Bernie Madoff was the High Priest of Modern Ponzi Schemes. He died in an American prison in April.
His asset management company received a one percent income each month, rain or shine. He also offered capital returns and a money back guarantee.
The steady and excess rewards were made possible because Madoff used the cash in his notional £15billion of funds from new investors to pay off the old.
Fool’s Gold: Bitcoin is not a contributor to the greater economic and public good, unlike, for example, investing in bonds or shares.
His actions were exposed when the financial crisis caused panic among investors.
The incredible ride experienced by bitcoin investors, who saw it rise to $68,000 on Nov. 8, before falling to $48,000 towards year’s end, has not been endorsed by this column as a place where it is safe to invest.
I was not convinced by the appearance of respectability and support from Elon Musk that made it an official currency in El Salvador, Central America.
You must acknowledge that not only are fortunes made by the early adopters, but also those with enough intelligence to make a profit on their way up.
From the very beginning, central bankers had been skeptical. CNBC’s Alan Greenspan, former Fed Chairman, compared it to fragile currencies that proliferated during the American Civil War of 1861-1865, and then disappeared.
On his last visit to London, James Gorman from Australia, the chairman of Morgan Stanley’s investment bankers, stated that instead of $60,000, he believed it was worth 60 dollars.
The academic skepticalness about bitcoin is growing. Robert McCauley from Boston University, a senior researcher, argues in a blog post on FT Alphaville that comparing Bitcoin to a Ponzi scheme would be unfair.
In the hope of making handsome returns, people invest in bitcoin. The profits made by cashing out sustain this expectation. However, there are no outside sources of income.
Old investors who cash out of a Ponzi scheme are only doing so to the detriment of any new money.
Bitcoin is not like other investments in bonds and shares. It does nothing to improve the economic or social condition.
Legal processes led to the recoveries of $14billion or 70% of funds lost by early Madoff investors. However, it is unlikely that any bitcoin investors will ever be able to get their money back. Bitcoin scams are not worth the trouble.
Merry-go-round
Because of their superior returns, private equity is attractive to wealthy families offices and asset managers.
Some of these successes have been spectacular. Blackstone’s quick flip of trading platform and financial data powerhouse Refinitiv to the London Stock Exchange is a case in point.
Advent Jansen and Philip Jansen were responsible for the remaking Worldpay (now at BT).
Today’s report reveals that global sporting organisations, from Six Nations rugby and Liverpool FC, are also being financed by private equity.
All the money doesn’t reach its intended targets. In 2021 some £31billion of private equity deals consisted of partners selling corporate assets from funds to new portfolio companies.
This may allow partners to pay cash back to investors at earlier stages.
Needless to say it can also be profitable for private equity principals who collect carried interest, usually a 20 per cent share of transaction values, as they pass ‘Go’.
Doesn’t the concept of using new funds to pay off old have a familiar ring?