Madoff--Ponzi Scheme

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SpartanBull
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Madoff--Ponzi Scheme

Post by SpartanBull »

Hi there,
Pardon the randomness of this post, but some recent "ponzi scheme" stuff in the news led me to the following question, to which I have not been able to find a decent answer. How did Bernie Madoff expect to ultimately get away with what he was doing, as in what was the endgame? I full understand how a ponzi scheme works, and it seems that the only way not to get caught is to continue the ponzi scheme, find new targets, new cash flow, etc. Was his plan to just keep the thing going for the rest of his life? I get that he's a criminal/sociopath etc etc, I get that. But I guess when I think of a typical crime like "robbing a bank", the objective is that someone plans to rob a bank, "get away with it" and then be rich. Silly but makes sense. The Madoff thing didn't make sense to me because there was no universe where he wasn't going to eventually get caught. Was he going to flee the country maybe?
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in_reality
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Re: Madoff--Ponzi Scheme

Post by in_reality »

And what of those assisting his scheme? Were they all planning to flee together? Fake a bunch of losses to conceal their theft?

Or maybe just string it along as long as possible.

His wife did ok in the deal. Maybe that was the goal ... Shift the assests to the blameless spouse who then walks away with millions.
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Re: Madoff--Ponzi Scheme

Post by Toons »

" How did Bernie Madoff expect to ultimately get away with what he was doing,"

At heart,I think he knew that one day,
the walls would come tumbling down :happy
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Re: Madoff--Ponzi Scheme

Post by mouses »

in_reality wrote: His wife did ok in the deal. Maybe that was the goal ... Shift the assests to the blameless spouse who then walks away with millions.
How did that work? I would have assumed the whatsisguy in charge of deciding who gets money, who has money clawed back, would have gone after any of the family's assets that came from the scheme.
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in_reality
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Re: Madoff--Ponzi Scheme

Post by in_reality »

mouses wrote:
in_reality wrote: His wife did ok in the deal. Maybe that was the goal ... Shift the assests to the blameless spouse who then walks away with millions.
How did that work? I would have assumed the whatsisguy in charge of deciding who gets money, who has money clawed back, would have gone after any of the family's assets that came from the scheme.
She settled to give it all back except $2.5M.

It's inexplicable to me given she once worked as his bookkeeper and maintained her own office at the Madoff firm.

So she got a great life and then $2.5M. It's beyond crazy.
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Re: Madoff--Ponzi Scheme

Post by Call_Me_Op »

If criminals considered the consequences of their actions, they would probably not be criminals.
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Re: Madoff--Ponzi Scheme

Post by staythecourse »

Call_Me_Op wrote:If criminals considered the consequences of their actions, they would probably not be criminals.
Well said. To expand the conversation further if folks thought about their consequences there would be less poor decisions that are made. Take tobacco smoking which is involved in the top 5 causes of death in America and is in the top 2 most preventable causes of illness (morbidity) yet folks still smoke.

Some folks are just self destructive. Why is a better question and likely never to be answered, i.e. nature vs. nuture.

Good luck.
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Re: Madoff--Ponzi Scheme

Post by Index Fan »

IMHO Madoff didn't think long-term (most criminals don't). He received respect and accolades for his alleged outperforming of the market, which fulfilled some deep-seated emotional need inside him.
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Re: Madoff--Ponzi Scheme

Post by cheese_breath »

Why limit the discussion to Madoff? Don't all Ponzi schemes risk eventually running out of suckers? But I don't think Bernie ran out of suckers. Wasn't it the 2008 financial crisis and people wanting to redeem their shares that did it? If it wasn't for that, at his age he might have been able to keep it going until he died.
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Re: Madoff--Ponzi Scheme

Post by Polymath »

The reason people these things is not because they simply ignore the consequences, it is any combination of:
- under weighting consequences (poor judgement)
- false belief that they are somehow unique (delusion)
- rational trade-offs of now vs later (arguably good judgement)

In the case of Bernie, he managed to have many amazing years of life, secured a future for his family (financially) and all he has to do is most likely sit in prison until he dies. Comparatively I've known many people who worked their fingers to the bone their entire life, developed all kinds of health problems living in pain and died not knowing who would take care of their spouse/family. Comparatively Bernie did great! Which is one example of why he may have saw it as worthwhile and not simply ignored the consequences.

By the way, Bernie accepts visitors at the minimum security prison he resides in North Carolina. You could ask him yourself.
Last edited by Polymath on Sat Feb 20, 2016 8:39 am, edited 1 time in total.
Nicolas
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Re: Madoff--Ponzi Scheme

Post by Nicolas »

in_reality wrote:
mouses wrote:
in_reality wrote: His wife did ok in the deal. Maybe that was the goal ... Shift the assests to the blameless spouse who then walks away with millions.
How did that work? I would have assumed the whatsisguy in charge of deciding who gets money, who has money clawed back, would have gone after any of the family's assets that came from the scheme.
She settled to give it all back except $2.5M.

It's inexplicable to me given she once worked as his bookkeeper and maintained her own office at the Madoff firm.

So she got a great life and then $2.5M. It's beyond crazy.
Her son Mark committed suicide and her other son Andrew died of cancer. She has reaped worldwide scorn. And $2.5M doesn't go very far in Manhattan.
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Re: Madoff--Ponzi Scheme

Post by Index Fan »

And $2.5M doesn't go very far in Manhattan.
Move.
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Re: Madoff--Ponzi Scheme

Post by Justalearner »

Are any of the investors also guilty? Why doesn't the smell test prevail? Reminds me of the 1970's Savings and Loan "crisis"
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Re: Madoff--Ponzi Scheme

Post by in_reality »

Nicolas wrote:
in_reality wrote:
mouses wrote:
in_reality wrote: His wife did ok in the deal. Maybe that was the goal ... Shift the assests to the blameless spouse who then walks away with millions.
How did that work? I would have assumed the whatsisguy in charge of deciding who gets money, who has money clawed back, would have gone after any of the family's assets that came from the scheme.
She settled to give it all back except $2.5M.

It's inexplicable to me given she once worked as his bookkeeper and maintained her own office at the Madoff firm.

So she got a great life and then $2.5M. It's beyond crazy.
Her son Mark committed suicide and her other son Andrew died of cancer. She has reaped worldwide scorn. And $2.5M doesn't go very far in Manhattan.
Which has no bearing on the fact that neither her nor her husband ever legitimately earned any of it. If she's innocent, I do feel sorry for her misfortune. Even so, I can't see why she is entitled to anything that wasn't legitimately earned. Sorry.
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Re: Madoff--Ponzi Scheme

Post by IowaFarmBoy »

My observation with people caught up in embezzlement or misappropriation of funds is that it frequently starts as a "temporary" loan that they will "pay back soon". They don't start out intending to steal but have gotten into some kind of a bind. However, things rarely work out that well (at least for those that get caught) and the money isn't replaced and generally they need to "borrow" larger and larger amounts. It gets easier and easier.

A ponzi scheme seems more deliberate but I could see something like that happening there. I promised my friend a certain return and I need to make good on my promise even if my investments haven't done so well. And my next investment will hit it big so I can make it all up soon...... and the cycle begins.
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Re: Madoff--Ponzi Scheme

Post by Bill Bernstein »

IowaFarmBoy has it exactly right.

Most big fraud isn't deliberate; it usually begins with a small loss somewhere, then a slightly larger "borrowing" elsewhere, which also goes wrong . . . and so on.

In Madoff's case, he began as a successful arbitrageur back in the 60s--convertibles, I believe. At some point, his simple model got too popular/stopped working, and he began reporting fictitious returns. His sociopathic personality extended the lie far beyond where most folks would have run it.

Same with Nick Leeson, Richard Nixon, etc. It's not the initial infraction that gets you; it's the cover up.

Bill
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Re: Madoff--Ponzi Scheme

Post by montanagirl »

What I wonder is whether the scheme could have kept going if the housing bubble/stock market hadn't crashed so hard. I mean a lot of schemes could have kept going but for that.

He would still look like a genius, right? or was his scheme unsustainable in any event?
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Re: Madoff--Ponzi Scheme

Post by nisiprius »

Yes to what IowaFarmBoy and Bill Bernstein said.

As with Ponzi himself, the schemers get drawn into the scheme themselves, in a way. Ponzi apparently believed the international postal reply coupon thing was valid, but he was enterprising enough to start accepting money before working out the details and realizing it wasn't, and by then the thing was snowballing. The general idea is that many Ponzi schemes are tricky investment strategies gone wrong, but the people who invent the strategies believe they are valid. "The market can stay irrational longer than you can stay solvent," but they think that if they just commit a small amount of fraud they can stay solvent long enough for the strategy to work, and then they can fix it and it will have been harmless. A little white fraud.

I remember some guy in the paper who was going to jail for fraud, having ruined... I think it was a small company's pension fund, give it to me to manage... and lost maybe 75% of their money... and told the press that it was really a tragedy that he was being sent to jail because "now they'll never get their money back." Did he really believe it himself? Who knows? Remember the line in "The Music Man" where Harold Hill tells Winthrop that he's a great kid and that's why he wanted Winthrop to be in the band... and Winthrop objects that there isn't really any band, it's a fraud... and Hill says "I always believe there's a band, kid."

Which is easier to do: put a stop to it now and ruin your life, or keep it going just a while longer, knowing that if/when it does blow up, your life won't be any more ruined? And at least some entrepreneurs, both honest and dishonest, are just plain optimists; like Mr. Micawber they really believe that "something will turn up."
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Re: Madoff--Ponzi Scheme

Post by mattshwink »

Justalearner wrote:Are any of the investors also guilty? Why doesn't the smell test prevail? Reminds me of the 1970's Savings and Loan "crisis"
Investors - not quite. There were some in the scheme who received more money than they put in (early investors) because of the steady stream of "dividends" paid out (10-12% per year). The trustee did go after them through clawbacks. The most notable is Jeffrey Picower's estate, which returned $7.2 billion.

The feeder funds that funneled money to Madoff have been subject to a variety of lawsuits and fines.
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Re: Madoff--Ponzi Scheme

Post by mattshwink »

in_reality wrote: Which has no bearing on the fact that neither her nor her husband ever legitimately earned any of it. If she's innocent, I do feel sorry for her misfortune. Even so, I can't see why she is entitled to anything that wasn't legitimately earned. Sorry.
It's telling that she (or his sons) were never charged (though his brother and other members of the firm were convicted).

He did have a legitimate business, that made good money. The investment business was separate. Of course, both closed. The legitimate business was never accused of wrongdoing (though it closed because of association with Madoff no one wanted to do business with them anymore).

Separating the legitimately earned from the ponzi on a personal level is impossible. I agree $2.5 million was too high (but was about 4% of what her lawyers argued she was entitled to).
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Re: Madoff--Ponzi Scheme

Post by mattshwink »

montanagirl wrote:What I wonder is whether the scheme could have kept going if the housing bubble/stock market hadn't crashed so hard. I mean a lot of schemes could have kept going but for that.

He would still look like a genius, right? or was his scheme unsustainable in any event?
Well, that is the problem with Ponzi's. Eventually the market goes upside down and people want their money. If it wasn't the 2008 crisis it would have been something else, eventually. You need more money to pay the income stream, which keeps increasing the more people you add. It collapses under it's own weight, eventually. How long he could have kept it going no one knows.
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Re: Madoff--Ponzi Scheme

Post by mickeyd »

I recently saw this movie on TV which I thought captured the "Madoff Situation" pretty well. Old lesson to be learned~ "If it looks to good to be true, it probably is."
It is an excellent film with great insight into how easily thousands of investors were scammed for decades as long as the return on investments continued to be high and as Bernie would say "we need to continue to grow and find new investors".

http://www.imdb.com/title/tt4035574/
It's telling that she (or his sons) were never charged.
One died before trial of a disease and the other committed suicide.
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Re: Madoff--Ponzi Scheme

Post by vtjon »

I watched an interesting documentary from Amazon Prime this morning called "Chasing Madoff." It was pretty interesting though doesn't really explain the why but does explain how he went on for so long without getting caught.
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Re: Madoff--Ponzi Scheme

Post by Fallible »

Good thread.

New York Times reporter Diana Henriques, who wrote "The Wizard of Lies," one of the first good books on Madoff, interviewed him in prison and here's how far she got:
http://www.forbes.com/sites/johnwasik/2 ... 719a633415
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Re: Madoff--Ponzi Scheme

Post by Nicolas »

Why couldn't the SEC have found this guy out and shut him down -- incompetence?
I remember reading that someone in the financial industry (Harry Markopolos) looked through his annual reports and decided within five minutes that it must be a scam. He alerted the SEC and was ignored. https://en.m.wikipedia.org/wiki/Harry_Markopolos
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Re: Madoff--Ponzi Scheme

Post by stemikger »

I think they start out thinking they can somehow get out before it gets out of hand, then they get caught up in it and it becomes too big to stop. And of course there is a great deal of ego involved. Madoff was like a God in certain circles. Maybe he started to believe it.

Some may argue that the stock market is a kind of Ponzi scheme and if you really think about it social security fits that description pretty well. Please note, this is not political, it's just the way social security is structured (it's a pay as you go system). As far as the stock market, for every loser there has to be a winner. If someone is selling a stock, someone has to be buying (not quite a Ponzi, but there are similarities).

You should also watch the movie about Mark Dreyer called Unraveled. If it wasn't for Madoff, he would be the person who pulled off the biggest Ponzi scheme in history and unlike Madoff, he tells you his thought process during the film. It was fascinating. Here is the link to IMDB below:

http://www.imdb.com/title/tt1595061/

As stated above, the most frustrating thing with the Madoff scheme was how the SEC dropped the ball so badly.
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Re: Madoff--Ponzi Scheme

Post by tennisplyr »

I think he even admitted that it grew beyond his control and like riding a wild horse, he took it to the end. Like people with massive egos, they feel they are above it all.
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Re: Madoff--Ponzi Scheme

Post by selftalk »

I think Madoff initially had a misuse of investor funds and borrowed some of his investors money to get the money back and then began losing in trading stocks and then borrowed more hoping to reverse the situation. Remember that most folks cannot beat the market. I`m sure Madoff knew that at the time as he was a professional in the market. A bear market usually catches up with swindlers as investors get scared seeing their supposed profits decline in value and decide to get some of it and cash out. Then it all falls apart. If a bear market did not come along it could go on for years.
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Re: Madoff--Ponzi Scheme

Post by samtex »

mattshwink wrote:
in_reality wrote: Which has no bearing on the fact that neither her nor her husband ever legitimately earned any of it. If she's innocent, I do feel sorry for her misfortune. Even so, I can't see why she is entitled to anything that wasn't legitimately earned. Sorry.
It's telling that she (or his sons) were never charged (though his brother and other members of the firm were convicted).

He did have a legitimate business, that made good money. The investment business was separate. Of course, both closed. The legitimate business was never accused of wrongdoing (though it closed because of association with Madoff no one wanted to do business with them anymore).

Separating the legitimately earned from the ponzi on a personal level is impossible. I agree $2.5 million was too high (but was about 4% of what her lawyers argued she was entitled to).
Not sure if the accuracy of the latest tv movie but it appeared the legitimate part of the business was also being supported by the ponzi scheme being run downstairs. His sons and wife were kept away from those offices and it became quite a family conflict.

I never realized that Madoff never invested the fund's in the ponzi side of the business. It truly was a ponzi scheme.

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Re: Madoff--Ponzi Scheme

Post by in_reality »

samtex wrote: Not sure if the accuracy of the latest tv movie but it appeared the legitimate part of the business was also being supported by the ponzi scheme being run downstairs. His sons and wife were kept away from those offices and it became quite a family conflict.

I never realized that Madoff never invested the fund's in the ponzi side of the business. It truly was a ponzi scheme.

Samtex
I don't believe it for a second.
says an individual who served with her on the board of the Queens College Foundation.... (who regularly received) lifts to board meetings. During one ride she said, “Bernie and I are going on vacation in Cap d’Antibes. We have a boat there.”

“How long you going for?” her passenger asked.

“About two months.”

“Two months! How can Bernie leave the business for two months?”

“Oh, we can go away because the boys [Mark and Andrew Madoff] handle the business.” The board member adds, “That stuck with me, because either the kids were in on the nuts and bolts of the business or there is no business.”
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Re: Madoff--Ponzi Scheme

Post by mattshwink »

in_reality wrote:I don't believe it for a second.
says an individual who served with her on the board of the Queens College Foundation.... (who regularly received) lifts to board meetings. During one ride she said, “Bernie and I are going on vacation in Cap d’Antibes. We have a boat there.”

“How long you going for?” her passenger asked.

“About two months.”

“Two months! How can Bernie leave the business for two months?”

“Oh, we can go away because the boys [Mark and Andrew Madoff] handle the business.” The board member adds, “That stuck with me, because either the kids were in on the nuts and bolts of the business or there is no business.”
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I believe that the reference here is to the legitimate, mark to market business, not the hedge fund. The sons were intimately involved (it was the only place either had worked). The hedge fund was kept separate, and he had someone to run that (Frank DiPascali Jr.). They vacationed a lot in France (they owned a house there, and kept their yacht there). He also spent a good bit of time in the Beach House in Montauk and in Palm Beach. In each of his businesses he had people he trusted to run things in his absence (sons and brother in the legitimate business, and Frank for the Hedge Fund). He didn't commit the fraud alone, but there has been no real evidence that his family was involved in the hedge fund.
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Re: Madoff--Ponzi Scheme

Post by subrosa »

Hello Nicolas

Re: the SEC if really interested this is actually good reading: https://www.sec.gov/news/studies/2009/oig-509.pdf
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Re: Madoff--Ponzi Scheme

Post by flyingaway »

montanagirl wrote:What I wonder is whether the scheme could have kept going if the housing bubble/stock market hadn't crashed so hard. I mean a lot of schemes could have kept going but for that.

He would still look like a genius, right? or was his scheme unsustainable in any event?
I would believe that his scheme would keep going until his death if there were not that market crash.

The reason is that most of his clients did not withdraw money before that, they just wanted to keep the money grow on paper.
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Re: Madoff--Ponzi Scheme

Post by Null_Detector »

stemikger wrote: Some may argue that the stock market is a kind of Ponzi scheme and if you really think about it social security fits that description pretty well. Please note, this is not political, it's just the way social security is structured (it's a pay as you go system). As far as the stock market, for every loser there has to be a winner. If someone is selling a stock, someone has to be buying (not quite a Ponzi, but there are similarities).
Slightly off-topic, but since it's brought up, a pay-as-you-go system has often been used in public and private pension systems and is not equivalent to a Ponzi scheme. Social Security is a social insurance/transfer program that has elements that may appear to be pyramid-ish; those who characterize it as such are inherently making a political statement (typically a disparaging one).
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Re: Madoff--Ponzi Scheme

Post by Valuethinker »

in_reality wrote:

So she got a great life and then $2.5M. It's beyond crazy.
One son dead. Not sure about the other. Did one kill himself?

Husband in prison for forever, basically.

A name that will be forever infamous and particularly in NYC and the circles in which she lives.

I wouldn't say this was a great life outcome.

I know too many people whose partners were committing major financial misdoings, and they didn't know. Nothing criminal or dramatic like this, mind. But it's amazing what people don't know about their partners and spouses.
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Re: Madoff--Ponzi Scheme

Post by Valuethinker »

Null_Detector wrote:
stemikger wrote: Some may argue that the stock market is a kind of Ponzi scheme and if you really think about it social security fits that description pretty well. Please note, this is not political, it's just the way social security is structured (it's a pay as you go system). As far as the stock market, for every loser there has to be a winner. If someone is selling a stock, someone has to be buying (not quite a Ponzi, but there are similarities).
Slightly off-topic, but since it's brought up, a pay-as-you-go system has often been used in public and private pension systems and is not equivalent to a Ponzi scheme. Social Security is a social insurance/transfer program that has elements that may appear to be pyramid-ish; those who characterize it as such are inherently making a political statement (typically a disparaging one).

Absolutely.

https://principlesandinterest.wordpress ... ons-gloom/

will explain the problems in thinking about PAYGO.

*All* pension schemes are a redistribution from those working to those not working. Whether you mediate that through interest & dividends (ie funded pension schemes), government pension schemes (Social Security) paid for by payroll taxes, or any other way, that's all a pension scheme is.
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Re: Madoff--Ponzi Scheme

Post by Valuethinker »

stemikger wrote:
Some may argue that the stock market is a kind of Ponzi scheme and if you really think about it social security fits that description pretty well. Please note, this is not political, it's just the way social security is structured (it's a pay as you go system). As far as the stock market, for every loser there has to be a winner. If someone is selling a stock, someone has to be buying (not quite a Ponzi, but there are similarities). y.

https://principlesandinterest.wordpress ... ons-gloom/

the ideological issues are so severe in the use of Ponzi Scheme and Social Security that it' s worth reading the above.

I think from the totality of your paragraph that you understand the key point. Either a financial markets solution (funded pension schemes) or a state funded pension from payroll taxes (SS), are a transfer of economic resources from the working to the non working. In either case, at the macro level, what matters is how many people you have working relative to nonworking, what pensions the latter receive, and how productive the workforce is.

The US has relatively young demographics for a developed country and people work to a relatively late age. So it's in good shape. The peak moment for SS vs. GDP is below what countries like Italy and Germany pay in pensions *now*.
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Re: Madoff--Ponzi Scheme

Post by Nicolas »

subrosa wrote:Hello Nicolas

Re: the SEC if really interested this is actually good reading: https://www.sec.gov/news/studies/2009/oig-509.pdf
Thanks -- it's going to take me awhile to get through these 477 pages. :happy
I didn't know this existed, should make for interesting reading.
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