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.