Understanding Ponzi Schemes
The scheme itself is fairly simple, it’s the marketing which is complex.
In a basic scheme the Ponzi, (named after the originator, Charles Ponzi) offers investors fantastic returns on their money, if they bring in five more investors. He pays the first batch with the money received from the investors they have brought in. The first batch, having profited, prove the scheme is legitimate, and race out to bring in more investors so that they can reinvest.
Charles Ponzi source
As long as new investors arrive, the Ponzi can use their money to pay the previous investors, and as long as the investment scheme seems to be doing so well, those who profited continue to reinvest.
There is no investment, it as merely an increasing number of new fools handing their money to the Ponzi, who hands it to old fools, (taking a slice for himself)
Usually beginning with dirty money, the Ponzi creates the scheme to launder it. Hence the drug baron with 500 Million dollars he can’t spend can get a Ponzi to create the Investment scheme, which on paper is doing fantastic business. The drug baron can claim to have made his fortune through investments, which he will then place in some distant bank.
The paper trail is immaculate.
The investment scheme is a duly registered company somewhere, with directors, paying all taxes, salaries for employees, operating bank accounts, so the dirty money washes clean.
Once the drug baron’s money has been washed, he has no further need of the Investment scheme. The Ponzi will now keep running it for his own benefit. If he is wise, he will get out quickly with what he has. If unwise, he’ll be arrested and his scheme will be closed.
The fools will, even beyond the collapse of the scheme, the disappearance of the directors, the closing of the office, continue to believe that they were actually part of a legitimate investment scheme. They have no idea what was invested in, how the money was made, only that they gave the Ponzi $X and he gave them $XX, the first time. They reinvested $XX to gain $XXX and are waiting on their money. It never occurs to them that they were asked to bring in five fools to invest $X to pay them.
Ponzi’s work because people are greedy. They work because of the elaborate marketing.
The Ponzi always appears to be a decent person, always makes money for those early investors who, if they took their money and ran would not be bankrupt today. But fools don’t take the money and run. They reinvest it, most reinvest all of it. A few are wise enough to take back the original investment and only play with the ‘interest.’
Ponzis work on the most uneducated as well as the most educated. They work on wage slaves as well as millionaires. Bernie Madoff ran the biggest Ponzi for the longest time. People kept reinvesting money that had long ceased to exist. The five or fifty or five hundred million dollars people believed they had in the scheme and were reinvesting had disappeared long ago.
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