Understanding the Madoff scheme and the Ponzi
Just before the year ends, something big happened that have created ripple effects in the market. Bernard L. Madoff became the subject of investigations and he was being investigated for the largest Ponzi scheme in history. And if the reports are true, the scam has cost the investors around $50 billion. Since the Madoff saga is being likened to the Ponzi scheme, then it is imperative that the interested student should learn about the Ponzi scheme first and Charles Ponzi.
The Ponzi scheme is considered to be a fraudulent investment scheme wherein the perpetrator will pay the returns of one investor from the money paid by the subsequent investors rather than profiting from it. The Ponzi scheme is a term used in the United States and in other countries this scheme is known as the pyramiding scheme.
In order to entice future investors, the scheme will offer high short term returns and in order for the scheme to get going, there should be steady stream of potential investors that are willing to invest in the scheme. With this kind of scheme, it is expected that the overall scheme will destine to fail because there will come a time when the earnings will be less than the payments. In most cases, these kinds of schemes are stopped by authorities before it blows up. The name of the scam is based on a true person, Charles Ponzi. He is not the one who invented this kind of scheme but his case was the biggest then and losses were massive so the name Ponzi stuck. Ponzi made use of this scheme right after emigrating from Italy to the United States in 1903.
