The prevalence of ponzi schemes?

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.

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

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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.

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.

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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.

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

yes, ponzis come in all guises.

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.

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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.

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.

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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).

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).

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 )

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

.... Inevitably, the world caught up with Ken Grace. .... He was prosecuted on five counts of misconduct, and had further misadventures, including a shooting incident at a Gold Coast casino. Last week, the 58-year-old was confirmed dead after being found in a Sydney hotel room when he was due to face sentencing.

The tragic saga of Ken Grace was certainly colourful. But his crime is all too common, a garden variety Ponzi scheme in which he conned people into giving him money that he either lost or spent until he was found out. The victims – investors and those around him – suffered immensely
financially and emotionally.

There will be more Ken Graces, and chances are some are actively running their schemes as we speak. But having now borne witness to a few, I have learned there are important considerations to avoid falling for them.

One is to never let your guard down. Some of the most effective schemers have raised money from within their own circles of trust such as family, religious groups or communities. Often, it’s an unwitting accomplice who has won the trust of others who lures victims.

Another lesson is to never outsource due diligence, particularly to celebrities. Top sportsmen and women deserve our respect and admiration but if they’re pitching a financial product it’s almost certainly because they’re a cheap and effective way for a promoter to buy credibility.

Even finance and business celebrities are prepared to trade their trust for a quick fee, or have fallen for such a pitch themselves. And some sources aren’t as credible as they appear. (Goldsky’s Asian hedge fund award is an example.)

The reality is that even the sharpest among us are not immune from manipulation, as much as we like to believe otherwise. It could be a friend giddy about a biotech stock, an untapped resource, or a start-up that will change the world. Sometimes the promoter believes his or her own bulls--t and on the rare occasion, the punt actually pays off.

But all too often we’re being pitched a simple transfer of wealth predicated on hope and hype. We’ll all meet our own Ken Grace one day if we haven’t already. The best we can do is make sure he doesn’t ruin us.

Ken Grace attempting to bully ASF into removing a very negative post about Goldsky Asset Management. The post was not removed.

Dona Ferentes said:

We’ll all meet our own Ken Grace one day

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Former occupation ? ..Used car salesman . Don't know many of them but heaps of former builders ! Watch out for those dodgy buggers , too. ( Takes one to know one, I guess . )
Old mate Ken took an Olympic swimmer ( see Sam Riley in the youtube video ) and an Olympic cyclist for an expensive ride , along with two AFL hotties who both lost , north of 100 grand .
The son's BMW was a " gift" from dad. His step daughter received a private jet flight up to QLD for a ( ahem ).. a boob job . Heavens.
And $24 Million is still unaccounted for. All gone by now.