One of Wall Street's biggest Ponzi schemes has hit not only the United States but also the whole world. It is surprising that victims of the fraud range from banking institutions to hedge funds, the super-rich to the famous, and pensioners to charities. The suspected fraudster is veteran money manager Bernard Madoff, 70, who once served as chairman of the Nasdaq Stock Market. He was arrested last week for allegedly defrauding investors.
In what U.S. prosecutors say was a $50 billion fraud, Madoff reminds the world of Charles Ponzi who duped thousands of New England residents into investing in a postage stamp speculation scheme in the 1920s. A Ponzi scheme is an illegal type of pyramid scheme in which money from new investors is used to pay ``returns" to previous investors. According to the Securities and Exchange Commission, these types of schemes are based on a ``rob Peter to pay Paul" model that continues until the promoter can't raise enough money from new investors to pay the earlier investors.
What's really astonishing is that investors had not known of Madoff's fraud until he was arrested. He must have failed to keep his scheme due to the Wall Street meltdown and its contagion effect on the global financial markets. Some market watchers even thought that the con artist might have gone on his defrauding spree if there had not been the worldwide credit tsunami. It seems that his brilliant money management career and connections with noted figures had made it possible to dupe investors for a long period of time.
Madoff's scheme has added gloom to the reverberating financial turmoil. Among his victims are HSBC Holdings of Britain, BNP Paribas of France and Nomura Holdings of Japan. Madoff's investment pool also included a charity of movie director Steven Spielberg and the foundation of Nobel laureate Elie Wiesel, according to media reports.
Several South Korean financial institutions also fell victim to the Ponzi scheme with more than $100 million in investments. Korea Life Insurance, the nation's second-largest insurer, invested $30 million in Fairfield Sentry that put money into a U.S. hedge fund managed by Madoff. The Korea Teachers Pension also invested $10 million in two hedge funds related to Madoff's scam. Other institutions included UBS Hana Asset Management, Korea Investment Trust Management, Samsung Investment Trust Management and Hanwha Investment Trust Management.
There is little doubt the fraud scheme is the result of loose regulation in the United States and financial market globalization. As is seen in the U.S. subprime mortgage crisis, regulators have failed to properly supervise the banking sector and monitor the capital market to prevent a financial crisis. It is a shame that they have been found caught off guard without detecting the fraud at an initial stage to minimize damage to investors.
It is imperative that the U.S. and other countries work together to establish an effective mechanism to ensure prudential regulation and better protect investors. We now live through a crisis of trust and confidence. Without restoring trust and confidence we can never succeed in containing such a crisis. Let's learn a painful but valuable lesson from the fraud scheme and the ongoing financial turbulence.