Bernard Madoff's Ponzi scheme

On the afternoon of December 11, 2008, CNBC News Radio reported a major event. The affair involved a Wall Street legend named Bernard Madoff, a former chairman of Nasdaq. He was arrested by the FBI after he admitted that his investment fund was virtually bankrupt, behind a Ponzi scheme involving tens of billions of dollars. The breaking news shocked the world and instantly attracted wide attention.

In just two weeks, some investors chose to commit suicide because they could not bear the sudden financial losses. Three months later, after an outcry by millions, Madoff was sentenced to 150 years in prison, the most severe sentence in U.S. financial history.

How did Bernard Madoff, the former chairman of NASDAQ, who created, directed, and acted on the largest and longest Ponzi scheme in history, manage to keep it under control for more than two decades and keep the rest of the world in the dark? This article delves into the life of Bernie Madoff and his Ponzi scheme to get behind the scenes of the financial scandal.

Bernard Madoff, born on April 29, 1938, grew up in an ordinary Jewish family in Queens, New York. Although his talent is not outstanding, he has always had a determined will. In 1960, Madoff, then 22, was in his first year of a master's degree in law. However, with a $5,000 loan from his father-in-law and another $5,000 from his own earnings, he decided to drop out of school and start Madoff Securities Investments, a firm that would become a nightmare for countless people half a century later.

In the beginning, the company was a market maker, also known as a "market maker, "providing services for the stock market. Madoff's firm allowed investors to place orders over the phone, such as 10 shares of Coca-Cola. Madoff would quote, and if the price was right, he would close, and he would make the difference, the spread. This is the trading scene that you see in the movie, which is actually the trade that the market maker is executing.

Over time, Madoff's firm grew, especially in the highly competitive brokerage market. However, he made a key decision that put his company on the map: the electronization of securities trading. He helped develop an electronic stock quotation system that completely changed the traditional way of trading by telephone, and this initiative allowed him to immediately dominate the market. Madoff is credited with pioneering electronic stock trading. This technology later evolved into the world's first electronic stock trading platform, now known as NASDAQ.

However, Madoff did not stop there, and he worked his way up to the position of the largest market maker on Nasdaq.

According to the Wall Street Journal, in 1992, 90 percent of all stock trading in the United States passed through Madoff's firm. He has held a number of important positions, including Chairman of Nasdaq, Chairman of the American Association of Securities Dealers, Chairman of the International Securities Clearing Corporation, Chairman of the National Commission on Business Conduct of the SIA Exchange Commission, and many others, most of which are related to the government. Madoff became a highly respected figure in the financial world, and the CEOs of major Wall Street investment banks were not relaxed in front of Madoff; if they needed a deal and could not get it done, they would turn to Madoff. He had successfully built his firm into an asset management institution so shrouded in secrecy that some considered it a badge of honor to entrust their money to Madoff. As for Madoff, he achieved his original goal of controlling the cash flow and keeping the money flowing in.

Madoff knew what he was going for. He didn't have to chase high returns, but he couldn't lose money. His return on investment, like a ruler, continues to grow with little fluctuation. That's how he made his mark on Wall Street. Madoff's returns are incredible because you need to look at risk as well as yield when measuring investment returns. He claims that the secret to his success is the use of arbitrage strategies, in which he buys and sells related assets in different markets in order to obtain risk-free returns.

This was the behind-the-scenes story behind Madoff's massive scheme, in which he claimed his investment strategy was based on arbitrage and was in fact a Ponzi scheme.

A Ponzi scheme is a type of financial fraud that typically involves investors being promised high returns, but those returns are actually paid off to early investors by attracting funds from new investors. The Ponzi scheme takes its name from American financier Charles Ponzi, who pioneered the scheme in the 1920s.

The basic principle of a Ponzi scheme is that scammers promise investors high returns and then use the new investors' funds to pay off the returns of earlier investors to create a seeming success story that in turn attracts more investors. The process continues until there is a mass redemption of funds by investors or the scammers can no longer attract enough new funds to cover the returns. Eventually, the Ponzi scheme collapses, causing early investors to lose money.

In practice, Madoff did not make real investments but adopted the model of a Ponzi scheme. He continually raised money from new investors and then used the money from the new investors to repay the returns of the old investors, a typical characteristic of a Ponzi scheme. This pattern continued until Madoff was unable to pay any more returns and his fraud was finally exposed.

On December 11, 2008, when the FBI arrested Bernard Madoff, he finally admitted that there was virtually nothing left of his investment fund, totaling $65 billion in losses. The incident shocked the financial world and revealed a massive Ponzi scheme, the largest in American financial history. The scam resulted in huge financial losses, and several investors committed suicide in the following weeks due to their financial difficulties. In the end, Bernard Madoff was sentenced to 150 years in prison, one of the most severe sentences in American financial history.

The incident highlighted regulatory gaps in the financial sector and the need for investors to be wary of Ponzi schemes and shady investment schemes. It has also served as a lesson to the financial world not to fall for too-rosy investment promises and to exercise adequate due diligence and risk assessment. The Bernard Madoff case has also inspired financial regulators to improve their regulatory systems to better protect the interests of investors.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.