A Ponzi scheme is one where potential investors are enticed to invest in a company by the investment manager, in this case being Madoff, promising high returns with a guaranteed low risk. The system keeps ticking over, with older investors receiving payment from new investors’ investments; with it becoming a cyclical act with the new paying the old. However, once there is a shortage in the amount of new investors, it leads to many key people not receiving payment. This was the situation Madoff found himself in, forcing him to give up this unforgivable scheme. The first thought which comes to mind when reviewing this foolish strategy is the way in which investors simply trusted Madoff with huge amounts of money including their life savings.
Before the scheme collapsed Madoff was a well trusted Wall Street luminary, with himself assisting in the foundation of the NASDAQ stock exchange and serving a term as its chairman. Thus allowing him to lure celebrities such as Steven Spielberg and Kevin Bacon and coaxing Fairfield Greenwich Advisors to lose half of their assets to the figure of $7.5 billion. Madoff’s Ponzi scheme, which was originated by Charles Ponzi in 1920, was only rumbled by himself, with Bernard Madoff confessing his sins to the public in December 2008. In March 2009 Madoff pleading guilty, he is now serving a 150 year stay in Butner Federal Correctional Complex, Butner, N.C.
On the other hand, what bemuses many people is why did Madoff confess to this plan which can be deemed a success throughout its 20 year existence? The simple answer is conscience. Madoff had reached a point with there being a shortage of new investors; along with the high returns he offered becoming more and more suspect. Thus he started to panic when he eventually acknowledged the uphill battle which formed as repercussions for his ill-mannered actions.
Crisis management expert Eric Dezenhall makes these claims regarding Madoff’s confession, “I suspect that Madoff’s confession is an aberration borne out of the visceral catharsis that occurs when the Joker in the deck suddenly turns up, the Joker that precedes a catastrophic depression.” I find it somewhat ludicrous that Madoff’s shenanigans were not discovered sooner, with Dezenhall’s remarks confirming that the actions of many within our economy must be closely monitored; with trust and confidence within an economic figure being ultimately futile. This view can also be supported by Akerlof & Shiller’s book ‘Animal Spirits’. The book states that an economy cannot be tampered with, without acknowledging that it has a sinister side which we all must understand.
The sinister side of an economy is represented perfectly here by Madoff, with his egotistical behaviour leading to ruptures within Wall Street and bad faith on behalf of investors in the system. Further evidence of the desperate need for many to understand the underlying animal spirits within our economy is the fact that changes in the nature of predatory activity within our economy has led to many recessions, with the recession of July 1990 to March 1991 in the United States being a critical example. Corruption needs to be dealt with at the centre, or it will inevitably feed back into more corruption as part of the confidence multiplier. In order to avoid scandals similar to Madoff’s magnitude, the Government must become more stringent with their investment regulations and fraud detection measures in a desperate attempt to better the economy’s future and wellbeing.
Contributed by Jeevan Bajwa