How to steer clear of Ponzi schemes
With so many smart people duped by a seemingly sound investment operation, how can we detect a Ponzi scheme in the future? Marketplace's Mitchell Hartman talks to Tess Vigeland about how to identify a sketchy deal.
Bernard Madoff (Courtesy of Street Insider Web site)
More on Investing, Crime - Law
TEXT OF INTERVIEW
Tess Vigeland: Imagine your life savings wiped out in an instant. Or your favorite charity forced to close its doors because endowment money vaporized. That happened all over the country this week as investors in Bernard L. Madoff Investment Securities scrambled to assess their exposure to his alleged $50 billion Ponzi scheme. So many people -- smart people -- were duped for years, that you gotta wonder how you're supposed to avoid the same fate? Marketplace's Mitchell Hartman is here with some pointers. Hi Mitchell.
Mitchell Hartman: Hi Tess.
Vigeland: So, is there a way to identify a Ponzi scheme, up front?
Hartman: Besides it being named Ponzi incorporated, right?
Vigeland: Right. Or now Madoff incorporated, I suppose would be a clue as well.
Hartman: Right. And of course one of the things to notice is they often sound like legitimate business, but there are a few characteristics of Ponzi schemes that are very obvious and identifiable if you step back and from actually hoping to make money on them and look at them sort of square in the eye. Number one, they promise very high returns and very regular returns ? sometimes 25 percent over 90 days and 40 percent over a year ? and they keep delivering those returns in good times and bad, or at least they tell you you've earned your money on paper and almost no investment delivers so reliably.
Vigeland: Well we're talking about timelines of 90 days, maybe six months, maybe a year, but this Madoff alleged Ponzi scheme went on for years, and years, and years. How was it different?
Hartman: In some ways, you know, at its core, the mathematics of it probably weren't all that different from any Ponzi scheme. I'm kind of thinking of this as sort of Ponzi 2.0 or Ponzi on steroids. It was very sophisticated, you know ? multiple sets of books, trades not being done here but being done in Europe allegedly, people getting statements that were sort of hard to read but really indicated that trading was going on ? and that does make it presumably harder, even if you're very savvy, to see what may be underlying it.
Vigeland: Well, then let me pose a question that came in from a listener this week. I really think it's the question out of this case, which is, if folks involved on Wall Street can't figure out the validity of an investment ? its regulators can't figure it out ? what possible chance do the rest of us have?
Hartman: Well, an investor should ask themselves: is this so good that it's probably too good to be true? And if it seems as if it is, there well may be something wrong.
Vigeland: And that's a lot of the red flags that you already talked about.
Hartman: Right, exactly ? the guaranteed returns, the very high returns. But if you can't understand or don't know what the strategy is, it's best to stay away from it. Let the people who think they understand it risk their money on it. And finally, don't invest with someone who doesn't have a proven track record, a name that's known, and especially, books that are open to the proper regulatory authorities to look to see if that assets are really there, that they're really being traded and that the returns that are being reported are really happening.
Vigeland: Alright. Marketplace's Mitchell Hartman, thanks so much.
Hartman: You're welcome.
Comments
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12/21/2008
This extremely story shows that investing with 'a name that's known' (i.e.Madoff) is worthless.
From Steamboat Springs, CO, 12/20/2008
Do you not believe the entire stock market, pension funds, et al, have been a ponzi scheme? Look at the millions made by CEO's using other peoples money and not paying the back a red cent. Maybe, as opposed to the government deciding that we should own a home and give us an interest deduction, we should decide ourselves. Maybe as opposed to the government giving us a tax break to invest in the stock and bond market we should decide ourselves. Maybe as opposed, to companies and our government committing an unknown amounts of money to allow people to retire, those companies should pay their employees a little more, encourage them to pay off their homes, and then look towards local business' to invest their savings. As opposed to investing in a company that is going to outsource your job or someone else's in order to make a buck. I wonder if NPR, will ever decide that just maybe a story on the Federal Reserve is a worthwhile topic. They have created this mess, in conjunction with other countries manipulating their currencies in order to be the lowest cost producer in the world. Maybe we should, as opposed to thinking more government is the solution, maybe it is less. As the high powered investment guru recently pointed out, that people are flawed and power corrupts and absolute power corrupts absolutely. Why should we think that ceding more power to the federal government, as our forefathers warned us of, or to the UN. Maybe those people in charge have good intentions, and yet they do not know what is the best solution. The best solution typically will come from the ground up. yes Obama projects the facade that he is working from the ground up. But will he really?!?!!! Why do we tax employers for employing people, (for unemployment purposes)? Why not tax those things that cause unemployment, (technology, energy, and foreign produced goods)? On Health care, we have insurance, but it is becoming evident that many diseases are a result of diet. Why not tax twinkies, beer, potato chips, etc. (wait we give a tax break to produce that high fruitcose corn syrup crap. That makes sense, pay companies to make stuff that will cause them to be unhealthy, that way the health care industry makes out, as does hostess. The auto industry bailout, heck we do not need the massive number of cars that are produced today. Cut GM, Ford and chrysler in half, take the empty factories and turn them into wind turbine factories, or companies to rework the nations electric grid. Why are we looking at rebuilding our non-productive infrastructure? We need to rebuild our productive infrastructure, farms, steel mills, reinvigorate the local economies that made the middle class prior to the corporations taking control. I suppose you are a corporation and get your funding from them and can not provide hard hitting journalism that this country badly needs. you can contact me, sure, how much does it cost to actually produce a story on why the Federal Reserve will not disclose to Bloomberg where the 2 trillion dollars in loans went to? What does it cost to do a story on why a small food coop was raided by a swat team? If it is not much I might sponsor a show that actually looks towards waking people up to the corruption. This freaking radio station did not bother to cover Ron Paul's campaign, and goes to show how tied your program is to the status quo.
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