The Fed's Contribution to Ponzi Schemes

12% Returns - “Guaranteed”

You don’t know whether to laugh or cry every time another Ponzi scheme comes to light.

July 28 (Bloomberg) — The U.S. Securities and Exchange Commission said it halted a $50 million Ponzi scheme near Detroit that raised money for a real-estate investment fund and targeted the elderly.

A federal judge in Michigan agreed to freeze assets after the SEC sued John Bravata, 41, and Richard Trabulsy, 26, claiming they lured more than 400 investors by promising 8 percent to 12 percent annual returns, the agency said today in a statement. Of $50 million raised since May 2006, less than $20.7 million was spent on real estate, the SEC said.

“Investors thought they were investing in a safe and profitable real-estate investment fund, but instead their money was being used to pay for luxury homes, exotic vacations and gambling debts,” said Merri Jo Gillette, director of the SEC’s regional office in Chicago.

The defendants allegedly lured investors by saying the fund offered “safer returns” for individual retirement accounts. More than half the proceeds raised by BBC Equities were conversions from investors’ IRAs, the regulator said.

This should sound very familiar since all Ponzi schemes rely on the same ridiculous promises, very high rates of return with virtually no risk. The promoters of this latest Ponzi scheme promised returns 1200% higher than what is available on a 2 year treasury note with virtually no risk. 400 hundred “investors” took the bait, apparently believing that 12% returns were available with little risk.

Knowing exactly how many potential investors had to be solicited in order to get 400 to sign up would provide some interesting insights on investor behavior. Do a significant percentage of individuals fall prey to smooth talking con men promising returns that would normally imply high risk? As we have seen from the Madoff Ponzi scheme, many wealthy and sophisticated investors succumbed to the lure of high returns with low risk.

Desperate Search For Yield Due To Fed ZIRP Policy

This latest Ponzi scheme may be unique in that the perpetrators targeted the elderly. Con men have a natural instinct to prey upon the most vulnerable and offer them what they need the most. Many elderly investors who previously depended on interest income from savings have seen their incomes reduced to virtually zero as the Fed has forced rates at the short end to near zero.

Super low cost funding from saver deposits have resulted in huge lending spread profits for the banks. A Fed zero interest rate policy [ZIRP] is the silent unpublicized part of the bank bailout. In this zero sum game, the banks are the winners and the savers are the losers. How many financially prudent savers have been forced by the Fed’s policy of zero rates to take high risks (in search of yield) that has resulted in catastrophic losses?

Savers who must have income to survive have been forced by the Fed to assume more risk with longer maturity and / or riskier asset classes. Some savers, in their desperate search for yield, have wound up losing everything to Ponzi scheme operators.

For retired savers searching for higher yields and who can tolerate price fluctuations, consider allocating some assets into diversified blue chip companies that pay dividends such as:

Altria Group (MO) 7.2%
Kraft (KFT) 4.1%
Merck (MRK) 5.1%
Home Depot (HD) 3.5%
AT&T (T) 6.4%
Philip Morris Intl (PMI) 4.6%

Disclosures: No Positions

Comments

[Ferdinand E. Banks]

Here we seem to have a classic issue from welfare economics: the innocent taking the fall as a result of the bad faith and stupidity of the delinquent.

I'm thinking of George W. and Bill Clinton in the roles of the latter, because without those two louts the war in Iraq would not have taken place, and Americans might still believe in truth and logic.

2009 Jul 29 09:24 AM

[john s. gordon]

we were promised by wolfowitz & co, that the iraq war would cost the taxpayer nothing & would be financed totally out of oil revenues. did anyone actually believe that?
> jack

2009 Jul 29 09:58 AM

[a. palmer jr.]

I have a hard time believing anything said by anybody in power. These people like Wolfowitz have no idea who's going to pay for what but they do know that if their plan fails they can always fall back on the American taxpayer to fund their follies. I don't believe anything from either major party because they'll say anything to stay in office or to get into office. They're must be some awfully nice perks to being in office, maybe I'll check into that!

2009 Jul 29 12:29 PM