Bernie Madoff

Apparently Bernie Madoff has secured a rare place in our history. His name is likely to be added to a new phrase in the American vocabulary, the Madoff scheme. The term Madoff scheme is already beginning to show up in various money pundits' articles, blogs and shows.

Bernie Madoff himself began by calling what he did a Ponzi scheme, so named after an infamous con artist of the early Twentieth century. An Italian immigrant, Charles Ponzi 1882-1949, concocted an elaborate plan to use International Postal Reply coupons as a method of making money, based on International exchange rates. He enticed a lot of people to invest money in his scheme; promising huge returns on their money. The first people to invest in Ponzi's scheme did indeed make a lot of money. In its day it Ponzi's scheme was every bit as huge a swindle as Madoff's scheme. However, as with other pyramid schemes in their many variations, those coming late to the game lost a lot of money.

A common denominator of pyramid schemes is that one person or a few people will have an idea or even a product that they sell to others. The way the others get wealthy is to bring in more people. Even if a product is involved the real way to make money is recruitment of others. Each person brought in will enrich the person that brought them into the pyramid scheme. The people brought in must recruit more people. This is a geometric progression that ultimate will fail, because there are a finite number of people that can be brought into the scheme.

There are significant differences in the Madoff scheme and the Ponzi scheme. The Ponzi scheme was an equal opportunity con. Anyone who could get a few bucks on could invest in the Ponzi scheme. Madoff, on the other hand, was very careful in his selection of victims.

Madoff's targets were the top 1% of the wealthy. He set up his plan so that someone could only join if asked to do so. The plan's avowed goal was not to make money, but rather to preserve wealth already acquired. He reserved the right to kick anyone out of the group any time he wanted to. The scheme worked beautifully. There is nothing like telling someone they will be a part of a special group, that only a select few can be part of, to have them clamoring to join. Billions of dollars were invested, moved around, and eventually lost; thanks to Madoff's scheme.

Madoff's ultimate reward may be that his name is used as a phrase to describe a certain type of financial con. A hundred years from now someone will claim that their scheme is a variation of the Madoff scheme. If he wanted to go down in the history books Bernie Madoff seems to have succeeded. But, what a legacy.