Ponzi Scheme House Edge
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February 27th, 2012 at 1:30:09 AM
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Just saw a show about Tom Petters on 'American Greed'.
He was the genius who ran the countries second biggest
Ponzi scheme, outdone only by Bernie Madoff. Ponzi
schemes are really just gambling systems. The house is
the schemer and the players are the investors. The schemer
offers a really high edge on their investment, of at least
20% to 30%.
Petters got people to invest 3.65 billion, and Madoff got
18 billion. This was great for the few people who made more
money than they invested. But it seems to me, its a negative
expectation game for the Ponzi schemer. Do they really
think they'll get away with it forever? If they're smart enough
to come up with such a complicated plan, aren't they smart
enough to carry it out to its logical conclusion? Is a decade
of high living on yacht's and in $10mil houses enough to
offset the rest of your life in prison?
I can understand the greed on the part of the players investing.
But the schemers must not understand gambling very well.
Every system has a weak spot and will hit a brick wall eventually.
He was the genius who ran the countries second biggest
Ponzi scheme, outdone only by Bernie Madoff. Ponzi
schemes are really just gambling systems. The house is
the schemer and the players are the investors. The schemer
offers a really high edge on their investment, of at least
20% to 30%.
Petters got people to invest 3.65 billion, and Madoff got
18 billion. This was great for the few people who made more
money than they invested. But it seems to me, its a negative
expectation game for the Ponzi schemer. Do they really
think they'll get away with it forever? If they're smart enough
to come up with such a complicated plan, aren't they smart
enough to carry it out to its logical conclusion? Is a decade
of high living on yacht's and in $10mil houses enough to
offset the rest of your life in prison?
I can understand the greed on the part of the players investing.
But the schemers must not understand gambling very well.
Every system has a weak spot and will hit a brick wall eventually.
"It's not called gambling if the math is on your side."
February 27th, 2012 at 1:41:29 AM
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Its a bit like a gold digger who marries a fat old geezer ... she is betting on his health not being sufficient for her skills and his lawyers not being as good as her lawyers.
Same thing with a Ponzi scheme... the organizers want it to continue unimpeded but surely know that they do indeed have to face the music at some time. They just hope to be able to face that music from Brazil or something and have had a good life before being caught and getting their slap on the wrist.
Same thing with a Ponzi scheme... the organizers want it to continue unimpeded but surely know that they do indeed have to face the music at some time. They just hope to be able to face that music from Brazil or something and have had a good life before being caught and getting their slap on the wrist.
February 27th, 2012 at 1:49:14 AM
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Likely the largest Ponzi scheme in recent history was started soon after the original, by Franklin D. Roosevelt, and does fine to this day.
It didn't all end there either. The entire Keynesian economics is about instituting Ponzi schemes on a national level. "Dig holes and then fill them up again, so that wages are paid as if value was created" - it's a bit different implementation, but pretty easy to recognize as the same idea.
Seeing how FDR died quite popular, having later economic recovery that he initially only impeded attributed to him, got to wipe his butt with the Constitution, and never went to prison for any of it, the game is great for a truly smart schemer.
It didn't all end there either. The entire Keynesian economics is about instituting Ponzi schemes on a national level. "Dig holes and then fill them up again, so that wages are paid as if value was created" - it's a bit different implementation, but pretty easy to recognize as the same idea.
Seeing how FDR died quite popular, having later economic recovery that he initially only impeded attributed to him, got to wipe his butt with the Constitution, and never went to prison for any of it, the game is great for a truly smart schemer.
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February 27th, 2012 at 1:55:24 AM
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Quote: FleaStiffIts a bit like a gold digger who marries a fat old geezer ... she is betting on his health not being sufficient for her skills and his lawyers not being as good as her lawyers.
Same thing with a Ponzi scheme... the organizers want it to continue unimpeded but surely know that they do indeed have to face the music at some time. They just hope to be able to face that music from Brazil or something and have had a good life before being caught and getting their slap on the wrist.
You'd have to say that Madoff went pretty close to pulling it off.
萬歲言論自由。
February 27th, 2012 at 4:06:53 AM
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Quote: victorimmatureYou'd have to say that Madoff went pretty close to pulling it off.
No, not really.
Alot of people figured out something was wrong and steered well clear of it but kept their mouths shut.
Some figured out something was wrong but said let me in at preferential rates or I won't keep my mouth shut.
Some figured out something was wrong and opened their mouths but were told to shut up and pay attention to the emperor's clothes.
But he never really got close to pulling it off.
February 27th, 2012 at 6:28:48 AM
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I love that show.
Ponzi schemes always fail; they are unsustainable. All it takes is one investor to ask for a redemption, or a small run on deposits, and you are crushed. You'd think the schemers would have learned this by now, but no. There are also some interesting legal issues with bankruptcy and "clawbacks" of money the investors redeemed.
Ponzi schemes always fail; they are unsustainable. All it takes is one investor to ask for a redemption, or a small run on deposits, and you are crushed. You'd think the schemers would have learned this by now, but no. There are also some interesting legal issues with bankruptcy and "clawbacks" of money the investors redeemed.
"Dice, verily, are armed with goads and driving-hooks, deceiving and tormenting, causing grievous woe." -Rig Veda 10.34.4
February 27th, 2012 at 11:42:53 AM
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Petter had to make $116mil every month just to stay
ahead. He went to Vegas a lot and owed over $10mil
in gambling debts. It must be fairly easy for casinos to
write off debts like that, they aren't out any real
money, like they are when somebody wins. They can
issue lots of credit, what do they have to lose. If they
don't get paid all they lost is potential money, it can't
hurt their bottom line.
ahead. He went to Vegas a lot and owed over $10mil
in gambling debts. It must be fairly easy for casinos to
write off debts like that, they aren't out any real
money, like they are when somebody wins. They can
issue lots of credit, what do they have to lose. If they
don't get paid all they lost is potential money, it can't
hurt their bottom line.
"It's not called gambling if the math is on your side."
February 27th, 2012 at 11:56:02 AM
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Yep. As long as all the people to whom they extend credit lose at the tables (and never pay up), the casinos just lose their operating expenses. If, as should be expected, some debtors win and some lose (and then don't pay), then the casino will be down even more. It can definitely hurt their bottom line.
February 27th, 2012 at 11:57:42 AM
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To say nothing of those who lose and then sue.
February 27th, 2012 at 1:35:15 PM
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Quote: EvenBobPetter had to make $116mil every month just to stay
ahead. He went to Vegas a lot and owed over $10mil
in gambling debts. It must be fairly easy for casinos to
write off debts like that, they aren't out any real
money, like they are when somebody wins. They can
issue lots of credit, what do they have to lose. If they
don't get paid all they lost is potential money, it can't
hurt their bottom line.
They lose if it's a one way bet. They'd undoubtedly be better off NOT having made the credit line with the customer in the first place if the customer is a dead bet and fails to pay his credit line off. Even if we assume that they'll always gamble back the winnings, servicing a whale will hurt their bottom line if they don't get the $10 million in debt.
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
February 27th, 2012 at 1:48:42 PM
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Quote: EvenBobI can understand the greed on the part of the players investing. But the schemers must not understand gambling very well. Every system has a weak spot and will hit a brick wall eventually.
Michael Lewis on Charlie Rose
Although Money Culture is a 20 year old book, it is short stories and is easier to read than longer books. Michael Lewis was hired by Salomon Brothers in 1985 after graduating from London school of Economics and moved to New York for their training program. He only worked there for 4 years before going into writing. He has a keen insight into the thought process of people who make dozens of times as much money as their parents.
Some of the stories in Money Culture are about the similarities in psychological profiles between some people that most of society would call sociopathic and successful money managers.
One of Michael Lewis's books was Moneyball (2003) which Brad Pitt's movie was based on. I particularly like him because he is so entertaining, while not pandering entirely to lowbrow lust for money aka "Lifestyles of the Rich and Famous". He is also extremely intelligent, and he explains how people can be swept up in what would normally be considered illogical.
Some books on Money:
Money Culture 1991 Michael Lewis
More Money than God
All Marketers are Liars
The Winner-Take-All Society
February 27th, 2012 at 1:56:34 PM
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Quote: FleaStiffNo, not really.
Alot of people figured out something was wrong and steered well clear of it but kept their mouths shut.
Some figured out something was wrong but said let me in at preferential rates or I won't keep my mouth shut.
Some figured out something was wrong and opened their mouths but were told to shut up and pay attention to the emperor's clothes.
But he never really got close to pulling it off.
He was in his 70's before he had to relinquish the high life.
萬歲言論自由。
February 27th, 2012 at 2:08:27 PM
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Michael Lewis is great. I also like Liar's Poker (memoir about his time at Salomon Brothers) and The Big Short (about the literal handful of people who saw the subprime implosion coming and made huge bets against it. Fascinating.)
On the subject of Ponzis, there is a great case about this small-town lawyer in Arkansas who was Ponzi'ing his clients, and like most, went to the casinos to win money to pay them. He ran up huge credit lines and stiffed casinos from Shreveport to Greenville and Tunica. His case became well-known in legal circles because the bankruptcy trustee went after the casinos to get some of the money back on a pretty obscure "good faith" provision of the BK code. (Casino knew or should have known he was scamming and his marker was no good).
On the subject of Ponzis, there is a great case about this small-town lawyer in Arkansas who was Ponzi'ing his clients, and like most, went to the casinos to win money to pay them. He ran up huge credit lines and stiffed casinos from Shreveport to Greenville and Tunica. His case became well-known in legal circles because the bankruptcy trustee went after the casinos to get some of the money back on a pretty obscure "good faith" provision of the BK code. (Casino knew or should have known he was scamming and his marker was no good).
"Dice, verily, are armed with goads and driving-hooks, deceiving and tormenting, causing grievous woe." -Rig Veda 10.34.4
February 27th, 2012 at 4:06:49 PM
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Check kiting is a small form of Ponzi. You write a check
for $300 for your rent, cover it the next day with a check
from another bank, then cover that with a 3rd banks check.
You can keep it up for awhile, until you get the cash to
deposit.
That was years ago. Banks are much hipper now. In fact,
I wrote a check to Lowes the other day, which I rarely do,
and they ran it thru the machine and handed it back to
me. They had already deducted the money from my account
and didn't need the check anymore. They used it just like
a debit card.
for $300 for your rent, cover it the next day with a check
from another bank, then cover that with a 3rd banks check.
You can keep it up for awhile, until you get the cash to
deposit.
That was years ago. Banks are much hipper now. In fact,
I wrote a check to Lowes the other day, which I rarely do,
and they ran it thru the machine and handed it back to
me. They had already deducted the money from my account
and didn't need the check anymore. They used it just like
a debit card.
"It's not called gambling if the math is on your side."
February 28th, 2012 at 6:26:02 PM
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I really don't remember the last time I wrote a check. It's either cash or debit, and rarely credit, for me.
I think the goal of Ponzi is to rotate the money around until you hit an investment that will pay back your debt or die. Those are the two solutions I see.
I think the goal of Ponzi is to rotate the money around until you hit an investment that will pay back your debt or die. Those are the two solutions I see.
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