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THERE is no simpler fraud than a "Ponzi" scheme. You take the money from one client, then use the cash from another to pay them a return, while keeping something back for yourself. Provided the clients keep growing in number there isn't a problem - you can keep on churning for ever.
And provided they don't ask any questions. That's one of the mysteries about the Madoff affair: why sophisticated investors on this side of the Atlantic, such as Banco Santander, HSBC, RBS, Man Group and Nicola Horlick's Bramdean Alternatives, not to mention some of the savviest market players in the US, took what he was doing on trust.
The reason was that his CV made him unimpeachable. He was the former chairman of the Nasdaq exchange, not some new, unknown operator. He was making a profit, which means people are less likely to wonder what is happening to their money.
They were entitled to assume, too, that the authorities had paid him a visit and been over his books. That they didn't is another oddity. But the Securities and Exchange Commission let him be - possibly because he had previously been one of them, as it were, as head of Nasdaq.
Madoff was allowed to continue in his own, unbelievably easy way. The fact his assets under management grew to $50 billion merely added to his lustre.
His "big lie" as he called it, has left the investment industry with some awkward self-examination to ponder. If the clients don't closely examine their hedge fund portfolios then how can they possibly know if what they're being told is correct?
Likewise, if the regulators don't bother, then the foundations for many frauds, not just one, are surely laid.
The industry is largely unsupervised and Madoff was able to play upon that, to stunning effect. But what his exposure teaches us is that the time has come for much more rigorous probing. The awful prospect his downfall raises is that he is not alone, that there may be many more like him out there.
Reader views (5)
Would anyone like to buy into AmWay cleaning products?
- Bryan Pike, Reading UK
Ponzi scheme = National Insurance funded state pensions. Pity all the baby-boomers are going to retire sooon and will want paying out after forty to fifty years of paying in.
- Gordon, Gerrards Cross, Bucks
Bloke, as they say, it's only when the tide goes out do you find out those who are swimmimg without trunks.
- Pete, London
A "Ponzi" scheme - sounds pretty similiar to the way public sector pensions operate!
- David, Lewes, East Sussex
What a marvelous exposing device a global financial crisis is. See the emperors with no clothes and the vagabonds draped in others' attire.
- Bloke, London
