The Madoff Ponzi Scheme: Recession For Investors

The 2000’s were not your ideal years for the market. There were many factors that lead to these top corporations to take advantage of their investors and even the people. During the first year the internet bubble had crashed and dipped for a big loss for the investors who were active in this certain market. After this happened the next new market came and this was the mortgage industry. There were subprime loans that in the long run were going to destroy the people who were of lower income that were trying to get off of their feet. The banks and the hedge funds were to blame for this because they were creating mortgaged backed securities that helped investors invest into homes in collections without actually having them owning the home itself. This was a risky investment for investors because a good amount of these home owners were going to default and cause this investor to lose money instead of earning it. Now this is where the insurance company comes in to play by creating a system that protects the mortgage backed securities from defaulting. This was just another way for these big corporation to use their greed to create a profit for themselves. A little time done the road Bernie Madoff came into play with Split strike strategy that in the eyes of everybody else was amazing, but little did they know that he was running the biggest Ponzi Scheme ever in history. “The 2008 recession is linked to the subprime mortgaged crisis that gave millions of people with poor credits ratings, that created very risky investments.” (Editors,2017) Eventually all these operations came to end because their actual cash and assets were diminished, during the 2008 year these schemes created a recession and crashed the overall market into almost nothing. This went along with Madoff losing his investors basically everything they had invested or owned during their lifetime. According to one of the many investors of Madoff, “I am in shock and have unbelievable anger, but she can’t come to the truth on how this fraud could have operated underneath our government.” (Bernfeld, p.157,2009) Schemes like Bernie Madoff are what put us into a Recession and the cause of many of the world’s investors losing money.

Capitalism is something that I strongly believe in and think it is very good for our economy in flourishing. The first characteristic of Capitalism is the invisible Hand. This is the idea that businesses who are not fit to be in the free market will be wiped out without the help or assistance from the government. The invisible hand is really invisible and works in its own way, it’s taking away these bad business that are not good for the market and keeps the other businesses regulated and flourishing. The second characteristic is the free market; this allows anybody who has the capital to join the market with the same regulation all these other businesses have. The free market creates competition to see who can create the best product at the most efficient and effective manner. With capitalism there is going to be risk in order for people to make profit, but the question is how much risk is too risky? During these years,” President Bush was pushing an ownership society so all the people without homes could become a part of the system.” (Lowenstein, p.17,2011) I believe that everybody getting homes is a good thing, it is a step up to the middle class and gives you more opportunities to operate in the free market.

Next, Rugged individualism is when an individual or company is totally self-reliant and independent from outside, state or government assistance. This connects to this decade because a lot of these business that were making risky investments with their investors’ money had no regulation or government assistance because the investors were totally reliant on this company to create a profit for them. The government in my eyes should be nowhere near the businesses because it is a free market and the company can choose what they want to do with their investors and have no government intervention telling them what they can and can’t do with it. The term social Darwinism is similar to this in way. Social Darwinism is when the laws of natural selection, meaning the survival of the fittest will survive. This originated from a science study of animals a long time ago, but now has involved into the economic world. This connects to the 2000’s decade because all these investors and companies were trying to create the highest return of profit for their investors. This wasn’t always the case though because many of these companies were using their investors’ money to invest into risky investments that in the long run was the cause of the Recession of 2008 that destroyed many people lives and families.

There were many times that Wall street met Main street. For instance, wall street are these big businesses that are large and global investments firms, while Main street are these small independent investment companies that were using these Wall street business to make a profit for themselves and their few investors. I believe that there were not many social variables that had influence, besides how you are connected to everybody. For instance, people who were rich and well known had influence from the other people who were also very wealthy. These people expanded their companies worldwide that had influence on other people because they knew mutual friends that put their trust into these big businesses like Madoff.

To me what caused the 2008 crash was these big business that were making risky investments into things that no one knew about. The housing market that burst caused many things to go wrong with the financial industry including banks to stop lending and causing the amount of capital to decrease for them because they were risking that the housing market was going to continue to increase and create a profit for them in the long run. Instead in crashed causing many people to lose their homes and move right back to their lower income home because the market was not booming anymore and this ownership society was no more.

Greed was a terrible thing that everybody in this market had and it never helped them financially, besides the high executives that were very greedy and took a lot of money away from their investors for themselves, “these high executives would be obsessed with their own enrichment and not the enrichment of the investors. “(Lowenstein, p.127,2004) Both of these people in the process were very greedy, but the way Enron worked started to show that the executives were being too greedy and taking too much of the money for themselves and not disbursing it through all the greedy investors who were trying to create a profit for themselves just like the corporation they lended their money to. The greed for these executives was more than the investors themselves because they were the ones who didn’t have their money being invested into something very risky to in return create a higher profit for them and their investors’ money.

Occupy wall street was protest that started in New York City near Wall street. They were protesting for the average American people who were struggling while the Rich American, 1% were taking home more than 25% of the whole income in America. According to Gautney, “they were a leaderless group where everybody was seen to be leaders.” (Gautney,2011) There were trying to draw attention to the rising economic inequality that wall street was to blame for. We can learn from this group that these wealthy Americans do not need every single penny of money that they were making and that each one can give a little back to the 99% who are struggling to live and prosper in life. According to Amadeo, “the tea party was a group of conservatives that thought that government intervention into the economy market needed to be less, and this group was made up of 65% of the middle income people.” (Amadeo,2019) I believe that I would’ve been a part of this movement because having less government intervention is what is best for a free market like us in the United States. Without this government intervention the invisible hand will take their place by removing the scummy business that were not benefitting our economy, but in return were harming it and the people who are involved with it.

Madoff was using a very strategic strategy that was known as the split-strike. It is a very complex strategy that the typical person had no idea what it was or how it worked, but with his words it seemed very intriguing to the investors. Madoff was not a well-known person until after he was arrested. Most of the people who knew Madoff were very wealthy and these people who he knew were how he got a majority of his funds. The investors of the people he knew trusted Madoff’s friends and they are the reason how he got all these funds to fund his Ponzi scheme that got so big. Madoff was taking these people’s money and putting it into a fund that no one knew about besides his closest people and they also knew what he was doing. He took the money of many people and not just the rich ones. He had people from all income levels that have invested their 401ks to their life savings. The rich people who lost a portion of their money were affected to a certain extent that in reality didn’t do much damage to them. The people who lost everything was our society. These people who have been working their whole lives to get a little bit money was all gone. These people had nothing and were done for, they had gone from living in a good place to the absolute bottom where it had affected the amount of consumption these people would be able to use in our economy. Another reason was this caused the whole society to have trust issues and become more smart with their money/investing. Madoff wasn’t your ideal man, he was very good with his words and the actions he was doing. He created many phony document that helped to cover his behind from the regulators from noticing. This showed that the regulators didn’t go into a deep enough depth on what he was doing and that they were kind of oblivious to what he was doing, or they just didn’t care enough to keep going because of the falsified records that showed Bernie’s business was booming. I believe that this regulators during his lifetime who investigated him are morally at fault because they didn’t do their job of destroying him earlier in his Ponzi scheme. Therefore, all these people who lost their money should partially be blaming the SEC regulators who didn’t do the job that they were supposed to be doing.

A net winner is an investor that invested with Madoff early and before the collapse withdrew more money than they invested with. When Picard whas trying to determine who were net winners he was looking at all the files, all the investors and basically all the financial records that were real and not the fictional ones that were created by Bernie. According to Picard, “he knew where all the money went out before the collapse and it totaled to around 6 billion paid to investors all around the world, while the rest was consumed by Bernie Madoff.” (Picard, p.256,2011) Picard was playing a cat and mouse game and it was going to take time for him to get this money back for all the other investors that lost more than these investors did. Picard was just following the Catholic Principle of life and dignity of a Human person. He sees that society is even and these millionaires that created profit after all this were going to lose money just like everyone else did that did not get lucky like them. He seen that human life was under attack and that he needed to make change so these people had something to lean on and were not completely broke. Picard was just trying to prevent conflict from all the media and everything that was going on he was trying to make the situation a little less terrible than it already was for these people.

I believe that the most interesting topic to me was the Ponzi scheme. The Ponzi scheme was very interesting to read and try to understand how Bernie Madoff got away with this fraud for so long and continued to take his investors’ money for himself. This to me is very important in understanding how we can stop people like him doing the things he did to investor, so that one day when I want to become an investor I will not fall victim to something like his Ponzi Scheme. The second most interesting thing to me was the housing bubble. I thought it was interesting because of how in depth investors and banks got with the market including the subprime mortgages that eventually crashed and left thousand without homes and in debt to people because they defaulted on their loan. Lastly, the last interesting thing to me was the Split strike conversion strategy. I want to learn more about this because to me it seems like a great strategy, but for Madoff it was used wrongly. I feel that this strategy can still be used today without the chaos and great profits for the investors and people behind it without them taking all the money for themselves.