Kevin Lamson

Exploring Madoff's Ponzi Scheme Will Unveil the Causes of This Global Monetary Crisis

Well written piece. However I do take issue with your lumping all banks with Ponzi scheme operators. Ponzi scheme by definition means a scheme whereby the schemer obtains money by promising huge returns on the money. After obtaining the funds, in place of actually investing the money as promised, the Ponzi schemers uses the money for other purposes which include financing unuausally expensive personal lifestyle, gambling and other losses, and acquiring expensive personal and real property, which gives the outward appearance of success. Because the Ponzi schemer has spent the money he was given to invest he no longer has the money or any assets he can access to repay the principal to the party who gave him the money. This is why he must continually lure new investors into his ever growing web of deceit.

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.