The Pyramid Fraud - Unfolding the Madoff Financial Scam

Hardly has the dust settled on the ongoing Financial crisis than the news of another scam being unearthed makes waves.

Coincidentally, crises are good times for the general economy since the rotten apples get detected and are busted. The institutions with strong foundations weather such storms, anyways ...

The Madoff Financial scam is one such rotten apple among so many that the world has been witnessing in the past 12-16 months.

Anatomy of the Pyramid Fraud:

Bernard Madoff, a prominent figure on Wall Street (now for the wrong reasons), ran an "investment" company which basically attracted investors with consistent ROI, unheard of in most asset classes of the same risk-profile. Now 70 years old, Madoff started this trade, lot earlier.

His modus operandi was simple. Rolling Credit.

Accept investor A's invested dollars and show it as investor B's profit. Of course, the specifics would be a little more laborious to explain. But, this is essentially the concept of a Pyramid scheme. The scheme successfully works by attracting more investors into the dragnet ... as long as investors do not attempt to redeem their gains en masse'. A few redemptions here-and-there would be fulfilled by the investments of fresh investors.

How did the Fraud get exposed ?

The Pyramid Fraud works as long as redemptions do not exceed fresh investments. Investors in Madoff's firm were happy seeing their profits rise regularly, consistently and significantly. This is usually a trap to lure customers to remain invested and preempt redemption. The scheme inevitably panders to the oldest human vice - Greed ! The growing profits bolster the ego of existing investors and draw in new ones who share another human weakness - naivete !

Could anyone be so naive as to believe the attrocious profits being posted by Madoff's firm so consistently ? Well, the layman investor can't be blamed. Large and Global banks fell prey to Madoff's hidden schemes. International banks from Britain (Royal Bank of Scotland), Japan, South Korea, France, Spain etc... invested millions of Euros & Dollars into Madoff's "investment" company trusting that he had a secret formula of returning such profits on amounts invested.

When the tough gets going ... the going gets darned tough !

The looming financial crisis across the globe has already been declared to be of the order of many trillions of dollars. Forget counting the zeroes ... Small Fry like Madoff were waiting to be hit. When all the investors - small and large claimed their redemptions, the horror of the scheme came to the fore.

Thanks to the rolling-credit concept, Madoff had only been recycling investors' money among others of the same clan !

Confession

Madoff has confessed to his Pyramid Fraud scheme and of having defrauded trusting investors to the tune of $50 Billion !!!. Might sound like a small amount compared to the cinders of the global meltdown around us ...

But, figure these approximate numbers -

* Royal Bank of Scotland loses $ 600 Million

* Spain's Santander Bank had an exposure in excess of $ 3 Billion !

* French Natixis Bank also pegs it's losses to approx $600 Million

* Nomura of Japan could lose $ 303 Million

* South Korean FIs and Banks had an accumulated exposure of $ 95 Million

..... Clearly, the biggest heist in a long time ...