So many words #017 - Madoff

I have become death, destroyer of pension funds

By far the most gratifying scandal to watch in the financial crisis so far has been the downfall of Wall Street legend and Level 18 Financial Illusionist Bernie Madoff (伯納德 ∙ 馬多夫 Bónàdé ∙ Mǎduōfū). The scale of his fraud (騙局 piànjú) was simply so immense that it took on almost biblical proportions, the investment guru himself acting as the first horseman of the financial apocalypse, a locust plague on the sheltered elites of Aspen, Colorado.

On the outside, Madoff ran (經營 jīngyíng) a hugely successful hedge fund (對沖基金 duìchōng jījīn), i.e. an unregulated financial institution. Madoff offered some of the highest returns (報酬 bàochōu) in the business, effectively doubling his clients' money every four or five years. Having your money invested in Madoff was a badge of honor among the rich in America, a way of showing that you were one of the chosen ones, an elite among the elites. And maybe the rest of us can take comfort that even these people, the bald and successful, failed their saving throw against greed magic and forgot one of the most basic lessons of capitalist society:

如果一件事情好到不象是真的，多半不是真的 if something sounds too good be true, it probably is

What Madoff had actually done to get these fantastic returns was to run what is known as a Ponzi scheme (龐茲騙局 pángzī piànjú), a classic fraud where the investments of new participants are used to pay out returns to those higher up the chain. The Chinese Wikipedia gives a good summary of how the scheme works:

參與者要先付一筆錢作為入會代價，而所賺的錢是來自其他新加入的參加者，而非公司本身透過業務所賺的錢。投資者通過吸引新投資者加入付錢，以支付上線投資者。 New participants [in the scheme] need to pay an initial entry fee, which is also the only source of revenue in the enterprise. The investor pays those higher up the chain by attracting new investors and getting new entry fees from them.

But this cannot go on forever:

但隨著更多人加入，資金流入不足，騙局泡沫爆破時，最下線的投資者便蒙受金錢損失 But as more people get involved, the incoming capital flow is not big enough to sustain the scheme. The bubble bursts, and the investors lower down the chain lose money.

In Madoff's case, his financial trickery was so clever that the scheme could theoretically have operated until his death before it would have run out of money. However, when the financial crisis arrived, the withdrawals became too many to service and he had to admit to the fraud, leaving his investors with huge losses and damaged egos, and the rest of us with glorious schadenfreude (幸災樂禍 xìngzāilèhuò).

In Taiwan and the mainland, ponzi schemes are known as 老鼠會 lǎoshǔhuì, "mouse meetings", and have become increasingly popular in the new climate of fast growth and materialism in China. The name is a play on the fast recruiting rate often seen in these scams (which is necessary to keep the scheme going). Here's how my girlfriend explained it:

[her] 說:

因為　他是　一個人拉很多會員

[her] 說:

每個會員　再拉很多人進來

[her] 說:

就像　老鼠一樣　很會生

[her] 說:

生ｂａｂｙ

Both ponzi schemes and mouse parties are collocated with 加入 jiārù to join, same as for any organization.