Bernie, Ponzi and Social Security

You all know by now that Bernie Madoff was given a 150-year sentence for perpetrating a $65 Billion Ponzi scheme. That’s 145 years more than the original Charles Ponzi received on November 1, 1920. And Ponzi only served 3-1/2 years of that sentence in the Federal Penitentiary. After being released, Ponzi got another 9 years in State Prison in MA, however. He was then deported back to Italy and finally died on January 18, 1949 in Rio.

Ponzi promised 50% profit in 45 days or 100% profit in 90 days; investor’s choice. He originally bought Postal Reply Coupons in other countries and then cashed them in the USA. Due to the foreign currencies exchange-rate differences, it was a form of arbitrage. But the paperwork to make this happen was so involved that there was just not enough profit to warrant all the work required. That didn’t slow-down Ponzi, however. He kept promoting his scheme despite the lack of actual Postal Reply Coupons in his vault.

So the concept of taking money from one person early-on and then repaying that early person with monies obtained from later investors has been called a “Ponzi Scheme” ever since. Sound like anything else in which you’re forced to participate?

It wasn’t even original to Ponzi. Charles Dickens described a similar scheme in “Little Dorrit” which was published before Ponzi was born. Speculation is that Ponzi actually learned of this concept from William F. Miller, a Brooklyn bookkeeper who used the same pyramid scheme in 1899 with which he took-in $1 million.

Charles Ponzi was always a ne’er-do-well throughout his life. Bernie Madoff by comparison, had developed an impeccable business reputation. Furthermore, Bernie kept within the realm of reasonable expectations; high though they may have been. Bernie also operated his scheme during a period of generally increasing stock prices.

So now that we’ve sentenced Madoff for “high crimes,” when are we going to sentence the SEC (the Swindler’s Encouragement Committee) for their crimes? After all, one Harry Markopolos sent letter after letter to the SEC over a 10-year period telling them that Madoff was doing something illegal. Markopolos even provided calculations to prove that Madoff couldn’t possibly have accomplished what he claimed. In their infinite wisdom, the SEC ignored Markopolos and allowed Madoff to continue his Ponzi scheme. Shouldn’t the SEC be held responsible? We’re told time and again that we needn’t worry – the SEC (read government) is here to protect us from financial fraud. Right! Most investors do rely on SEC oversight, and Madoff was right at the very top of their good-guy list. Now, the very agency that allowed this to happen right under their noses not only goes Scott-free but is being allocated still more money for their budget needs. Are you beginning to see the picture here? Talk about rot on the vine!

Just how unusually evil were Madoff’s actions? Not that unusual. In fact, the whole notion of paying off past investors with the funds of present investors is at the very core of our Social Security system. At least Madoff sought the consent of his investors who let him “invest” their money based on their own free volition. Do you have anything to say about the withholding of Social Security taxes from your paycheck? And at least Madoff didn’t attempt to then defend himself with the claim that he was conducting wise public policy.

It never ceases to amaze me that “the folks” continue to permit the government to play this charade. Invariably, the government messes-up some program and then says by way of excuse, “we were overworked, understaffed and didn’t have enough money to do it correctly.” And then they get even more money for that failed project, yet the project continues to fail. Many of FDR’s “programs” from the 1930s were later ruled unconstitutional yet they still exist in Washington, District of Criminals. Their excuse is that they are still “winding-down” those programs in preparation to then end them. Don’t forget that the Department of No-Energy created under the Carter Administration now employs over 100,000 bureaucrats, operates with a budget in excess of $100 Billion, and has yet to accomplish it stated objective – that of helping the USA become energy-independent.

Back in the 1980s, a “creative” teenager by the name of Barry Minkow, formed a company in Los Angeles called ZZZZBest. He took his company public in 1986 and was considered a real hot shot in the business world. Well, of course, it was a sham and Barry went to jail. But now Barry works for the government helping them ferret out other crooks. “It takes one to know one” seems to work. So why not put Madoff to work helping the government root-out all the other Wall Street crooks? Chances are he knows all of them on a first-name basis.

Tex Norton

July 7, 2009

The Daily Reckoning