# The prevalence of ponzi schemes?



## mellifuous (29 August 2009)

http://www.youtube.com/watch?v=_D8asfMtx1o&feature=PlayList&p=3DC05BEA558B9D28&index=0&playnext=1

http://www.youtube.com/watch?v=DtvolnU6Zgc&feature=related

Shouldn't ASIC take more notice to ensure strong positive cash flow in particular entities, for example managed funds?  What are the auditors responsibilities to ensure a particular level of cash flow before ringing alarm bells?  What should be the liability of directors?


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## Buckeroo (29 August 2009)

mellifuous said:


> http://www.youtube.com/watch?v=_D8asfMtx1o&feature=PlayList&p=3DC05BEA558B9D28&index=0&playnext=1
> 
> http://www.youtube.com/watch?v=DtvolnU6Zgc&feature=related
> 
> Shouldn't ASIC take more notice to ensure strong positive cash flow in particular entities, for example managed funds?  What are the auditors responsibilities to ensure a particular level of cash flow before ringing alarm bells?  What should be the liability of directors?




That's nothing compared to the giant US ponzi scheme & the authorities there are actively encouraging it

Cheers


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## mellifuous (29 August 2009)

"... Ponzi schemes are very typical of most financial activity. Banks and the Social Security System are ponzi schemes. If the definition of a ponzi scheme is paying previous investors with the money gleaned from future investors then literally everything in the financial sector is a kind of ponzi scheme, so this thin line, or grey area between 'proper' ponzi schemes and 'ligitimate' ponzi schemes fools a lot of people..." Sam Vankin (economist)

http://www.youtube.com/watch?v=IymklQKT-lc

http://www.youtube.com/watch?v=8B0GiYADisw

Yes, it seems to me that so many of these managed funds were no more than ponzi schemes.  When I looked at the loans made by City's FMF, about 60% of the value of the fund were directed to loans not returning any money plus to debt.

How the auditors didn't put it down in 2007 is a big surprise to me.

I'd bet that all those similar managed funds really had cash flow problems (or debt) that was somehow masked.

I can't believe that the outcomes of Westpoint, MFS, FMF and the like are much of a surprise to those 'in the know'.


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## mellifuous (3 September 2009)

yep.. there is no end to creativity.


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## doctorj (3 September 2009)

mellifuous said:


> Banks and the Social Security System are ponzi schemes.



How are banks ponzi schemes?


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## tech/a (3 September 2009)

doctorj said:


> How are banks ponzi schemes?




In *very simple *terms.

1000 invest $100K into a bank.
Bank then lends 80% to mortgages.
1000 original investors walk in wanting their $100k

Worse still as happened in the US.
Mortgages are only worth 80% of the original deal.

OOOPPs


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## doctorj (3 September 2009)

tech/a said:


> In *very simple *terms.



Most banks I'm familiar with are doing a pretty good job at matching the tenor of their assets/liabilities.


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## mellifuous (3 September 2009)

doctorj said:


> Most banks I'm familiar with are doing a pretty good job at matching the tenor of their assets/liabilities.




yep, they sure have -- especially when governments around the world had to step in to either buy them out or guarantee their deposits.

some ponzis are supported - that's what the grey line is all about - some are supported, others are not - sometimes the line is blurred.

without government intervention, the whole banking system could have collapsed into itself.

Banks are big time ponzi, so are governments.


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## doctorj (3 September 2009)

mellifuous said:


> Banks are big time ponzi, so are governments.



But why?

They receive deposits and invest that money in the form of loans.  If you use that definition, everything that involves a risk is a ponzi scheme.

Got an axe to grind?


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## tech/a (3 September 2009)

doctorj said:


> But why?
> 
> They receive deposits and invest that money in the form of loans.  If you use that definition, everything that involves a risk is a ponzi scheme.
> 
> Got an axe to grind?




Until it goes wrong and the balance of Creditors debtors and assets skews severely like it did for these guys.
Some pretty massive figures in here!

http://en.wikipedia.org/wiki/List_of_acquired_or_bankrupt_banks_in_the_late_2000s_financial_crisis

We/Private business get in the Poo and we go bankrupt. If your big enough and the debt is big enough you have far more power than the little guy.
Many are bailed out with NO LIABILITY to repay!!

How'd those poor buggers who lost their homes like to be in the position to do that!


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## doctorj (3 September 2009)

tech/a said:


> Until it goes wrong and the balance of Creditors debtors and assets skews severely like it did for these guys.
> Some pretty massive figures in here!
> 
> http://en.wikipedia.org/wiki/List_of_acquired_or_bankrupt_banks_in_the_late_2000s_financial_crisis
> ...



We're not debating the merits (or lack there of) of their risk taking, but their fundamental business model.  

Too many criticise banks without understanding how they work or what happened.  I guess it's tall poppy syndrome or trendy or something.

Ponzi schemes require new money to pay returns to earlier investors.  Banks pay their depositors returns through earned returns on their loans and the excess liquidity they deposit at other banks.

Just because some banks needed to be bailed out, doesn't make them all (or perhaps any of them) ponzi schemes. It's a non-sequitor


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## mellifuous (3 September 2009)

Ah contraire, banks have loaned out money to lenders to purchase landed asets (in the main), and if there's a rush on the banks, the banks cannot pay - they simply don't hold the reserves to pay all of their depositors out.  

The banks cannot demand the money back from lenders in order to protect themselves, so they're in deep trouble.

In the ordinary course of business, the fact that they cannot pay out under total stress is not important.  However, it is when everyone wants their money back at once.

It's really all about liquidity and cash contingencies.   There is no way any bank is able to pay back all its creditors in any given short period, or at all.

I'd guess that at all times, all banks are illiquid.

However, if such circumstances don't rise to being 'ponzi' in your mind, then they don't.

My concern is never with banks, because I know that governments will always act to secure them, but businesses run on the same model are a different ball game and place investors money at substantial risk.


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## tech/a (3 September 2009)

> I'd guess that at all times, all banks are illiquid.




Your post is well put mell.

Could it not then be argued that most banks could be classified as insolvent!
Certainly at times cash flow insolvency if not balance sheet insolvent (At times).


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## mellifuous (3 September 2009)

yes, I think so.  However, without the trigger of a panic run by depositors, there is no problems because the flow of money in and out is well managed.  

It's very different for entities like the First Mortgage Fund (my bad investment) whereby up to 60% of the fund was either non-payment loans (capitalised) or debt (bank facility (or so called 'co-investors')).

In the latter case,  I think it was Ponzi after the market started to wain and negative publicity began to pop up here and there.  Of course, with poor (to non-existent) cash flow, the entity become ponzi (in my view) as early as August 2007, but was allowed to continue on until being frozen on 3 March 2008.

During that period investors were permitted to invest and re-invest, while the manager deconsolidated the fund to protect itself - inside knowledge is always very, very helpful.

As the author of the first-quoted excerpt says, its a 'grey line' that's often blurred.


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## Trembling Hand (3 September 2009)

tech/a said:


> Could it not then be argued that most banks could be classified as insolvent!
> Certainly at times cash flow insolvency if not balance sheet insolvent (At times).




No because insolvent is the inability to pay one's debts *as they fall due*.

So banks are not insolvent because they can cover their debts of their day to day business until they can't then they are insolvent. :

Very important diff 



doctorj said:


> Got an axe to grind?



 It would seem so.


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## Gillie (3 September 2009)

tech/a said:


> Could it not then be argued that most banks could be classified as insolvent!
> Certainly at times cash flow insolvency if not balance sheet insolvent (At times).




Don't forget that liquidity is also the big issue. Any company should always maintain a working liquidity of at least 1.2 to 1.5 times, anything less than this would/should ring alarm bells.


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## mellifuous (3 September 2009)

in the good times, who cares - when things go pear shaped, it's a whole different kettle of fish.

no axe to grind - that's already done.


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## Trembling Hand (3 September 2009)

mellifuous said:


> in the good times, who cares - when things go pear shaped, it's a whole different kettle of fish.
> 
> no axe to grind - that's already done.




But that is why your argument that all financial insto's are ponzi's is dumb. Thats the same for ALL business. They are all fine until ..... [insert whatever], they lose a big customer, they get flooded by a hurricane, the market changes. Its just silly.


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## prawn_86 (3 September 2009)

Banks operate a unique model (not a ponzi scheme) that is required in todays society. Banks are heavily legislated and regulated in most countries, however that does not mean they cannot go bust.


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## mellifuous (3 September 2009)

Trembling Hand said:


> But that is why your argument that all financial insto's are ponzi's is dumb. Thats the same for ALL business. They are all fine until ..... [insert whatever], they lose a big customer, they get flooded by a hurricane, the market changes. Its just silly.




It's not my argument that 'all financial institutions are ponzi', it was the idea that they are 'ponzi-like'.  Actually, I should have taken the quote from the videos.   For some reason banks took prominence in the thread, which wasn't my intention.

Nevertheless, contrary to your belief, others have formed the view that :-

"... Ponzi schemes are very typical of most financial activity. Banks and the Social Security System are ponzi schemes. If the definition of a ponzi scheme is paying previous investors with the money gleaned from future investors then literally everything in the financial sector is a kind of ponzi scheme, so this thin line, or grey area between 'proper' ponzi schemes and 'ligitimate' ponzi schemes fools a lot of people. ..." Sam Vankin


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## mellifuous (3 September 2009)

I should point out that my argument relates to entities (like the First Mortgage Fund) that were devoid of cash that they were surviving only with 'new blood' coming into the fund, and with increased lending (thanks to the banks).

When entities such as these operate in diffcult conditions, they become somewhat ponzis because the managers know that the funds are in deep trouble, but don't disclose that to the investing public - in fact they aver quite the contrary in order to induce investment in the great hope that their dreams will not die.

There are those who think banks (and government) are ponzi in nature, and that is fine, but we all know they generally conduct their business well, and failing a real drama, they weather most ups and downs in the market.

Nevertheless, the failure of a bank would come as for any other ponzi-type enterprise but at some length of time and from a catastrophic event, while the mismanaged type enterprises fail rapidly as a consequence of a much less catastrophic event, and with drastic consequences.

It's my point that there are many companies which  operate 'ponzi-style' in troubled times when they should otherwise wind up.


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## doctorj (3 September 2009)

mellifuous said:


> "... Ponzi schemes are very typical of most financial activity. Banks and the Social Security System are ponzi schemes. If the definition of a ponzi scheme is paying previous investors with the money gleaned from future investors then literally everything in the financial sector is a kind of ponzi scheme, so this thin line, or grey area between 'proper' ponzi schemes and 'ligitimate' ponzi schemes fools a lot of people. ..." Sam Vankin




Does he say why banks are ponzi schemes?   It’s a pretty bold statement to make without a supporting argument, when others here that actually understand the industry have made a good fist of disagreeing with on logical grounds.

Let me say again – banks pay returns to depositors, not with the money received from new deposits, but through the revenues earned through taking risk (eg. loans)  or depositing excess liquidity with other counterparties.  How is that ponzi like?  

Yes, banks have a large number of deposits that are available ‘on demand’ but typically banks endeavour to match the tenor of their funding base (deposits and in some cases money markets) with the tenor of their outstanding loans.  

Even a deposit run won’t necessarily kill off a bank.  Just about every country in South Eastern Europe has seen net deposit outflows reach 15-20% of the deposit base in a single month and there hasn’t been a significant increase in bank failures.

I’ve attached a graph showing the cumulative liquidity of a real bank, current to December last year.  It’s not a particularly well run bank by any means, and yet it shows a relatively typical pattern of liquidity.  The business model of banks is not that of a ponzi scheme.


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## mellifuous (4 September 2009)

doctorj said:


> Does he say why banks are ponzi schemes?   It’s a pretty bold statement to make without a supporting argument, when others here that actually understand the industry have made a good fist of disagreeing with on logical grounds.




Doc, the quote was taken from the following video:-
http://www.youtube.com/watch?v=IymklQKT-lc&feature=fvst
The quote is at about 6:20

This is the second of the two part Inside Story episode.
http://www.youtube.com/watch?v=8B0GiYADisw

I'll fall between two stools and agree with both of you.


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## knocker (4 September 2009)

All this is a fallacy ok.

Look I just bought a nice Victorian home here and the estate agent will revalue it  because they are chopping down trees in the park.!!! How good is that?
And we have Japanese/Chinese/iNDIANS LOOKING AT THE PLACE/\  wOW


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## mellifuous (5 September 2009)

yes, ponzis come in all guises.


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## Julia (5 September 2009)

mellifuous said:


> yep, they sure have -- especially when governments around the world had to step in to either buy them out or guarantee their deposits.
> 
> 
> without government intervention, the whole banking system could have collapsed into itself.



In Australia the government offered the guarantee not because any of our banks were in danger of collapsing but rather as a political move to build confidence amongst the voting public.


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## mellifuous (9 September 2009)

Julia said:


> In Australia the government offered the guarantee not because any of our banks were in danger of collapsing but rather as a political move to build confidence amongst the voting public.




Yes, that's right - some say that everything politicians do has a political motive.

Without confidence, there is nothing.  An interesting series to watch is the 'Assent of Money' on the issue of 'confidence' (and of course, other things).


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## mellifuous (27 December 2009)

http://www.moneymanagement.com.au/article/House-rules-know-your-product/239125.aspx

"... According to Atchison, with the benefit of hindsight, three key factors were behind the sector’s decline. The first was the com*position of the distributions paid to investors.
 “The distributions paid by A-REITs was not just rental income … yields were being supported by considerable dis*tribution of trust capital,” he said. This created a “misunder*standing” and “gave a false impression” of how some of the trusts were performing.
Higgins agreed capital return became an issue. ..."


Is this 'capital return' indicative of a ponzi scheme (at least a short/medium term one)?

And think about it, investors pay tax on that 'capital' returned as 'distributions' (in unlisted managed funds with mostly hidden impairments).


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## noirua (28 December 2021)




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## divs4ever (28 December 2021)

so does the Chinese company Evergrande qualify ??

 i think  not , by the strict definition , as it intended ( hoped more likely ) to become a successful business empire  using the tried and tested back-up plan  .. become so, that  big the government  can't afford to let you fail 

 however YouTube  has several educational  videos about Bernie Madoff   who operated a pure Ponzi style scene ( returned SOME recently injected  capital  into the long-term holders  , while never investing a cent on the client's behalf )


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## frugal.rock (28 December 2021)

I see your Ponzi scheme, and raise you a Madoff affair....


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