Exploring Madoff's Ponzi Scheme Will Unveil the Causes of This Global Monetary Crisis 35 comments
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For those of you that have been shocked by the fraud committed by former U.S. NASDAQ Stock Exchange Chairman Bernard Madoff in running a Ponzi-scheme disguised as a hedge fund that will create an estimated USD $50 billion of losses for investors, you shouldn’t be. Why? Because we all accept and enable a much bigger global Ponzi scheme that dwarfs the fraud committed by Mr. Madoff.
For those of you unfamiliar with Ponzi schemes, a Ponzi scheme basically is any business proposition that fulfills returns to investors not through gains achieved by tangible, real investments but through the simple use of subsequent investors’ money. In other words if you invest USD $1,000 in a Ponzi scheme and are promised 15% returns after one year, the Ponzi scheme operator will merely take USD $150 of another investor’s money to provide you with your 15% returns after one year.
Though such a scheme is a scam, it can work en perpetuity as long as the majority of investors in the scam do not demand their money back at the same time. If they do, this is what will cause the scam to crumble. The Madoff hedge fund is a perfect example of how a Ponzi scheme can successfully operate for decades as long as no investors recognize the scam.
Fellow hedge fund manager Harry Markopolos recognized the scam almost a decade ago. After Mr. Markopolos studied the remarkably steady returns of Madoff’s hedge fund and the stock-options strategy reportedly being utilized by Madoff to obtain his stated returns, Markopolos concluded that the results were impossible to achieve with the investment strategies Madoff claimed to be utilizing. In fact, Markopolos explicitly wrote about his concerns almost a decade ago in a letter he sent to the U.S. regulatory body, the Securities Exchange Commission [SEC], in which he stated, “Madoff Securities is the world’s largest Ponzi Scheme.” One cannot be more explicit than this accusation.
In fact, Markopolos’s suspicions of Madoff’s Ponzi scheme was not a one-off event, but he repeatedly informed both the New York and Boston bureaus of the SEC of Madoff’s fraud over a nine year period, according to a Wall Street Journal investigation. Yet, the SEC did nothing to shut down Madoff’s Ponzi scheme. Why? Although, Markopolos spotted the Ponzi scheme, and other firms paid to vet hedge funds as honest also spotted the Ponzi scheme, investors in Madoff’s hedge fund did not. Thus, as long as the victims remained unaware, the fraud incredibly lasted more than nine years after it was first identified.
I can only speculate as to the reasons the SEC would look the other way when faced with overwhelming circumstantial evidence of fraud. Still, the SEC’s response to Markopolos’s accusations of fraud and inaction almost exactly mirror the U.S. Commodities Futures Trading Commission’s [CFTC] sluggish response and inaction to heavy, compelling circumstantial evidence of possible fraud that is currently happening in the COMEX gold and silver futures markets (follow this link to read some of this compelling circumstantial evidence).
Besides the obvious reasons why regulators would acquiesce to powerful investment banks and commercial banks and enable them to operate in manners that oppose the interest of the public, what other reasons would regulators have to ignore compelling evidence of fraud? And this is the answer that we must unearth if we desire sustainable solutions to this current economic crisis. If we do not unearth this answer, I guarantee you that within another one or two decades after this current global economic crisis passes, the same crisis will happen again.
As the saying goes, once you tell one lie, one is forced to then cover up that lie with numerous other lies and the chain of lies never ends. The same applies to fraud. Nicola Horlick, the manager of Bramdean Alternatives in the U.K., which may lose 9 percent of her funds invested in Madoff’s hedge funds, told the BBC, “This is the biggest financial scandal, probably, in the history of the markets.” This statement is untrue. In fact, Madoff’s hedge fund fraud is an insignificant speck in the galaxy of financial fraud. The biggest fraud of all, one that absolutely dwarfs the $50 billion fraud committed by Madoff, is the fraud of our current fractional reserve monetary system.
What happened to Madoff’s hedge fund would happen to any large U.S. commercial bank under similar circumstances, and I dare anyone to prove this otherwise. Madoff’s hedge fund’s fraudulent scheme was exposed after more than a decade when investors cumulatively asked for $7 billion of their money back. If investors had asked for such a large cumulative amount in redemptions in 2000, Madoff’s hedge fund would have likely collapsed eight years ago instead of today. According to a January, 2008 SEC filing, Madoff’s hedge fund had approximately $17 billion under management; thus $7 billion represented about 41% of the fund’s deposits.
Now consider if the same thing happened at a U.S. Commercial Bank. If all depositors of any major U.S. commercial bank asked for 41% of their deposits back within a several day span, would any of you doubt that such an action would bankrupt that bank? Bank runs are always incorrectly described as a loss of confidence in a bank that results in a bankruptcy. The fact of the matter is that if the bank had your money and all the money of all other depositors in their vaults, a bank run could not happen. A bank run leads to a bank bankruptcy because of a simple fact. Just as was the case with Madoff’s hedge fund, they do not have your money.
Thus, if two basically equivalent actions would bankrupt two businesses, why do we consider the leader of one business despicable for his fraudulent activity while we simultaneously accept the action the leader of the other business as “legitimate”? And this is the fraud of our current monetary system and fractional reserve banking system that is the root cause of all global economic upheaval today.
Sure I know that academics will criticize my criticism of the global monetary system with replies of “this is how banking has always been and besides, what else is one going to do, keep their money underneath the mattress?” But the fact remains: this is not how banking has always been. There have been historical periods of a sound currency and sound monetary systems with centuries of price stability both in the U.K. and the United States (but this is a much more complex topic for another day).
Today, most Americans believe that the Reserve Ratio Requirement [RRR] of U.S. commercial banks is 10% because that is the “stated figure” given by the U.S. Federal Reserve. Recently, I asked a few U.S. bankers that have been in the industry for 10 years and Private Bankers that have been working at U.S.banks for more than two decades what the RRR is for U.S.commercial banks, and they all answered 10%. Ten percent is the textbook answer, but it is an Alice in Wonderland fantasy figure and does not reflect reality in the slightest. So yes, even the viral internet movie “Zeitgeist” was erroneous in their explanation of the fractional reserve banking system when they quoted the U.S. reserve requirement for commercial banks at 10%.
According to Robert H. Rasche, a senior vice president and director of the Research Division at the Federal Reserve Bank of St. Louis, “Under the legal reserve requirement ratios that were established in December 1990 and April 1992, and the home-brewed ratios allowed via the implementation of retail deposit sweep programs since 1994, reserve requirement regulations no longer are binding constraints on the portfolios of most depository institutions.”
In case you didn’t understand that statement, in plain English, Mr. Rasche of the U.S. Federal Reserve stated that most U.S. commercial banks no longer abide by any reserve ratio requirement at all. In fact, for many types of bank deposits in the U.S., the stated reserve requirement is amazingly zero percent! In 1991, the U.S. Federal Reserve reduced the reserve requirement for all Eurodollars (all foreign currency deposited in U.S. banks) to 0%. In December, 1990 and January, 1991, for all non personal time deposits (term savings accounts owned by corporations, deposits representing the proceeds of a promissory note or banker’s acceptance, deposits owned by Edge Act Corporations and Agreement Corporations, and deposits owned by foreign banks), the Federal Reserve reduced the reserve requirements to 0%.
If you are a U.S. bank customer, and you wondered why U.S. banks have always shuttled anyone with significant savings into a Money Market Deposit Account [MMDA] for the past decade, you need not look any further than the reserve requirement regulations. Though banks will never tell you why they want you to sign up for a sweep account, the reason is simple. The reserve requirements for MMDAs, as governed by the Federal Reserve’s Regulation D, is 0% as well. Thus if you have your money in a type of account that has any type of reserve requirement, it is the banks' goal to sweep your money into accounts that have zero reserve requirements.
And if you think the situation is better in other developed and leading economies, you would be sorely mistaken. The Bank of Canada has also since abolished reserve requirements while the system of European Central Banks, in the early 2000s, only established a pathetic 2% reserve requirement on almost all liabilities (Source: Research Division at the Federal Reserve Bank of St. Louis).
Click to enlarge
Click to enlarge
The two charts above, courtesy of the Board of Governors of the U.S. Federal Reserve, visually illustrate the degradation of the safety of the U.S. commercial banking sector. Since the reserve requirements for U.S. Money Market Deposit Accounts was reduced to 0%, one can observe the banking industry’s push to shuttle their clients’ money into MMDAs. Concurrently, you can also notice the precipitous decline in U.S. commercial banks that are now bound in their activity by reserve requirement regulations.
As of 2000, according to the U.S. Federal Reserve Board of Governor’s own statistics, more than 70% of all U.S. commercial banks were not constrained in any way by reserve requirement ratios (this figure may even be higher today but I couldn’t find any more up-to-date statistics regarding this). Due to the complicit nature of U.S. regulators that have allowed the majority of U.S. commercial banks to virtually lend out every single dollar that they receive in deposits, and an institutional fractional reserve banking system that allows the creation of money out of thin air, any money deposited in the U.S. commercial banking system is virtually guaranteed to be returned to you with less purchasing power. In other words, every dollar that you put into the U.S. banking system, by the time you withdraw it, will be able to buy less than the dollar you gave them. And that is the biggest Ponzi scheme today.
Disclosure: None
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This article has 35 comments:
> jack
(Grandma Got Run Over By a Reindeer)
WilliamBanzai7
(chorus)
Palm Beach got run over by Bernie Madoff's Ponzi reindeer
Just two weeks before Christmas Eve
You can say there's no such thing as a Wall Street scamster
But as for we in America, we believe
He'd been chalking up bogus Alpha
So the SEC said he had to go
And as he waltzed out of his lair on Third Avenue
Defiant as he was, he said, "Positive returns, hell no!"
When they woke up yesterday morning
It was clear the Palm Beach clique had been attacked
May as well stick a note to their own foreheads
Saying, "Oh Lord, please give us our money back!!"
(repeat chorus)
Now we're all so proud of our regulators
They've been taking this so well
See them crammed in Madoff's office
Knowing that SEC Chairman Cox will soon be sent to pink slip h-e-l-l
It won't be a Merry Christmas thanks to Madoff
Nor a Happy Hannukah as well
And we just can't help but wonder
Dosn't all of Wall Street have that pungent Ponzi smell?
(repeat chorus)
Now that Madoff's books are on the table
See all the other asset managers dance a jig (Ah!)
And the bogus billion dollar earnings
That not surprisingly had been rigged!
Be forewarned all you rich country club investors
Better watch out for yourselves!
You should not be dreaming of serial Alpha
With hedge fund goofs who play golf better than yourselves!
(repeat chorus)
All based on the insane notion we can "grow the economy" enough to make up the difference. Talk about mass deception..
Speaking of, let's talk about the simplest attribute of freedom. Trust.
We don't have it, nor will it come about in my lifetime -- Im sure my tier 3 assets are less than yours.... Trust me!
Banks are set up as depositories for depostor's money. Most of the money that is desposited is then loaned to borrowers or invested in different types of rated securities. If there is a run on the bank the bank may not have the liquidity to immediately pay the depositors money. This off course does not mean that the bank has no money or assets as is usuaully the case in a Ponzi scheme.
As a result of the myriod of investment vehicles that have been "invented" in the last few years, many banks have invested despositor's money in such things as mortgage backed securities. Many of these so-called securites have turned out to be of questionable value. This off course means that the banks who invested in these securities are holding assets of questionable value. It may be that some of the executives of these banks have concealed the actual losses from these assets in order to ward off a run on the bank. This off course has the appearance of a Ponzi scheme. Perhaps the U.S. Goverment by bailing out these banks has actually allowed these banks to conceal their actual losses and illiquidity.
I think that many hedge funds and mutual funds could actually have been Ponzi schemes. Only time will tell. But where there is smoke fire usually folows.
In the US, and world wide, we're underfunded for future needs in health care, education, energy, environment, and retirement, to name a few. We are spending money we don't have today, in all these areas, and expecting future generations to pay it off, in addition to saving for their own needs. Good luck.
In today's reality, everybody is running a Ponzi of some sort. Paying by credit card instead of cash. Buying a house with a 30-year mortgage. Borrowing against your house to buy stock or a new car. It's all a "buy now, pay later" deal, with huge penalties if you can't pay on time.
The world's economy is based on people spending more than they currently have, going into debt to the bankers, and spending the rest of their lives paying high interest and low principle on the maximum amount of debt possible. This is just the current version of the "indentured servitude" model the dark overlords have been using for thousands of years.
Folks, if we really want reform, we need to change HOW government is funded and operates:
1) Abolish the IRS, income, property, and cap gains taxes. Fund government only with sales taxes and tariffs.
2) Pass a balanced budget amendment.
3) Term limits for Congress.
4) NO gifts or political contributions to politicians of ANY KIND from corporations...only from individuals.
A good first step for the needed tax overhaul is the Fair Tax:
fairtax.org
PLEASE read it and consider signing up for the mailing list. We must each get involved, at least a little -- if only by helping spread the word!!
A very painful but probably necessary solution is to default on debts and issue greenbacks. Ship our debtor nations grains, advanced energy equipment and older military hardware to avoid a major 3rd world war, live as a 2nd tier nation and start over. The citizenship will force such a scenerio at some point, we may as well begin building many contingency plans.
Fractional reserve banking should likewise be abolished. Bank and finance people would argue that fractional reserve lending makes the economy go round.
Others would argue that it allows banks to collect interest on a much larger pool of money than they actually have access to.
There are other ways to supply credit to an economy then letting banks run amok like they do today.
Without financial regulation, the order of the day is - figure out any way you can, create any kind of scheme, cobble together any type of financial junk and market it to the masses or some wealthy "friends" with no concern about who gets hurt. Banking reserves were supposed to be there to give some legitimacy to the banks position as a depository and lender. A 20% bank reserve made some sense, but not a 10% reserve and certainly not 0% reserve where the Fed is printing money and selling bonds at 0% interest.
Maybe the banking system should crash and like a phoenix arise in a new highly regulated depository format where the profit motive is gone. Why should anyone deposit money into a for profit banking system where now the only security is provided by the Gov. which is bankrupt? Shouldn't depositors be the ones making the decisions where their money is invested. If they want to gamble with their money, it's their business. But when the banks make the investment decisions, it's with your money. This whole thing stinks.
It's nice to see that people on this blog are not financially ignorant. Our eyes are opening to the scam that's being run on us by the fractional reserve bank-debt money system. Once you realize that all money begins its existence as bank-debt loaned at interest, it becomes possible to understand the true nature of the world's financial woes as Mr. Kim's article describes.
If all debt is repaid there IS NO MONEY. This truly is "indentured servitude" as rogerk2 puts it. The obvious solution is the issue of debt free money either as private money or government money, but that's not as easy to do as it seems even thought the federal government is constitutionally required to do it.
American history is the story of the battle between financial freedom and the European money power--Rothschild--tha... sought to control US money as it did Europe's. The first Rothschild "central bank" was the Bank of England in 1694.
To avoid English currency control Ben Franklin's America issued its own debt free money, colonial scrip, which was followed more formally by Continentals. The European 'banksters' engineer financial panics to kill free currencies and replace them with their own, as they did with scrip and Continentals and later with Lincoln's greenbacks.
Andrew Jackson killed the 2nd National Bank and US central banking stayed dead for over 70 years. Unfortunately, people like Lincoln, Garfield and Kennedy, who try to institute America's own money against the banksters, share a common fate.
Gold bugs on this website advocate a return to gold-money or gold based money but I wouldn't be too sure about that until we know who presently owns all the gold. I suspect the banksters have amassed a large portion of the world's gold so when they offer to "save us" from financial meltdown with "sound" world banking on a new gold standard they will actually be finalizing their ownership of the world's money.
That's a very important, basic difference that any child should be able to understand.
THOSE ARENT PONZI SCHEMES.
PONZI SCHEME DOES NOT MEAN BORROWING MONEY.
PONZI SCHEME IS WHEN YOU TAKE INVESTMENTS AND SQUANDER THEM AND PAY INVESTORS BACK WITH NEW INVESTORS MONEY IN AN ACT OF DECEIT.
WHEN BANKS TAKE YOUR DEPOSITS, THEY DONT JUST POCKET THE MONEY, THEY INVEST IT/LOAN IT IN ORDER TO MAKE MONEY AND PAY DEPOSITORS BACK WITH RETURNS ON THEIR INVESTMENT. I AM ACTUALLY A SOCIALIST AND I UNDERSTAND THIS BASIC FUNDAMENTAL CONCEPT OF FINANCE. FRACTIONAL RESERVE BANKING IS GOOD AND NECESSARY AND IF YOU DISAGREE YOU ARE AN IDIOT.
On Dec 16 12:11 PM rogerk2 wrote:
> So far, the commenters still haven't seen the really big picture...the
> whole world economy is a Ponzi scheme, taking money from future "investors"
> to pay for stuff current investors demand.
>
> In the US, and world wide, we're underfunded for future needs in
> health care, education, energy, environment, and retirement, to name
> a few. We are spending money we don't have today, in all these areas,
> and expecting future generations to pay it off, in addition to saving
> for their own needs. Good luck.
>
> In today's reality, everybody is running a Ponzi of some sort. Paying
> by credit card instead of cash. Buying a house with a 30-year mortgage.
> Borrowing against your house to buy stock or a new car. It's all
> a "buy now, pay later" deal, with huge penalties if you can't pay
> on time.
>
> The world's economy is based on people spending more than they currently
> have, going into debt to the bankers, and spending the rest of their
> lives paying high interest and low principle on the maximum amount
> of debt possible. This is just the current version of the "indentured
> servitude" model the dark overlords have been using for thousands
> of years.
Energy is more universally needed and wanted than gold, in these times. I am trying to hang onto a house while of an age where a job other than one not connected to health-care cost would be close to impossible to find. I have a roommate whose job is in energy-regulation. It seems likely her job would be the last to go.
Oops. Got to go feed the stove.
Energy is an addiction with current building standards in much of the world. In a frigid place, with an energy-inefficient built environment, people will reliably want energy. If a utility, whose lifestyle is financed by government-enforced monopoly, announces a huge price hike, the price of wood will go up also, and stove makers and installers will be busy.
Some of the feds would like to bust every garage sale and neighbor-help-out findable, but I don't see how this is going to be practicable for them or for the states either, in the long term.
Some localities are prepared for this as their right-fringes and their left-fringes both saw it coming and began brainstorming what to do about it all. I love hanging out in the fringes and trying to get them to cross the great divides between them. Unusual allies (sociologists used to call this phenomenon cross-cutting cleavages) happen as people look away from the usual suspects (unemployment lines that don't answer) to find ways to survive. I have found throwing myself on the mercy of neighbors when in need to be much more satisfying because a few steps next door on a snowy day tends to end up being a back-and-forth, as we inventory and horse-trade about who's got more of this or that.
APPLAUSE!
Naked shorting is like fractional reserve banking: you deliver statements of account based on something you don't have. It's a sham. All the B-schoolers go along because it gives them a shot at being the first to discover yet another new way to abuse the system and get rich.
I'm sure Bernie had a better lifestyle for the past 15 years than many of us will ever have, period. I'm sure his kids will be well off for the rest of their lives. So what if he spends a few years in jail and pays a few million in fines? So what?
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, (i.e., the "business cycle") the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."
Thomas Jefferson, President of the United States 1801-1809"
It does however explain why everyone is falling all over themselves to acquire bad banks that have a lot of cash and no reserve requirement since they have convinced all their depositors to put their money in FDIC unprotected accounts. That is until the Treasury guaranteed those funds to facilitate their buyout.
I thought that banks had to keep these "tiered reserve" ratios as a way to demonstrate the viability of the fractional reserve system? Nevertheless, I can see the venue for chicanery as these "reserves"turned out to be not so solid.
As regards Bernie Madoff... AND THIS IS JUST WILD SPECULATION on my part....I believe that the money is still there and not lost or Ponzied as he would like us to believe.
According to me, he diverted the money to offshore accounts that still have the cash under numerous assumed names.
Here's why. According to the WSJ, BM claimed that he used covered hedges on stocks to yield his vaunted 11% steady return. Experienced traders will tell you that this system does not work in every market condition, and for the duratrion claimed could never have been accomplished.
secondly, $50 BLN was, until recently, a serious bunch of money. To buy and sell calls and puts against such a position would greatly overload the system. There is no evidence that such large scale option trades took place.
Thirdly, it is claimed that he alone took careof these accounts on the 17th floor of his corporate headquarters and that his two sons were on the 18th and 19th floors, and had no dealings with Dad. So how does one active socialite have the strength and time to maneuver a $50 BLN behemoth in complex transactions?
Now, the man is 70 years old and i put it to you that he must have recently been diagnosed with a grave illness. What better way to abscond than to let his two sons "expose" him. He's dead meat anyway, and by exposing their Dad, the sons escape scrutiny.
So don't look for trading anomalies, look for money transfers to Cayman Island and such.
Anyway...just a thought.
"Thus, if two basically equivalent actions would bankrupt two businesses, why do we consider the leader of one business despicable for his fraudulent activity while we simultaneously accept the action the leader of the other business as “legitimate”?"
A long-range missile will destroy both a car and a bike, so why do we consider one safer to take on the highway? What a silly comparison.
From "It's a Wonderful Life"
You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.
From "the Simpsons"
"Joe, what the hell are you doing with my money?!" <Punch to the face>.
Let's think twice before punching everyone in the face, huh?
So it begs the question if there is a difference between over-leveraging and mismanageding assets and outright stealing - and the answer is YES.
If all your money has been in Gold bullion or some other value of storage since 1990, perhaps you have a soap box to stand on, but i'm guessing you put your money in the bank like everyone else because you believed in the economy and government that would backstop it.
As for your currency, if you made a conscious decision to be part of the economy and have a job that pays american dollars (maybe you're doing this for free) then you come across as a "told-you'so" hypocrite.
Unlike a Ponzi scheme, banks don’t use deposits to pay interest to previous depositors, they leverage deposits to make loans to others. The profits are (partially) returned to depositors as interest.
Please, say in several words
What happen to money market after such Ponzi firms craches and
what experience to all after