Bernie's Ponzi Scheme

When Bernard Madoff was arrested, he reportedly told FBI agents that his eponymous investment advisory firm had bilked investors out of $50 billion and was a "giant Ponzi scheme." So what is a Ponzi scheme? Ponzi schemes are illegal programs to make money by enticing potential "investors" with high expected rates of return which are funded by recruiting more particpants to invest. A pyramid scheme is the classic example. The first wave of participants is paid off with money obtained from the second wave of participants and so forth. Inevitably, the pyramid collapses under its own weight as it becomes exponentially more difficult to recruit enough new participants to pay off earlier ones. A very small group of early participants make the promised return while the rest lose everything. Simply put, it is a redistribution of wealth from new participants to earlier participants. Charles Ponzi was a 1920s swindler who took investors with the scheme that bears his name.