One big Ponzi scheme

Posted Jan. 01, 2009, at 5:38 p.m.

By this time, most people know that Bernard Madoff has admitted defrauding investors of $50 billion in a huge Ponzi scheme.

Most of it is gone, as in any Ponzi scheme, named for Charles Ponzi, who promised investors in 1920 to double their money in 90 days and paid the dividends from the money received from new investors until he ran short of new money.

Mr. Madoff apparently operated a similar pyramid scheme, but with a difference. He paid regular, modest dividends of 10 or 12 percent and kept it going for 20 years before his earnings no longer kept pace with his promised payments. The end result was the same: Most of the money was gone.

He supposedly acted alone, but details are emerging of a giant global octopus. Friends and associates and other funds funneled investments to him, often with a handling fee of l percent or l.5 percent. Many were innocent, but some appear to have been collaborating. The big credit-rating companies kept giving him top ratings. Government regulators either disregarded occasional tips that it was all a big fraud or took the word of Mr. Madoff and his friends that he was on the level. Most investors relied on Mr. Madoff’s carefully cultivated sterling reputation instead of performing “due diligence,” a lawyer’s term for cutting the cards.

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The hundreds and maybe thousands of victims now coming to light are mainly the rich. Some are selling their vacation homes or even their primary residences, hocking their art and jewelry, putting their yachts on the market and taking their kids out of expensive schools as they try desperately to cope with unexpected poverty. But it also affects poorer people who have depended on charities that placed their funds with Mr. Madoff.

Further down the economic ladder, poorer people are suffering from the closing of charitable institutions whose backers had invested in the Madoff operation.

At the same time, the broader financial meltdown is hitting people across the board, from top officers of big companies to the rank-and-file of employees, with pay cuts, layoffs and loss of health insurance.

Mr. Madoff was an equal-opportunity swindler, and we all are involved in an equal-opportunity recession. Rich and poor and middle class are all suffering from the financial crash. And when you think about it, there’s a certain similarity between Mr. Madoff’s swindle and the general financial meltdown.

The Madoff scam, in its essence, was selling shares of actually little or no value while assuring the investors, with backing by the rating companies, that their investment would be highly profitable and virtually risk-free. That is a perfect description of the flood of “structured investment vehicles” that Wall Street devised by packaging risky mortgages into bonds that they peddled as profitable and safe — also with the help of the rating companies.

It’s one big Ponzi scheme, and a new president and Congress must work their way out of it.

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