Blogs and Stories
The Original Bernie Madoff
Instead, a financial fraud as epic as Bernie Madoff’s deserves the appropriate historical comparison, to someone who raised 50 times more money than Ponzi and lasted 10 times as long. As the Madoff firm’s Web site noted, “In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world.” That line is truer than anyone imagined.
By October 1929, Ivar Kreuger was a household name. Investors knew him from magazine and newspaper photographs, his face constantly in shadow, with a sharp nose and small eyes, deep-set and dark. If Ivar had been chomping a cigar, one might have mistaken him for a slimmed-down Al Capone. From a modest background in coastal Sweden, Ivar had come to belong with the whitest of the white shoes, including his bankers from venerable Lee Higginson & Co. He wore charcoal suits and conservative pinstripe ties, and carried a cane and a black dispatch case. Although he was among the world’s wealthiest men, he was not yet 50 years old.
Ivar had first raised money from American investors just seven years earlier. His pitch was to lend to the struggling governments of Europe in exchange for monopolies on the production and sale of matches. Matches were a staple, something the typical American needed almost as much as food, clothing, and shelter. People used matches to light kerosene lamps, gas heaters, stoves, and, of course, tobacco. When the sun set, they struck matches to light fires for cooking, candles for reading, and cigarettes for smoking. Everyone carried matches; everyone used them; everyone bought them.
Since 1922, Ivar had delivered on every promise. He secured match monopolies through Europe, and paid double-digit returns. As his reputation soared, no one saw his companies’ intricate relationships with subsidiaries in Liechtenstein and Holland, or cared that annual reports were increasingly opaque. Everyone trusted Ivar. Why question him when the returns were so reliable?
Yet overall investors were starting to lose faith in markets. During the first three weeks of October 1929, stocks plunged, even as Ivar held steady. Mania turned to panic, and suddenly it was impossible to raise money. The credit markets seized with fear, and corporations broke deals. Lee Higginson was anxious to close Ivar’s newest securities issue, so it could earn a commission—a rare feat during the last quarter of 1929.
When the markets opened on Monday, October 21, so many investors dumped shares that by noon the New York Stock Exchange ticker was a full hour late. The markets plunged again the next two days. Ivar appeared not to be concerned. He sensed the panic, but didn’t want anyone to see him falter. He knew markets reflected emotions and perception. In finance, there was no such thing as reality. There was only, as J. Pierpont Morgan had intimated, what traders thought of a man’s character. If Ivar was a shining beacon of confidence, his securities would maintain their value, even if the rest of the market crashed.
With his photo on the cover of Time, Ivar put on a show of such confidence that he persuaded American investors to buy his new issue of “American Certificates,” even as the rest of the market collapsed. This complex new investment was based on Ivar’s promise to close an unprecedented deal with Germany: a massive loan in exchange for a match monopoly there. Investors bought the certificates, even though neither Ivar nor the German government had yet approved a monopoly deal. The media coverage of Ivar had been enough to spur them to believe.
The next day, the bottom fell out of the market. Panicked crowds gathered outside the Exchange as share prices collapsed on record volume. Rumors spread about brokers jumping from buildings downtown. The New York police commissioner sent a special detail to Wall Street. Eleven well-known speculators killed themselves, and many more were bankrupted.
How Obama Wins in 2012
As vice chairman of Public Strategies and president of Maverick Media, Mark McKinnon has helped meet strategic challenges for candidates, corporations and causes, including George W. Bush, John McCain, Governor Ann Richards, Charlie Wilson, Lance Armstrong, and Bono.
10 Power Food Combos
Divya Gugnani is the CEO and founder of BehindtheBurner.com, an emerging culinary media brand that creates expert-based content about food, wine, mixology, and nutrition.
The Dodd Wall Street Charade
Frank Partnoy is a law professor at the University of San Diego and has written several books about financial markets, including The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals (just out from PublicAffairs).
Geithner's Stress Test Sham
Frank Partnoy is a law professor at the University of San Diego and has written several books about financial markets, including The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals (just out from PublicAffairs).
Hedge Fund Managers Are the Heroes of this Crisis
Frank Partnoy is a law professor at the University of San Diego and has written several books about financial markets, including The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals (just out from PublicAffairs).
missbike
And a scant fifty years later- Reaganomics! The Republican free for all that let it happen all over again.
Didn't anybody smart enough to sleep their way into an SEC job wonder why there was all that regulation back in the day? Or were they doing too much blow with the folks at Interior...
exploora
Everybody knows that a Ponzi scheme is named after Ponzi because his type of scheme was different than the typical pyramid scheme. Madoff was the one who described his scheme as a Ponzi scheme because that is what it is was.
A pyramid scheme gets the people to do the work, the recruiting and selling of whatever it is they sell to make it appear like a legitimate business, where as the Ponzi schemer will offer to do all the work, and he only expects the person to hand over money, then old investors get some of the new investors money until the scheme runs out of new investors then it collapses due to the lack of new money, or when a demand for getting money back is greater than the amount of money which can be put back in.
That is why Madoff's scheme kept going for so long, cause so many people invested in it without doing any work. It was the lack of work and connection to the where the source of returns came from that hid what the scheme was, from investors and SEC, making the IRS one if the scheme's inadvertent benefactors.
This scheme could have have gone on for ever, as long as more money was being put in than was being taken out. That is why it grew the way it did.
They were all blowing into the bubble, and then pop.
exploora
No one is comparing the men, Bernard Madoff to Charles Ponzi, they are calling the scheme what it is, a ponzi scheme because calling it an affinity scheme would be harder to imagine what it is.
A ponzi which relies on security fraud and deceiving investors in investing money that won't actually be invested is a one layered scheme, whereas the multi layer schemes in typical pyramid schemes, collapse a lot faster.
A ponzi scheme is really an affinity scheme. That is what it should be called, but no one would know what you were describing if you called it that.
If anybody had looked into where the returns were coming from they would have known what it was, which matters more than the name they use to describe it.
But Madoff was allegedly able to hide the nature of the scheme, through the proprietary rules which protect cash flow and inadvertently making IRS one of its biggest, benefactors, and maybe at the end the only benefactor, if people have to give back their "earnings" and land up at sum zero, technically IRS may be the only one at the end who actually made money off this, not counting Madoff and alleged company.
If you are an investor who was defrauded from this, you would call it a horrible rip off.
exploora
There is a huge difference between Kreuger and Madoff schemes. Krueger's scheme was not a ponzi scheme, Madoff's scheme was. The fact was what Madoff did was such a simple ponzi scheme, and wasn't caught for so long is incredibly outrageous, that is what the issue is. There was no trades. It would have been easy to have audited Madoff's scheme compared to Kreuger's. In madoff's scheme, his accountant had his own alleged fraud going, he was not doing the job he was supposed to be doing, in Kreuger's case he made it very difficult to audit.
[According to Professor Partnoy, there are differences between the feted Kreuger and the obscure Madoff.
"What Ivar did wasn't as simplistic as a Ponzi scheme," he says.
"There was an underlying legitimate base to what Ivar was trying to do, but he was paying out more money in returns than his schemes were earning."
A Ponzi scheme is a fraudulent investment scheme that pays investors using money paid in by other investors rather than real profits. ] excerpted from http://news.bbc.co.uk/2/hi/business/7939403.stm
[He also conjured up "options", "derivatives" and stashed cash away in secret subsidiaries in Liechtenstein and Switzerland. Kreuger then began Enron-style financial engineering, reporting profits when there were none, and paying his generous dividends by attracting new investment or plundering existing ones. ] excerpted from http://news.bbc.co.uk/2/hi/business/7939403.stm
["The bondholders did get a large chunk of their money back. In contrast, where did the billions of missing money in the Madoff scheme go?"
In March 1932 Kreuger shot himself in a hotel room in Paris, just before a meeting with bankers, at which he would have faced some extremely tricky questioning.
A number of forged bonds had been found in his safe - on which he had also forged signatures - which were then used as security against his loans. ]excerpted from http://news.bbc.co.uk/2/hi/business/7939403.stm
hockeydog
The secret appears to be "become too big to fail". When the boys in power all share a vested interest in you prospering, and your ulitmate survival, you will survive and prosper.
Gives a new meaning to Mr. Spock's "live long and prosper".
Now, at the risk of sounding like a broken record, it bears reminding that the stock of the richest man in the world, Warren whatsisname is too expensive to purchase except by the uber-rich. This makes it too big to fail.
The billions funneled into Berkshire Hathaway through the backdoors of the AIG counter-party agreements, and through the outsized holdings in Wells Fargo continue to keep this balloon over-inflated.
Yesterday's close $94,390 per share for this "value" investing holding company speaks for itself. If my rantings strike you as "sour grapes" keep in mind that when the returns were rolling in for the Madoff investors, any questions raised were simply dismissed in similar fashion.
guiltybystander
my dad once charged a guy twice for the same thing at his store, and now I got a hankering to get a ponzi scheme going-- coincidence? I don't think so (and can I really get away with it for 40 years? that is so cool)
Thank you.
As a first time user, your comment has been submitted for review. It can take anywhere from a few hours to a day or two for your comment to be reviewed, depending on the time of week and the volume of comments we receive.