the credibility to lure investors with promises of 46% returns on their money each and every year. If it sounds too good to be true it usually is and guess what? It was!
I’ve heard his scheme described as a “Ponzi Scheme” and was a little confused by the term. So I grabbed the dictionary and also looked on Wikipedia to try and get a clearer understanding of what the term meant.
A “Ponzi Scheme” is a fraudulent investment scheme that pays investors returns from money that they or other investors put into the scheme. In other words money is not invested and does not earn a return (like buying shares and being paid a dividend). The money is put somewhere (usually somewhere that it will not be easily found again) and investors are paid returns from their own money or from other people’s money as it is deposited because the money is not earning a true return anywhere else. Slowly the money is siphoned away.
Investors are attracted to these schemes by the promise of abnormally high returns (like Madoff’s claim of 46% year each and every year) and they know nothing of the true nature of the scheme until their money has all but disappeared. The Madoff scandal was exposed when an investor wanted to withdraw US$7 Billion and the money was gone.
What this tells us more than anything is that money is not grown on trees. Promises which sound too good to be true are usually hollow and the dream of instant riches without the work which accompanies it is just that – a dream.