How Long Could a Ponzi Scheme Survive?


Recently a friend posed this question: If the market hadn’t gone sour, would Bernard Madoff ever have gotten caught?

I wonder.

Instead of investing his client’s money, Madoff put it in his bank account. He said he knew the day of reckoning would eventually come. But would it have come if he were able to continually pay out the promised returns? Or did it only collapse because so many people demanded principal withdrawals at once? Did it only collapse because investors lost their optimism? And if Wall Street runs on hope, how is that different?

What do you think?

Image Credit: liber, Flickr

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  • Max

    The math is against him. His need for money increases exponentially. Since he didn’t put his money in the market the decline didn’t make a difference.

  • WillyJohnson

    The biggest Ponzi scheme on record is still ongoing. Its unfortunate that the American public doesn’t get it…but Canadians do.

  • A Ponzi Scheme depends on the current number of “investors” scheduled for payouts, and how much those payouts are scheduled to be. Madoff made 1% per month like clockwork (or so the victims said), so it really depends how many clients he had. Eventually, it would have collapsed on it’s own because he could not have found new investors.

    The market going south could have done it. As well as many of his clients were entering retirement age, so they may have been withdrawing more than normal.

  • Well, the biggest Ponzi scheme has been running for more than fifty years.

    It’s the UK’s National Insurance scheme.

  • Devdas

    That would depend. What about the energy and waste Ponzi schemes which have been going on for generations?

  • Without a market meltdown no one would ask Madoff any questions, the chances are fair that the set-up would outlive him. He was the first amongst the equals. He came from the bluest of the bloodlines as far as money management goes in NY. He was top philanthropist who managed the money of the shrewdest of investors. He was a pious thief and this is a kind of pedigree that is exceptional. A convicted felon has a record he had none, rather the only record he had was managing money of the smartest.

    However, all said pedigree of this global outbreak is in one way was so unique that unlike the past depression the characteristic of this contagion is designed to ruin of the richest, the chances were good that he may have been outed. This annihilation of implicit wealth is a standard act of zero sum game where moral hazard demanded that the richest amongst the population should suffer the most. So in a way it is act of providence to build a level playing field for everyone. This is a crisis but in my opinion represents an opportunity too.