Word: ponzis
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Bernard Madoff's $50 billion Ponzi scheme continues to rock the financial world. But most hedge funds actually engage in similar - albeit legal - practices in the short run. In the past, these practices helped inflate their gains as well as hedge-fund managers' salaries and bonuses, but recently they helped bring about the failure of many major hedge funds...
Madoff never even came close to realizing the gains he reported and paid out to some investors. Yet even funds with fairly accurate estimates of unrealized gains are guilty of engaging in similar Ponzi practices in the short term. Here...
...except at a fatal loss, so it would sell its more liquid assets. Given that the fund is more likely to inflate its estimation of the illiquid assets, it would seem that investors who withdraw early get the better returns over that time period. Sounds a bit like a Ponzi scheme, right...
...course, a non-violent willingness to hurt other people for your own enrichment describes every mortgage bundler or junk-bond scammer who's ever forged a balance sheet. What distinguishes the Ponzi artist is the sheer scale of the scam...
...same exponential multiplication of funds that makes a Ponzi scheme impossible to sustain also means that, at first, it makes you very rich, very fast. "The financial payoff is so much larger," says Minnesota-based forensic psychologist Steven Norton. "The money comes in, the power comes in and that pushes them." What's more, says Galieti, the pyramid structure of a Ponzi scam means that there can be only one person at the pinnacle - an appealing idea for a narcissist who would just as soon not work invisible frauds inside a big investment bank...