Thursday, May 7, 2009

(This is the fifth instalment in a series on the trends that led to the present financial crisis)

1. Then there is the pyramid or Ponzi scheme. Bernard Madoff was only exposed after he lost 50 billion dollars of the money invested with him.

2. The operation is simplicity itself. The operator simply gives back a percentage of the money “invested” with him as dividends. If he pays a dividend of 20 percent he would finish the money in five years.

3. But as more and more new investors invest with him, he would be able to pay the dividends long after the earlier investors had got back all the money they had invested. Besides the investors would continue to invest more as they receive the high dividends.

4. Generally the investor would be so happy with the high dividends that they would not complain. The authorities would therefore remain ignorant of the operations of the scheme. Besides if exposed and forced to stop the investors would lose all the money they had invested.

5. Madoff would not be the only one to operate this scheme. Actually no wealth is generated as the invested money is actually returned. Nevertheless the so-called dividends would contribute to the per capita and GDP of the country.
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