“April 14, 2021: Business magnate Bernard Madoff dies at age 82 at his residence in the Hamptons”. This would have been the headline in American newspapers if it were not for the fact that 13 years ago, in 2008, it was discovered that Bernard Madoff had executed for more than three decades the biggest pyramid scheme in history.
Biggest pyramid scam in history
It is estimated that with this scam he defrauded a amount greater than 60,000 million dollars, and among those defrauded were banking and insurance entities, investment funds and private banking, foundations and charitable organizations, great personalities of cinema and sport and wealthy members of Jewish society American of which Madoff himself was a part.
For this reason he was sentenced to a 150 year prison sentence, and his death did not cover the newspapers in the United States but all over the world. The headline was much more like “Bernard Madoff, Wall Street's biggest fraudster, dies in prison” that the one who headed this post.
That someone was capable of scam such a large sum of money, during a such a long period of time and organizations and people with high financial knowledge, can lead us to think that the scam that Madoff created was a very complex network of companies and movements of funds impossible to track by regulators and analyze by private analysts. Nothing is further from reality.
Madoff himself stated about investigations by regulators (SEC): “Every time I got sick, I thought they would catch me. They should have only checked the accounts with Wall Street headquarters or the deals he made with the companies he negotiated.”
The pyramid scam
Taking these statements into account, it seems that the scam is much simpler than we could have thought. If it was so easy to do it, What is a pyramid scam?
A pyramid scam is characterized by Repay original investors with funds invested by new investors, so that a high profitability can be offered to the originals at the expense of the capital invested by the new ones.
It's that simple, investors' funds are never invested and are used to reward those who entered the scam earlier so that investors obtain the promised return without discovering that their funds are not invested in any financial product.
In this way and as the pyramid grows, that is, as the number of investors increases, each time a largest number of participants new ones to be able to repay the original investors and be able to perpetuate the scam.
It is this last characteristic that gives the scam its name, since the base of the pyramid (new investors) must always be larger than the top of the same (original investors).
Discovery of the scam
The scam is discovered when there comes a time when it is not possible to raise enough new capital that allows the promised profitability to be paid to all previous investors.
At that moment, when massive withdrawals of funds begin to be made, is when it is discovered that the funds invested by the participants have been used to pay interest and have not been invested in any financial product, so it is not possible to recover them.
Siren sings
Let us try, as far as possible, get something positive and learn a great lesson from what to date has been the mother of all pyramid scams.
Madoff offered very high returns, close to 10% – 12% annually, consistently regardless of the behavior of the markets. Thanks to these great returns and the privileged status What he achieved within American high society was able to attract new investors with which to reward the originals.
That is why it is worth remembering, and even more so considering the environment of low rates that we currently live in, that no one gives money for three pesetas, and that any investment, like most processes, It requires time and patience.
You should not be carried away by siren songs that promise infinite returns and implausible increases in the amount invested.
If we internalize that markets are volatile by nature and that the risk-return binomial tells us that to obtain higher returns we have to assume higher levels of risk, the biggest pyramid scheme in history will have served a purpose.
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