A Ponzi scheme, defined as a “fraudulent investment scheme that involves promising high returns to early investors out of the money paid in by later investors” (says Ignatius Reilly at Right Pundits), was named for Charles Ponzi, the infamous 1920s swindler. A modern day Ponzi scheme was apparently perpetrated by investor Bernard Madoff — by his own admission — as the head of a hedge fund off Wall Street was arrested today for allegations of the financial fraud. Bernard Madoff, 70, who has operated his own multi-billion dollar investment company since 1960, apparently remarked to his staff earlier in the week that the hedge fund ran out of his company was a “giant Ponzi scheme.”
Hedge funds are a mysterious, barely regulated type of investing that apparently few not fully immersed in the world and technicalities of Wall Street truly understand, claims Reilly. Only very rich people may make such investments, and a lot of it involves borrowing assets to turn around and resell right away. With hedge funds, you spread the risk to multiple arenas, increasing the chance for gain despite the shadiness of the gamble. Madoff’s hedge fund had $50 billion of investors money, reported Reilly.
To elaborate a bit more on the workings of a Ponzi scheme, it entails seeking a continuous flow of investors. The business makes money when you get more investors to sink their money into the Ponzi scheme, under the false pretense that they are investing in a business that will be generating profit, continuing to produce money for them in the long term. Of course this doesn’t actually occur– and any money an investor may see from the scam is generated purely by the investments of others, which is why the growing number of investors seems critical.
This crime could earn Madoff up to 20 years in jail and millions of dollars worth of fines. He has already made bail, however, at an easy $10 million.
While people like Reilly suggest that this incident could cause financial panic amidst our already poor economic state, making people lose faith in hedge funds, there are others more like myself who say– “who cares”? Those who actually made hedge fund investments likely had very little understanding of where their money was truly going, and they accepted that. To the very wealthy, this is just part of the financial world and investing. It’s probably an exciting gamble with throw-away money, to many of them. Hedge fund investors do not represent every day man. The things which Madoff, his company, and his investors partake in on a daily basis are over our heads yet may somehow financially affect us– and naturally that deserves justice. But what do I know? I’m just the little guy, looking up at the great big rich fatties, thinking of all the wonderful good that could have been done with all of those billions of wasted dollars, played with like mere Monopoly money. Me, sympathize with those shaken by the instability obvious in the world of hedge funds…?
Ignatius Reilly, Bernard Madoff: Ponzi Scheme Arrest, Right Pundits
Charles K. Ponzi Website
