Wednesday, December 22, 2010
Madoff's Business Model
The fact that Jeffry Picower's estate is returning 7.2 billion dollars to the Madoff fund is difficult to understand except if Picower was a partner of Madoff. Apparently, Madoff relied on a core group of investors who provided Madoff with cash in key moments during the multi-decade Ponzi scheme to solve liquidity issues. Madoff was an exceptionally intelligent and experienced financier, so how he imagined that a Ponzi can be operated safely for long? What was his idea of how it was going to end? Is it possible that he has seen other Ponzis going on forever? and hoped to be among them? Or he had seen other Ponzis wind down quietly and hoped to be able to do the same thing? He must have had in mind some kind of end game.
My hypothesis at this moment is that there is a basic misunderstanding of Ponzi schemes. Madoff may have had the idea that a well managed Ponzi is viable forever. Many financial businesses, maybe all of them, are basically Ponzis. The American Social Security and many pension funds certainly are. Pic: Ponzi.