Ponzi schemes are types of fraudulent investment schemes that usually affect the more gullible investor types out for big profits. It seems that the more calculating and savvier investors are the last ones to fall for such schemes. But just recently, Wall Street has been found to be victimized by a large scale form of Ponzi scheme.

Some of its victims include many banks from all over the world as well as several individual investors who might be considered experienced in their own right. Losses are estimated to be within the range of US$50 billion. But how did this happen?

Bernard Madoff

The Madoff Ponzi scheme may have succeeded for as long as it did, which can be decades, mainly because of the man who started it, Bernard Madoff. Madoff was considered as a legend in Wall Street.

He was even a former chairman of the Nasdaq stock market. The credibility and reputation that he has built up may have made a lot of investors more trusting of him that allowed the Ponzi scheme to succeed.

Inception

The Madoff Ponzi scheme probably started with the establishment of his Bernard Madoff Investment Securities in the 1960's. Although it might not be clear as to how the actual Ponzi scheme actually started, the founding of the fund surely may have helped given birth to it. And through it, Madoff started what is to become the largest and the longest Ponzi schemes ever.

Initial Clients

Bernard Madoff initially had the elite circles of the east coast as his major clientele. His reputation and credible status in Wall Street may have given his investors enough reason to trust him with their money. And for the most part, Madoff didn't. The fund provided its investors with the attractive and consistent returns that made them happy.

The success of the fund and the profits being made soon spread by word of mouth. Suddenly, Madoff was faced with a growing number of interested investors willing to have a stake with the fund.

Scheme Success

The success that the scheme enjoyed seems to be welcomed by many of its investors. Just as long as the investment made profits, the investors never bothered to know how such consistent returns are being made and from where.

And the success of the fund made bigger investors such as banks to get in on the deal. The mistake of letting such a fund provide such attractive returns without knowing and understanding the mechanisms would later on haunt the investors.

The Scheme Downfall

Ponzi schemes may elude suspicion mainly because of assured and attractive returns. Just as long as new investors come in, there is always money to spread around.

The main reason why Ponzi schemes work is that money provided by the new investors are being spread and handed to previous investors disguised as profits. It is simply a case of getting money from new investors in order to pay the older ones.

But then the economic recession came, which made a lot of people worried and concerned about their money in general. They wanted to get hold of it instead of letting others do the holding for them. This led to many investors wanting to cash out on their investments and, in this case, cashing out on Madoff's supposedly profitable fund.

But then, because it is all a Ponzi scheme, there is not enough money available to give out. The fund was not about savvy investing but rather just a case of having the money change hands.

The investors wanting to cash out eventually led to the discovery the scam which shook Wall Street and other financial institutions having a stake on Madoff's supposed fund. But by then, the damage has been done and estimated to go for about $US 50 billion in lost investments.