Ponzi Schemes Ponzi Schemes
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- You've probably heard the term Ponzi scheme before, let me
- write it down, and what we're going to do in this video is
- explain what it really is.
- You might have a sense it's some type of scam, that you're
- taking one person's money and giving it to another, but
- we're going to do a tangible example of
- how it actually works.
- And right here, I have two pictures of the probably the
- two most famous perpetrators of Ponzi schemes, this is
- Charles Ponzi right here.
- It was obviously named after him and then, more recently,
- this is Bernie Madoff, who pulled off probably the
- longest-lasting and largest Ponzi scheme of all time.
- Who knows, maybe there's a longer-lasting and larger one
- out there that we have still haven't figured out yet, but
- this is the largest one to date.
- And Ponzi wasn't the first person to come up with the
- Ponzi scheme, but they decided to name it after him because
- he was the first person to really make it famous.
- This mugshot was taken in the early 1900s when he was
- finally caught for perpetrating his scheme.
- So how does it work?
- So let's start with some investors here.
- We could get rid of pictures of these two gentlemen.
- So let's say that I've got a scheme, and what I'm going to
- do is I'm going to set up my investors, so
- these are my investors.
- And then, let's say, we have several time periods.
- So we can see why the investors think, at least
- initially, that my scheme is legitimate.
- So, let's say, that this is the time period, so we have
- period one, maybe this is years, year one, year two,
- year three, year four, year five.
- What I'm going to do is I'm going to write each investor--
- I'm going to write down how much money they think they
- have with me, the person operating the Ponzi scheme and
- then I'll show you exactly how much money I have and how I
- can even get away with having the first investors think that
- I'm legitimate.
- So let's say I have investor A.
- So this is going to be their investor's perceived-- let me
- do this in a different color-- investor's perceived holdings
- or perceived value.
- And over here, I'm going to write total actual value.
- So you can imagine, this is the actual amount of cash that
- I have. So we have the investor A in blue, and let's
- say in year one, he gives me $10,000.
- And I say I I've got a surefire way of doubling his
- money in the second year.
- So in the second year, I actually do nothing with the
- money and you know, I might actually be spending it on my
- own yachts and you know, fancy suits and whatnot.
- But let's just say I'm just keeping it in a bank account
- so you know, he gives it to me, $10,000 and I do nothing
- with that money.
- I don't even get interest on it.
- It's not even in a bank account, I
- stuff it into my mattress.
- So the reality is, after a year, it's still only $10,000,
- but I promised him that I had some type of a genius scheme
- that could double his money in a year, so I send him a
- statement that says that his $10,000 is now $20,000.
- And I feel good about it because I know that he's going
- to be so excited that his money doubled that he's going
- to want to keep his money with me, because he'll hope that it
- can double again.
- And not only is he going to do that, but he's going to go to
- the country club and show off to all of his other friends
- how he was able to do way better than they did with
- their investments.
- So he's going to essentially convince other
- people to join in.
- So let's say he convinces investor B to join in.
- Investor B looks at the statement says, hey, this guy
- running this-- well he doesn't know it's a scheme, let's say
- he says , Sal seems to know what he's doing, he doubled
- investor A's money in a year.
- I'm going to give him a bunch of money, let's say I'm going
- to give him $15,000 in year two.
- So how much total actual value do I have in year two now?
- I have the $10,000 from investor A plus this $15,000,
- so I have a total of $25,000.
- This is the actual amount that I have in my bank account,
- assuming that I'm not spending it on my
- yacht or my fancy suits.
- But the total perceived value, let me write that down another
- line, if everyone actually wanted the amount of money
- that they thought they had back, I would
- have to pay out $35,000.
- But we know that's not going to happen, because people
- think I'm such a good investor, they want their
- money to ride as long as possible.
- So you already see this discrepancy.
- There's only $25,000 in this little pile of money that I'm
- collecting, but people think that there should be $35,000.
- This is their perceived value, because the this guy thought
- his money doubled, although it didn't, it just sat there.
- Now, let's say that the next year I sent them statements
- that say, look, I made super-awesome investments
- again, the money doubled again.
- So this guy's money, his perceived value, he gets a
- statement that says you now have $40,000.
- This guy down here, investor B, gets a statement that says
- you now have $30,000.
- And then they go back to the country club, and they get
- investor C onboard.
- They're like, look, both of us have tried out this guy, he's
- doubled our money two years in a row for both of us, you
- probably want in on this as well.
- And investor C is like yeah, well you know, my two buddies,
- they look like legitimate guys, let me
- put my money there.
- Let's say it gets bigger every time because that's usually
- how these things go, you know, you normally don't don't have
- just three investors, you'll have hundreds of investors.
- And the more fake positive returns you get, the more
- people that want to put their money in.
- So investor C, let's say he comes in
- and he puts in $20,000.
- So what's the reality?
- Let's focus on it.
- So there's a perception on year 3, this guy
- just put his $20,000.
- A think he's got $40,000, B thinks he has $30,000, so the
- perceived value here's $40,000 plus $30,000, $70,000 plus
- $20,000 is $90,000.
- That's the perceived value.
- But the actual value is just going to be this $25,000 we
- had in period two, assuming we didn't spend the money or do
- anything with it plus the $20,000 that
- this guy just deposited.
- So the reality is $45,000.
- Now let's say that as we go from period three to period
- four, or let's say right when this guy gets his statement
- for $40,000, and it's the exact same time period that
- this guy had put in his $20,000.
- Let's say person A, he says, you know what, I felt like my
- ride has gone long enough, I don't want to test fate, let
- me take my money out and you might say, oh you the scheme
- will be ruined, but it's going to work because enough money
- is coming in from new investors to pay this guy off.
- We now have $45,000 actual value, even though the people
- think there's $90,000.
- So if this guy withdraws all of his money, so if he
- withdraws all of his money so it goes to zero, I have the
- cash to pay them.
- I have $40,000 even though people think there's $90,000.
- So I subtract out $40,000 right here, and there's only
- $5,000 dollars left in the bank account and since this
- guy withdrew his money, the perceived value-- this $40,000
- is no longer there, I gave the guy the cash-- the perceived
- value now is $50,000.
- So I essentially owe people $50,000, investors B and C
- think that they have $50,000 invested with me, but the
- reality is that I only have $5,000 in my bank account.
- And probably a more realistic reality is I was probably
- spending a lot of this money on my own little luxuries the
- whole time.
- But let's continue another way, once again this guy, not
- only did he double his money for two years, they're all the
- same country club.
- This guy doubled his money again, this guy just
- invested his money.
- And now this guy says, look, the scheme is legitimate.
- This legitimized the scheme This is legit.
- Because, look, I doubled my money for two years and I was
- able to withdraw the money.
- So he was able to withdraw his money, so when he goes back to
- the country club, he gives this guy and that guy more
- conviction that this is all on the up and up.
- And then investor D will probably jump in too and say,
- wow, now that he's doubled money two years in a row, I
- see it's legitimate.
- Investor A was able to withdraw his money, I'll give
- even more money, I'll give $100,000.
- Maybe this is a ton of people who are now
- going to put in a $100,000.
- And then the next year, I double the money again.
- And obviously, I won't make it exactly double, I'll make it,
- you know 40% one year and 30% percent the next year so
- doesn't look too suspicious.
- I want to make it look like real returns, but for the sake
- of our math, let's say I double it again.
- So now and we're in year four.
- And this guy withdrew all of his money, but investor B now
- thinks he has $60,000.
- Investor C thinks he has $40,000.
- And investor D thinks he has $200,000.
- Oh, and I forgot to put investor D's deposit here.
- So when he put a $100,000, I only had $5,000 in my bank
- account, but then if I add $100,000 I'll now have
- $105,000 in my bank account after this guy comes in at,
- you know, at the end of period three, we can imagine.
- And, with the perceived amount, I owe is $150,000.
- So the green is what happens after D comes in, so these are
- no longer valid.
- But you can see that as more money comes in, I have more
- and more money to pay out, even though
- I'm not doing anything.
- Even though all of these returns are fake.
- So now I actually have $105,000 even though people
- think, well that's at the end of period three, at the end of
- period four, what do people think?
- People think that I have $300,000 of holdings.
- Let me write that down.
- But the reality is I still only
- have $105,000 of holdings.
- This is the total actual value.
- But notice, if this guy or this guy, some of the early
- investors, wanted to pull out some of their money, although
- they probably don't want to, because where else can you
- double your money every year and this guy already showed
- that I'm good for paying back the money.
- But even if this guy or this guy wanted to pull out their
- money, I would be able to give it to them because I have at
- least enough for those withdrawals.
- Now, everything would be ruined if everyone gets
- freaked out or scared and if I have mass withdrawals or if
- more people withdraw money than there is in the bank plus
- the amount of money that comes in.
- So in order for a Ponzi scheme to keep going, and Bernie
- Madoff was able to do this for very long time, you have to
- have good, believable, legitimate returns.
- Although they're not legitimate, they just need to
- look legitimate.
- So that you have more money coming in that out.
- And the whole point of the doing this Ponzi scheme, if
- you're a stylish criminal, isn't just to keep the cash
- there, you know, the $10,000 from one period to the next.
- The whole point of it is to take a lot of that for
- yourself, for you to live off of and put into some Swiss
- bank account to be able to escape the
- country at some point.
- Anyway, hopefully you found that enjoyable.
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