Tuesday, December 16, 2008

"PONZI SCHEME"

The biggest money news this week is the $50 billion loss that resulted from a Ponzi scheme run by Bernard Madoff, a trusted New York money manager. This time mainly millionaires, not average Joes, lost their millions when Madoff announced all the money was gone. Friends, his own son, charitable organizations, college endowment funds, foreign banks, union retirement funds and individuals who were retired or planning to retire were wiped out. We talked to a friend of a friend of a friend who had $200 million invested with his old buddy Madoff. It is probably all gone. He says he will survive because he has several houses that can be sold and a huge, multimillion-dollar modern art collection.

The moral of the story is, as always: diversify your investments. We have known many collectors who were able to pull through a financial crisis by selling their collections. Your collections and the other contents of your house may actually be a kind of savings account.

We checked to see where the term "Ponzi scheme" originated. It's named for Charles Ponzi (1882-1949), who emigrated from Italy to the United States in 1903. The idea is simple. Ponzi took money from investors and promised a high return. The money he used to pay off the first investors came from later investors. He never had a money-making business. When he ran out of new investors, the scheme collapsed and investors lost all their money.

1 comment:

Felicia said...

I read the book about Ponzi (his business was in Boston) many years ago. he actually started the business based on buying international postage stamps from Italy and making a profit because the currency was different. By the time the stamps were discontinued, he had people giving him thousands to invest, so he kept taking in the money.
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