Monday, December 22, 2008

Madoff: not the biggest Ponzi scheme ever

I was amused to note that Bernard Madoff's massive fucking Ponzi scheme is being heralded as the biggest ever fraud by a single person, being worth some $50 billion (£33.7 billion at today's price). And so it is.
The FBI claims that three senior employees of Mr Madoff's investment firm - once a towering presence on Wall Street - turned up at his apartment on Wednesday to ask questions about the company's solvency. Two of them are believed to be his sons, Andrew and Mark, who have worked for their father for two decades.

Mr Madoff told them that he was "finished", that he had "absolutely nothing", and that "it's all just one big lie". He said the investment arm of his firm was "basically a giant Ponzi scheme," and that it had been insolvent for years.

A Ponzi scheme, named after the swindler Charles Ponzi, is a fraudulent investment operation that pays abnormally high returns to investors paid from money put into the scheme by subsequent investors, rather from real profits generated by share trading.

The FBI complaint states that Mr Madoff told his sons he believed the losses from his scheme could exceed $50 billion. If that is the case, his fraud would be far greater than past Ponzi schemes and easily the greatest swindle perpetrated by one man.

It is not, of course, the biggest Ponzi scheme ever perpetrated; Madoff's little earner was only worth some £33.7 billion over four decades. It's absolute peanuts compared to the biggest Ponzi schemes...

... which are National Insurance Schemes. I don't know enough about such schemes in other countries, but the UK National Insurance scheme will net the government a forecasted £104.56 billion for the 2008/09 tax year [PDF], dwarfing Madoff's four decade take.

For, as I have pointed out many times, NICs is a massive Ponzi Scheme.
Does this sound at all familiar?
Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money, but colossal liabilities were accumulating.

As with NI, the money was not actually invested: it was simply used as income and the liabilities were paid out of that income. The Ponzi scheme was a massive fraud, and so is NI. As with tax—or, as I prefer to call it, extortion with menaces—if it wasn't the state doing it, the whole scheme would be illegal.

So thank you to Bernard Madoff for reminding us that, in the hands of a private individual, a Ponzi Scheme is a massive and illegal fraud (quite rightly so) but when conducted by a government, it is socially responsible.

And whilst others had the choice of investing with Bernard Madoff (and lost. Well, if something seems too good to be true then it probably is), we do not have that choice: and whilst it is Madoff that will go to prison for Ponzi Scheme fraud, here in Britain it is we investors who will go to prison if we choose not to invest in the UK government's Ponzi Scheme.

Fucking hellski.


Mitch said...

The only thing Madoff fucked up on was not making it compulsory.

Mark Wadsworth said...

Yup. National Insurance, the second worst tax after Value Added Tax (or whatever other sales taxes you care to dream up).

As Milton Friedman said:

First, you must understand that the Social Security system is not an insurance system. The taxes that people are paying under the system are not in any relevant sense financing the benefits they themselves will ultimately receive. The Social Security system is a combination of a bad tax and a bad expenditure program. I have never heard anybody who would defend either half separately, and taking two bad things and putting them together doesn't generally make something good.

Henry North London said...

The NHS pension is a Ponzi scheme

For years we've been told quite frankly that our contributions pay out the pensions of those who are retired and not invested in our futures

That's one hell of a poisoned chalice to take on

Frankly I saw the light early whether it be due to the fact that I kept falling ill whilst working for the NHS or the fact that I just couldn't trust an organisation so mired in bureaucracy to actually come up with the goods 40 years from now

Of course by the time I retire there will be no NHS pension and Im screwed even though I have paid into it

Im thinking seriously about asking for my money so I can go invest it in something else

max the impaler said...

Fucking hell it's desperate, but the average bloke in the street still thinks if he ignores everything but 'footie' and 'cum dancing' it will all go away.

John B said...

I don't understand why taxing today's workers to pay today's retirees is viewed as a Ponzi scheme.

If we're going to get hardcore libertarian, then sure, I shouldn't be taxed to pay Sid and Doris Pensioner their gbp144 a week.

But if we think pensioners deserve rewarding for the time they spent working (and paying tax), then taxing me and DK to pay them doesn't seem like an obviously insane use of money.

I suppose it's possible that someone, somewhere, believes NI was ever anything other than another word for 'extra income tax with harsher rules on exemptions'. But it's pretty damn unlikely.

Gareth said...

"I don't understand why taxing today's workers to pay today's retirees is viewed as a Ponzi scheme."

It's a fair point. Ponzi's investors at least had a choice.

If Sid and Doris have been working and contributing why can't they get their own contributions back when they come to retire? The answer is; It has already been spent. All of it. You have yourself a Ponzi scheme.

Anonymous said...

Yup - It's shite isn't it. Then again - if I print money in my shed I am punished - if Gordy Brown does it he's being financially responsible... Interesting aint it.

Anonymous said...

"I don't understand why taxing today's workers to pay today's retirees is viewed as a Ponzi scheme."

Right. It isn't a Ponzi Scheme. It is just a tax. And if you, in turn, get money back in retirement that pension is a privilege.

At least in the US it is technically a privilege. Our courts and government have always held that receiving social security is never an individual right which cannot be withheld.

People tend to label some taxes, especially those they most dislike, as Ponzi Schemes. Doing so is just the usual erosion of meaning over time.

sign me Anonymous K.

Devil's Kitchen said...

John B,

"I don't understand why taxing today's workers to pay today's retirees is viewed as a Ponzi scheme."

Because that is not how it is sold, is it? It is sold as being a National Insurance fund: you pay in, and you get certain benefits – originally, unemployment benefit and a pension. You have to pay your stamps (your premium), you collect your benefit (your payout). See? Insurance fund.

If you haven't paid into the NI fund, then you are not entitled to certain benefits.

NI is sold as an insurance fund: it is not. There is no investment of the premiums (which is why doing the same provision (or better) is actually cheaper) and current income is used to pay out investors. Thus, it is a Ponzi scheme fraud.

Now, we might well decide, as you say, that it is a decent enough tax... Well, fine, let the politicians simply come out and say that it is an income tax and let's be done with it.

Abolish the idea of NI stamps, stop pretending that the money is in any way invested and that you are using returns on capital to pay investors.

And let's point out that the true rate of income tax is (20% + 11% + 12.8% (employers contribution) =) 43.8%, shall we?