A ponzi scheme?

Bert

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I keep hearing about these and I have no idea what they are.

I was just reading the article about David Akers (Kicker in the NFL) who lost 3.7 million in a Ponzi Scheme. I keep seeing that term and I dont really understand it.

I've googled it a little but I'll be honest, I dont work in finance or really invest past my 401k so some of the websites we a bit over my head.

Can anyone explain what a Ponzi scheme is in laymans terms?
 

Russ Smith

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I keep hearing about these and I have no idea what they are.

I was just reading the article about David Akers (Kicker in the NFL) who lost 3.7 million in a Ponzi Scheme. I keep seeing that term and I dont really understand it.

I've googled it a little but I'll be honest, I dont work in finance or really invest past my 401k so some of the websites we a bit over my head.

Can anyone explain what a Ponzi scheme is in laymans terms?

I think the basis of it is you're using money from "investors" to pay off other investors, instead of actually investing the money.

So you get 10 people from ASFN to give you $1000 each. Then you get 25 more to do it and you tell the first 10 people their investment has "earned" $200, but the $2000 it took to earn that actually came from the new 25 investors.

So the scheme only "works" as long as you have new investors in, and if for any reason people want to withdraw their funds, they're getting money from other people's losses. This is why the government is still going after money some of the Madoff investors "earned". They were the lucky ones who pulled out profits, but it wasn't real profit it was money from some other investor so the government has correctly determined that money should go back to the other investor.
 
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Bert

Bert

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Thanks Russ that makes more sense.

So I guess that's why they go after all the famous people in round 1 so they can tell other people; hey invest in this I've got Brad Pitt and Kurt Warner,, etc etc (just random examples)

It just always seems like they mention famous people who "got caught up" in a ponzi scheme but they dont seem to be the ones who always lose their money. I guess they are in the group that ges paid back most of the time...
 
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Russ Smith

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Thanks Russ that makes more sense.

So I guess that's why they go after all the famous people in round 1 so they can tell other people; hey invest in this I've got Brad Pitt and Kurt Warner,, etc etc (just random examples)

It just always seems like they mention famous people who "got caught up" in a ponzi scheme but they dont seem to be the ones who always lose their money. I guess they are in the group that ges paid back most of the time...

no I think they mention famous people because we recognize the names. Like that Salinas guy who committed suicide and had a bunch of college coaches like Lute Olson on his list of bilked clients, they mention Lute because we know the name. Or they mention the big money investors and famous people often have more money.

With Madoff the only people other than him and his honchos that made money were people who withdrew before they got caught. And they weren't withdrawing real profit they were getting paid out of funds someone else deposited.

The current example with the Miami guy same thing it's why the feds said any player who was paid by this guy they will pursue to get the money back. They're not enforcing NCAA rules, the guy is in jail for embezzlement and the money he used to pay athletes came from all his unlucky investors so if they know of players who got paid, they get the money back and can then use that money to partially repay investors.

I actually googled Ponzi a few weeks ago he was a real guy who did one of these scams they just named it after him.
 
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Bert

Bert

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no I think they mention famous people because we recognize the names. Like that Salinas guy who committed suicide and had a bunch of college coaches like Lute Olson on his list of bilked clients, they mention Lute because we know the name. Or they mention the big money investors and famous people often have more money.

With Madoff the only people other than him and his honchos that made money were people who withdrew before they got caught. And they weren't withdrawing real profit they were getting paid out of funds someone else deposited.

The current example with the Miami guy same thing it's why the feds said any player who was paid by this guy they will pursue to get the money back. They're not enforcing NCAA rules, the guy is in jail for embezzlement and the money he used to pay athletes came from all his unlucky investors so if they know of players who got paid, they get the money back and can then use that money to partially repay investors.

I actually googled Ponzi a few weeks ago he was a real guy who did one of these scams they just named it after him.

Ah ok see that's what I didn't understand, so some of the people investing in this know its a scam?

I thought it was just a ringleader who scams everyone.
 

Gaddabout

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It's also called a 'Pyramid Scheme,' because that's the way the structure and money flow works -- from bottom to top. The newest members are greater than the last batch and they end up paying the ones that came before them. Last new recruits standing get stuck with the biggest bill.

My first editor used this illustration to explain it to me:

- You set up at a dinner table by yourself.

- You invite strangers to sit with you promising them a free meal, but they have to pay for yours and invite others to pay for theirs.

- This keeps going until the authorities rush in and punish everyone for your crimes.
 

Russ Smith

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Ah ok see that's what I didn't understand, so some of the people investing in this know its a scam?

I thought it was just a ringleader who scams everyone.

NO sorry that was misleading. Some people for whatever reason withdraw their money early. The guy running the scam can't say no you can't have your money or it'll be obvious it's a scam. So he pays out the people who want to withdraw early on before the scam has been found out. So if you invest 1 million and he says you earned 250K profit, he takes 1.25 million from the total pot of all the investors money, and pays you out.

So you don't know the money came from others, and they don't know their money was paid to you.

But once the scam gets caught out and the feds get involved, they try to reclaim money to repay bilked investors and that includes "profit" paid out to people who withdrew early, even if they had no idea it was a scam.
 

conraddobler

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Social Security is a massive example of this as is our financial system in general.

Our finanical system is debt based, ie money is created when someone borrows it into existence but they never create the interest to pay that back, that is paid back by new entrants going into debt, creating more money through debt to keep the plates spinning in the air.

It's insanity to attempt austerity in a system like this, you'll literally explode it into smitherines.

What'll happen and what's happening now is that for a lot of generational, cyclical and other reasons we're in a natural slowdown.

This makes all the accumulated debt unpayable, because the new entrants have been cut down either by slowing birth rates or by inability to further borrow money.

What's been done so far is a select few have gotten what money has been printed, the banks, AIG, etc and they've used it to bet even more, to double down as it were.

This will end very badly and require ANOTHER bailout that we can't afford.

What the system needs is a flushing out right now.

You can do this by simply voiding x amount of debt or by printing the money and handing it out so everyone can pay the debt, thus debasing the debt.

People with a ton of money would love austerity, that makes all of us in debt cough up assets through default which they can then buy up on the cheap.

People say Ben Bernanke is printing money but he's really not, he's simply printing enough to plug holes in the system as they threaten the system.

It'd be better if he either:

Let the system collapse forcing the reset.

or

Printed up about 250k per person and gave it all out at once.

Either solution works

What we're doing now will end in massive violence IMO.

Honestly almost our entire existence is an example of a wealth transfer from young to old, which works well enough as long as the birth rates maintain steady growth.

The baby boomers were like a giant lump going through a python, they've so far helped things out but they are about to become the most epic drain ever.

Someone has to design a more mathematically stable monetary and financial system that is dynamic enough to allow some innovation yet function well in a stable population because we can't keep growing our population forever unless we institute a gigantic push to colonize space.

We're plenty grown up enough to understand all these principles, and to develop solutions for them, because frankly we have no choice.

If we do nothing it'll most likely generate a massive war over resources.

Everyone is a Keynesian now except they're not, he never advocated the government doing what we're doing he would of had us run pretty substantial surpluses for decades, store up money then shower it out right now, of course we didn't do that so we haven't been practicing it at all.

Austrians say you should just let the system collapse, it'll reset itself.

Personally my preference would be to do a massive money printing drop then convert over to a new monetary system in the process and be done with it.

That will never be done though, what'll happen is basically austerity with select bailouts for those connected and we'll grind our faces against a wheel of pain for about 3 or 4 more years minimum until it all explodes in violence.
 
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Cardinals.Ken

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Here's something that could be considered ironic...

The company I work for just required that I take a training course where I got to learn, in extensive detail, exactly how a Ponzi scheme works. (I would answer questions, however, I am subject to the non-disclosure agreement I was required to sign)

The intention was that we be better aware of how to spot someone looking to launder/invest their ill gotten gains.
 
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Bert

Bert

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NO sorry that was misleading. Some people for whatever reason withdraw their money early. The guy running the scam can't say no you can't have your money or it'll be obvious it's a scam. So he pays out the people who want to withdraw early on before the scam has been found out. So if you invest 1 million and he says you earned 250K profit, he takes 1.25 million from the total pot of all the investors money, and pays you out.

So you don't know the money came from others, and they don't know their money was paid to you.

But once the scam gets caught out and the feds get involved, they try to reclaim money to repay bilked investors and that includes "profit" paid out to people who withdrew early, even if they had no idea it was a scam.


I think I've got it now Russ, thank you very much for taking the time to explain it to me. (everyone else too)

So anyways, I got this investment opportunity I wanted to talk to you about....

JUST KIDDING.

Honestly I was just curious, other than my 401k, I've never messed around with the stock market. My parents were savers, not investors so I've never had anyone to ask about stuff like this. Since it's so low right now everyone is saying its a good time to get in, I have some savings, so I thought I would open a scott trade account or something like that, I just didn't want to fall in any traps. I'm going to start very small so it really doesn't matter anyway.
 

cardinalsflow

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Why did Akers invest all his money in one place? I mean it sucks he was involved with a Ponzi... but who the hell puts all their eggs in one basket?
 
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