Mitchell Zuckoff on the Bernard Madoff scandal
Professor of Journalism, Mitchell Zuckoff, has written essays for Fortune magazine and The Boston Globe on the recent Bernard Madoff Ponzi scandal. Zuckoff is the author of "Ponzi's Scheme: The True Story of a Financial Legend." Read excerpts from Zuckoff's articles below.
The real Ponzi behind the 'scheme'
Fortune, Dec. 15, 2008
Charles Ponzi wouldn't have thought much of Bernard Madoff.
Legendary Wall Street trader Madoff reportedly admitted last week that his success was an illusion, a fraud in which investors were paid not with the fruits of his own acumen, but with money from other investors. Prosecutors quoted Madoff as telling an associate that his $50 billion business was "basically, a giant Ponzi scheme."
Nearly 60 years after his death, Ponzi still has plenty to answer for. But if the allegations against Madoff are true, he has tarred what little was left of Ponzi's semi-good name. That might come as a surprise to people who consider Ponzi synonymous with fraud. But his tale is more complicated, and more nuanced, than that.
Read the full article.
Charities: the foundation of Madoff's scheme?
Fortune, Dec. 29, 2008
One of the most vexing questions in the Bernard Madoff scandal is, "How did he get away with it for so long?" A disturbing answer might be found in an unexpected place - the predictable nature of some of his hardest-hit investors.
Reports suggest that Madoff may have been a swindler for decades, using the Ponzi-scheme method of paying old investors with money from new ones. Most such frauds collapse within a year or two, as withdrawals exceed deposits, or regulators get wise. Eponymous schemer Charles Ponzi was in business for only eight months in 1920 before somnolent regulators were spurred to action by skeptical journalists.
Regulatory failures surely played a role in Madoff's longevity - the chairman of the Securities and Exchange Commission has apologized and promised an investigation into how examiners missed years of flaming arrows pointing toward Madoff.
But that doesn't explain the structural "success" that Madoff enjoyed for so long. One possible answer is that years ago Madoff solved the two interlocking puzzles that usually prevent Ponzi schemes from becoming perpetual money machines: sustaining growth while maintaining stability.
Read the full article.
Social Security a Ponzi scheme? No way
Fortune, Jan. 6, 2009
It was inevitable that once the phrase "Ponzi scheme" returned to the news in the wake of Bernard Madoff's alleged swindle, a chorus of angry voices would rise to condemn Social Security as, in their words, "the biggest Ponzi scheme of them all."
Their argument -- gaining momentum on the web, among some television commentators, and elsewhere (for examples, see "The Ponzi Scheme That is Social 'Security,' " "The Real 'Mother Of All Ponzi Schemes': Social Security" or "Madoff only the No. 2 Ponzi scheme") -- has a certain appeal because there are indeed some superficial similarities.
Essentially, here's their pitch: a Ponzi scheme is a fraud in which money from one group of people is used to pay promised returns to another group of people. The money isn't invested, it's just transferred, and at some point the scheme collapses because there's not enough income to satisfy withdrawals. (Madoff reportedly confessed to one of his sons that his $50 billion investment business fit that description.) Social Security's critics say it's a multitrillion-dollar Ponzi scheme because although individuals have "accounts," in fact the government uses income from current workers to pay benefits. When benefits exceed income, they say, the system will crumble, just like Madoff's.
It's hard to knock down such a persistent and seemingly elegant analogy. But since it creates a false impression of Social Security, and since I for one consider real Ponzi schemes too important and interesting to obfuscate, it's worth rebutting this myth.
Read the full article.
What Madoff could learn from Ponzi
Fortune, Jan. 13, 2009
Bernard Madoff seems once again to be borrowing from the Charles Ponzi playbook, in this case the final chapter. If so, he should be sure to read the fine print.
Federal prosecutors acknowledged in court documents this week that Madoff's lawyer is "engaging in discussions concerning a possible disposition of this case." That's typically lawyer code for either persuading the government to drop the charges -- not a chance -- or cutting a plea deal in the hope that Madoff might someday leave prison.
As it happens, that's just what Charles Ponzi did after it was discovered that his money-making machine was all chrome and no engine.
Read the full article.
A Parade of Ponzis
Fortune, Jan. 28, 2009
At the height of his popularity in July 1920, Charles Ponzi arrived at his Boston office to a terrible surprise: A copycat business had set up shop down the hall, siphoning off his customers by offering the same eye-popping returns that had made Ponzi the most talked-about man in America.
Ponzi knew that his competitors were frauds -- he had already learned the hard way that it wasn't possible to double investors' money in 90 days. The only way to make good on that promise was to secretly use money from new investors to pay notes that had come due, the old rob-Peter-to-pay-Paul scheme that would eventually bear Ponzi's name.
Ignoring the irony of the situation, Ponzi called the cops.
The crush of publicity surrounding Ponzi's alleged modern heir, Bernard Madoff, has resulted in a similar reaction, leading to a wave of arrests and flights by suspected swindlers and schemers who've become known as "mini-Madoffs."
Read the full article.
Madoff and Ponzi: Reflections of their times
The Boston Globe, Dec. 21, 2008
Beyond a taste for expensive suits and fancy financial footwork, Bernard Madoff and Charles Ponzi might at first seem to have little in common.
But a closer look reveals that the two men are reflections of their financial eras and of each other. Although Madoff's crimes are only alleged, he and Ponzi shared a keen sense of investor psychology and tribal loyalty, a penchant for mystery, and a belief that nothing beats word-of-mouth advertising from satisfied investors.
Read the full article.
