In 2008, Bernie Madoff taught the world the meaning of Ponzi Scheme: “I never invested the funds in securities as promised,” he told a courtroom packed with victims and media.
Where did he go wrong? Madoff said that during the U.S. recession in the early 1990s, he was “compelled’” to provide the returns that he promised investors.
He should have listened to Herbert Bayard Swope. Then the vicious cycle of paying dividends and redemptions to existing investors using the money from newer investors may have never begun.
Perhaps he tried it before and got away with it. But this time, maybe starting five or more years ago, he gambled and lost, and the company’s financial situation slippery-sloped into an impossible equation. After three decades of maintaining a reputation as a guru stock picker, consistently delivering returns through bull and bear markets both, he is now known as the mastermind of the worlds largest Ponzi scheme in history, totaling $65 billion, and worse over, is now the modern day mascot for investor distrust around the world.
I feel sorry for him. Only four months after confessing to relatives that, “Bernard L. Madoff Investment Securities LLC, was one big lie,” he’s sitting in a jail cell gnawing on a hundred and fifty year sentence. His sons turned him in and they aren’t even accused of any wrongdoing.
I don’t think he deserves it. Does this seem wrong to you? Hey, the SEC is also to blame for this mess. The whole monetary system is to blame for this. Madoff was the fall guy for a problem a lot bigger than himself.
As James Cromwell, in his portrayal of the 74th United States Treasury Secretary, Henry Paulsen, said in the 2009 TV movie, The Last Days of Lehman Brothers:
“The west is fucked. We fucked it up. Not just you or me. All of us. The west is done. It’s over. You wanna call it a game? This is the game. You want your grandchildren speaking Chinese? We had Rome. We had Europe. And now this: Us. This thing with cars and stereos and hula hoops, we ran through it all.”
In 2005, I learned the meaning of the term Ponzi scheme while working in Asia. If you want to do it right, you choose a 50+ year old handsome white male model and take photographs of him in all sorts of business and leisure positions and outfits. You tell the guy it’s for stock inventory shots. What he doesn’t know won’t hurt him. Get pictures of him sitting at desks with hot female executives, holding his glasses and pointing at graphs. Giving presentations with expressions of mightyness on his face. What goes on the presentation screen can be added later digitally. You get shots of him on vacation, golfing and with family and kids. You can take your model over to the wax museum and get shots with all sorts of famous celebrities, or just photoshop images of them with your new fund king. Take hundreds of shots, because you could be needing them for a few years.
You might be thinking that this wouldn’t fool any Americans. Well you don’t have to fool people in America. They are in debt anyways. It’s the new money holders of Asia that this guy has to charm.
You give the guy an identity, choosing his name and nationality carefully. You register him a company and give it a cool name. You spend a little time creating an image for this guy. Give him a spectrum of businesses that he owns or runs. He needs to have a reputation for managing hundreds of millions of dollars in assets. He’s got to have connections with money too and the perception of a consistently profitable business. The perception of an array of successful businesses. A room full of operators on computers can help. The perception that he has multiple streams of income.
Oh, and then there’s that investment portfolio he’s got. His hedge fund is paying like 12 % per year. You practically have to beg him to take your money. It isn’t registered or listed with any securities exchange commission, but that way he can legally privately offer shares to investors in an offshore location, “not available to US residents”. It’s not obvious that it isn’t monitored by any government agency. It’s a private bidness offering. You know… Bidness!
In a country with plenty of new money investors and not a lot of government regulation, the investment opportunity is neatly packaged and given to local investment agents, and while the information isn’t placed in the brochure rack in the cool red and white waiting room due to lack of any approval by the investment agency, the customer gets what the customer wants, and when the customer complains to the agent that the interest rates in mainstream investment products offered by financial institutions in this country are too low, the highly motivated agent shows him this one “opportunity”.
The agent reminds the investor that he would be breaking local laws to invest more than a certain amount of his total net worth abroad, but on that note, the agent will mention that there happens to be one company offering returns of 12% or more per year.
There’s a bank logo on the brochure. It doesn’t mention anything about who the fund manager is. We assume that it’s the guy in the photo, the boss, who is the man calling the shots. He can get a better return than banks because he invests in the little guy when the timing is right. Arbitrage and shit. We don’t even want to know how he makes his money.
To make the deal seem even creamier, according to the full color printed brochure, your money is 100% protected. One of this guy’s rich buddies is offering a capital guarantee, so just in case everything falls apart, the investors still get their money back. His friend’s company logo is on the brochure.
Sure, it isn’t unheard of for a company to get a return of 1% per month. What they don’t tell you is that they need to pay those agents a commission percentage, and then of course there are administration fees and managerial fees from all these derivative based institutions.
And then of course there’s the money deducted to line the coat pockets of the real bosses with some cool extra spending cash. But hey, there is no up front initial investment fee. That’s what make’s it so marketable.
Too many investors create an illogical investment scenario in their head and think that, because they thought it up, that it should exist. Then suddenly after doing a little research, these dream investment products suddenly produce themselves.
For the true schemer, creating real investment products is too much trouble. Real fund managers are too expensive to hire. It’s easier just to fake it when you are planning on running away with the money anyway. That is when you pull out the distracting new unseen pictures of the mighty model, just before you get on a plane to one of those unextraditing countries.
It’s really not that hard to create a boiler-room stock scheme that can quickly bank a million dollars. In 2005, I began working for “an old Hongkonger Conman." He was one of the nicest guys you could know.
Just before I returned to Taiwan from the states where this book begins, my most recent attempt at a US career backfired two weeks into the gig, and I went on unemployment. Those unemployment checks paid for my new passport and my ticket back to Taiwan.
I was really close to broke. I had maybe 1000 usd, so when I was offered the job withing 10 days of arriving, I took it. I went for it because I had spent too much time hanging on melancholy notes. Too many flat chords do not a symphony make.
Gits Ferrari, California 2009
Mr He wrote:I bought your book and read it - note that IO have in the past read ind enjoyed Eric Mader-Lin's Taipei mutt and other books about Taiwan by foreigners. Upon seeing this free giveaway, I have decided not to buy another book from you again, after all if i wait a few months, I might be able to download it for free.
You haven't yet acknowledged my statement that there is a difference between a PDF file and an actually printed and color-bound book. Especially the version you have which is an atrocious edit, yet still a valuable collectors item due to the fact that it's the first run. A hundred years from now, it could be worth a bundle, but as Huey Lewis says, it won't matter to any of us here.
I made a free e-copy and mentioned it exclusively on Forumosa, however my intention was only to build up anticipation for the sequel TOSA, which is the real reason I started writing to begin with, and will never be made available (by me) free.
I hope y'all can take a look at the cover of the book: http://www.theoilsandsofalberta.com