MOM Scams
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Transcript of MOM Scams
![Page 1: MOM Scams](https://reader035.fdocuments.net/reader035/viewer/2022081815/587e015c1a28abe11a8b4bd1/html5/thumbnails/1.jpg)
PONZI SCHEMES
So basically, in Ponzi Schemes, you have to have more in than out. Old investors
are paid with new Investor’s money.
The two most famous people known for this are Charles Ponzi (named after him)
and Bernard Madoff.
For any scheme, you need to have a story. Ponzi’s story was that he used to
collect stamps from different countries and sell them at very high profits. He
promised double the money in 90 Days. Although he had a history of being a
smuggler, forger, a person from shady underground, he had the magnetism, the
charm and charisma to bring people to his scheme. He went from 10->100->1000-
>10,000->20,000 people involved in his scheme.
Bernie Madoff, like his counterpart has the reputation, not investing ability. He
offered 1% p.m. constant, stable growth, in spite of the market volatility, i.e., 10-
12% p.a. People thought it was the safest portfolio they could invest in! He
published monthly statements, to show his investors where he invested the
money.
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This looked very legitimate, nothing to arouse suspicion, but actually was just
complete and utter fiction, as he later confessed. Ponzi had used monthly coupons
for his scheme, which was a big flaw in itself (you can’t have just coupons for
multimillion dollar deals!)
It was actually portrayed as a privilege to invest with Bernie Madoff. You had to
know somebody who knew Bernie! – for the trust. HE needed to see that YOU are
CONFIDENT, by himself being skeptical.
The ‘con’-man term came into existence in 1850 when William Thompson, a well-
to-do financier used to talk to random strangers and make-belief they knew him.
After some chit-chatting, he’d ask a favor, “Can you give me your watch?” which
they would, and would never see him again. He was called the Confidence Man.
People thought, when others were getting rich, why can’t we? (The Stock Market
Bubble)
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A major reason for Bernie’s success was Social Feedback Loop, a fancy term for
herd mentality. This started in the late 1630s, when speculators drove the price of
Tulip Bulbs to 6 times the average annual salary of a common American!
There was this basic trust in Wall Street, when you do deals, THIS TRUST WAS
BROKEN.
Bernie had a middle class life in Queens, NY. He worked as a life-guard in the
beaches, and was from Hostrid, not Harvard! He came from humble means,
exposed to wealth, not part of wealth. He knew the system, but wasn’t a part of
the system.
His story was that he had opened a Trading Firm = Madoff Securities, from his
proceeds in his lifeguard job (actually Ruth(wife)’s father loaned him $50,000). He
used up-to-date methods, was an electronic trading pioneer.
It was his idea to bring automation to the market, a screen based trading system,
for increased transparency (the irony!). NASDAQ, the first electronic stock market
started with this. Obviously, he had a say, a repo there. At the back, Bernie used a
special software to backdate trades and manipulate account statements.
His early investors were friends and family from his college and Jewish Clubs they
had joined. The trust factor was imminent, when people think a person from their
community won’t hurt them. Ponzi had also played the same card, with Italian-
Americans who said “He’s one of us! He’ll make us rich!” Bernie had powerful,
influential friends, considering he was the non-executive chairman of NASDAQ for
’91,’91,’93. He came about as a voice of experience, a go-to-guy for regulators in
security and exchange department, when advice was sought.
On the front, he was a caring person. He had dinner with his investors. Norman
Brayman, owner of Philladelphia Eagle Football Team, had all his family
foundation money invested, 32 Million Dollars! When his wife’s sister died, Bernie
came.
Bernie kept a finger on the pulse of his investors. His target crowd, as he saw, was
pretty much interested in Charity. Thus, he became both a generous donor and
investment guru. Words spread, Victim List increased. Bernie counted on
investors who won’t take their money back.
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Charities spend only 5% of their money and keep the rest invested (conservatism).
The coolest target Bernie could ever get! When Bernie’s scheme was surfaced,
many charity institutions had to close down!
When Charities weren’t enough, Bernie wanted to bring money from Hedge
Funds. The 2000s, Market boom was fuelled by privately, explicitly pooled
investment funds for the wealthy- unregulated, aggressive, corner cutting. Bernie
found specific mangers- Fund Feeders, who would be paid 20% Profits, playing
the Economic Boom of the 2000s.
In ’99, a Frank Casey went to a close friend Harry Marcopolos, a math-guy, to talk
about an investing firm he had invested a lot in. He believed in Madoff. It took
Marc 5 mins to say, “This isn’t Possible!”. Cut to 4 hours later, he concluded this
was a Ponzi Scheme, since he couldn’t recreate his earnings.
Marc went to the SEC in 2000, and every year till the 2008 Market Crash, when
Bernie was later exposed. However, he just got a deaf ear. He had raised about 2
dozen red flags, which were neglected! Once, when one officer did listen to him,
Harry told them there could just be two scenarios: Either Ponzi Scheme, or Insider
Trading. They checked for Insider Trading, but failed. Ponzi Scheme, no-no.
Moreover, Bernie has the SEC Chairman, and even the Commissioner in his
pocket, to say the least.
Bernie had survived the 1980s, the dot com bubble burst, but not this 2008
Financial Turmoil. This time, he had all of himself in Hedge Funds. People couldn’t
be repaid back! When his sons asked him what do we do now? Bernie goes, “This
was all a big lie”. No one knows where the 50 Billion Dollars went!
Do watch this: https://www.youtube.com/watch?v=S2nX3FdRyR0 A brilliant
documentary explaining all that I’ve mentioned above.
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What does Goldman Sachs do?
Once upon a time in a village, a man announced to the villagers that he would buy
monkeys for Rs 10. The villagers, seeing that there were many monkeys around,
went out to the forest and started catching them.
The man bought thousands at Rs 10 and as supply started to diminish, the
villagers stopped their effort.
He further announced that he would now buy at Rs 20. This renewed the efforts
of the villagers and they started catching monkeys again.
Soon the supply diminished even further and people started going back to their
farms. The offer rate increased to Rs 25 and the supply of monkeys became so
little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at Rs 50!
However, since he had to go to the city on some business, his assistant would now
buy on behalf of him.
In the absence of the man, the assistant told the villagers, “Look at all these
monkeys in the big cage that the man has collected. I will sell them to you at Rs 35
and when the man returns from the city, you can sell it to him for Rs 50.”
The villagers squeezed up with all their savings and bought all the monkeys.
Then they never saw the man nor his assistant, only monkeys everywhere!
Welcome to ‘Goldman Sachs’!