Sounds too good to be true, because it is

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By Jim Flynn

In a Ponzi scheme, high rates of fictional income are paid to participants from money being received from new customers. As the pyramid gets bigger, the schemer has to hustle twice as fast to keep up payouts and maintain an appearance of being a successful investor.

Charles Ponzi was an Italian immigrant and lifetime con man whose name has been used to characterize pyramid frauds since the 1920s. Ponzi served prison time in Canada, New England, Georgia, and Florida, but managed to keep on running like the Energizer Bunny. 

It would seem unlikely that a scheme larger and longer then Ponzi’s millions could be duplicated in our regulated and computerized age, but that was until Bernard Madoff came along. Madoff’s pyramid involved $55 billion and 13,000 investors.

Bernard Madoff perfected the two elements necessary for a successful scam – a reputation for personal integrity and persistent high energy. Mr. Madoff wasn’t caught. His batteries ran out.

Mr. Madoff began his career with savings of $5,000 and worked his way up to an executive position at a major stock exchange. He earned a reputation as a shrewd and ethical investor. Why he changed course is unclear.

Consumer agencies periodically run buyer-beware warnings that “if it sounds too good to be true, it probably is.” Nonetheless, Madoff’s clients came to believe he was able to achieve magical investment returns of 10 percent or more in both up and down markets. When his fraud collapsed, their response was “Not Bernie!”

Although Madoff had his share of ordinary investors with modest sums to risk, he had more than his share of celebrities, charities, philanthropies, and foundations, including overseas investors. The list of prominent people who stand to lose everything is extensive.

There is a temptation in the Madoff scandal to indulge in “Schadenfreude,” a German expression which means malicious joy at the misfortune of others, particularly wealthy others. A better view is that Madoff’s collapse is symptomatic of the unrealistic expectations which caused our current economic disaster.

For nine years two knowledgeable whistle-blowers told the Securities and Exchange Commission (SEC) repeatedly that Mr. Madoff was running a scam. They submitted numbers to prove it.

However, the SEC was participating in the Bush Administration’s political delusion that the financial system was just fine. SEC shuffled papers and did nothing, even after Barron’s financial magazine carried a story raising doubts about Madoff.

More recently, the same whistle-blowers revealed another Ponzi scheme in testimony before a Congressional committee. SEC officials testified after the whistle-blowers, but said they would prefer to give details of their handling of the Madoff matter in a private meeting.

Which raises the primary reason our economy slid into disaster and Bernard Madoff was able to perpetuate a gigantic scam for so long – lack of transparency.

Our federal government has become a collection of secret agencies doing their jobs, or fudging them, without congressional or public scrutiny.

The more recent Stanford International Bank collapse was characterized by the suddenly awakened SEC as “a fraud of shocking magnitude.” Stanford is another case of double digit returns over a period of 15 years.

How could Texas millionaire Allen Stanford have sold certificates of deposit to 50,000 customers at twice the rates being paid by other banks without raising suspicions of federal regulators over all those years?

University of South Florida history professor Gary Mormino theorized recently that the busted housing booms in Florida and several other states were a form of Ponzi scheme. Their success depended on an ever increasing flow of new buyers and new mortgages.

We think Professor Mormino’s thesis is equally applicable to our national economic collapse. When President Bush took the nation to war, he suggested citizens could best support the effort by going shopping. Americans cooperated by creating a Ponzi pyramid of personal debt.

Over eight years the Bush Administration, the Federal Reserve, and the Congress put regulatory agencies on snooze control, while they ran up their own Ponzi scheme of national debt. The new administration’s solution is to prop up the pyramid with more printed money.

When he was convicted, Charles Ponzi passed a note to his lawyer on which he wrote in Latin “The glory of the world passes away.” In other words, all good things come to an end – except the national debt.

Jim Flynn was formerly a corporate counsel, served in military intelligence during the Korean War and once aspired to be a newspaper columnist.