Madoff, who died last week in prison, where he was serving a 150-year sentence, has of course never met Ponzi, given that they lived in different eras. Ponzi died in 1949. But Madoff was perhaps Ponzi’s most successful disciple ever. He, unlike Ponzi, ran a Ponzi scheme for many years.
At its peak, Madoff’s supposed “investment scheme” had $64.8 billion in it. He claimed that he was generating returns by using a trading strategy called the split-strike conversion. But, in reality, the money wasn’t invested anywhere to generate returns. All that Madoff ever did was take the money being brought in by new investors in order to pay off the old investors, while supposedly generating a return of 10% per year, year after year. The scheme went bust in December 2008.
At its heart, the Ponzi scheme—named after Charles Ponzi—is a very simple operation. It promises a much higher rate of return in comparison to the other options that are available in the financial system at a given point of time. Many Ponzi schemes also have a supposed “business model” to make it seem like a legitimate business generating revenues. The first lot of investors who get into the scheme and earn the high return on offer become its brand ambassadors, giving it a very strong word of mouth publicity, and attracting newer investors.
Nevertheless, at the end of the day, money is being taken from newer investors to pay off the older ones. This is how even…