University at Buffalo sociologist, Lionel S Lewis, author of four articles in the journal Society about Madoff investors, explains how the Ponzi scheme works. He says:
To understand how confused thinking is, you need to understand how a con game works and the fact that it requires a “mark” willing to suspend his or her judgment.
First, the “roper”, who could be a brother-in-law, approaches the “mark” and says, “Listen, Bernie can make you a lot of money—a 16 or 20 percent return”. Now this is a far greater return than the standard investment produces, but the “mark” is greedy, like many people, and suspends reason in pursuit of easy cash. Remember, the “mark” is always a willing participant in pursuit of an unlikely outcome.
The con man—Madoff in this case—takes the “mark”’s money and spends it. He doesn’t invest it. He doesn’t realize a “return” on an investment. He just pays millions of dollars in finder’s fees to the “ropers”, gets them to pull in more “marks”, and uses that cash to pay off any of the “marks” who pull out of the scheme early, and spends the rest on estates, cars, vacations and yachts until the money is used up. Eventually the scheme collapses. The “marks” lose their money. In con terms, they’re “trimmed”. At this point, it is the job of the roper and other inside men in the con to “cool the mark out”—calm the waters to protect those perpetrating the con.
They do this, Lewis says, by pointing out to the mark that “he knew he was taking a risk (‘16 percent return? What were you thinking?’) and could have lost more, then sends him off, embarrassed, with his tail between his legs, but with a little cash, glad he’s not living on the street in a refrigerator carton”. The well cooled mark, according to Lewis, recognizes his part in the con. He’s not happy but he doesn’t call the cops, grouse about his losses on TV or blow up Madoff’s house.
Lewis is saying that people are voluntarily conned. They take a silly risk with their own money, knowing it looks fishy, but are so greedy, they do not accept a quick profit themselves from the scam, and get out while they are in the black. Instead, they hang on and on, reaping in the ill-gotten gains, maybe investing some of it anew, until the scheme inevitably falls apart. It is a pyramid selling scheme. It is illegal, and no one is justifying Madoff. He is in jail where he belongs, but the victims are still beefing, though it was a case of caveat emptor. They were buying a share in the scam, and were getting paid as long as new “marks” were being found. Now, they say they are victims of an investment con, that there were proper investments and they did not get their proper share. But there never were any proper investments! Lewis says:
Despite the fact that Madoff never ran an investment fund, no money was “made” on their behalf and there are no profits to return to them.
The scheme got so big and collapsed so swiftly that the “marks” were never cooled out:
So we find them posturing loudly as enraged victims online and off—in the papers, on television and radio—demanding “profits” they apparently think actually exist—they do not—and are owed to them—which is not legally the case.
Lewis focused on 167 people who invested with Madoff. He collected oral and written testimony, including lengthy interviews, from 42 of them and used other written material. Some investors, however angry and ashamed they are, and regardless of how much money they lost, have not sued and made a fuss. A lot of those people won’t talk to anybody. Lewis says:
Some who lost a lot were grateful they hadn’t invested more or glad to get back even a tiny percentage of what they lost, while others who lost less want everything they were “promised”—the 16 or 20 percent profit. They won’t accept that the “promise”, along with their gullibility, was part of the con, that they never could have won at this game, and still can’t, no matter how many attorneys they hire or how often they get on television.
What is sad is that many of those “trimmed” in the scam had worked hard to put together some cash, then greed got the better of them, they thought they could join the ruling class, and make buckets of money, and opted for Bernie Madoff’s shortcut to riches. They were gambling with their life’s savings, and gamblers know that they should only play on their gains, and should cut their losses. Of course, any pyramid scheme ends up with far more losers than winners, but the few winners can make fortunes out of all the little steers who are roped in.
The answer with any gambling—investing, if you prefer to call it that—is not to invest more than you can afford to lose. The trouble these days, is that the ruling caste are forcing the small guy into risky investments because the return at interest has been cut to zero. We can leave our life savings in the banks earning nothing, but eroding away by inflation and bankers’ bonuses, so we have to put the cash into something riskier.
Stockmarket crashes suit banks and financial speculators because it is the small investor who loses by bad timing and their inability to swing markets with sheer volume of investment, or influence, by buying stocks, talking them up with rumours of takeovers and such like, then selling at a profit while the stock is high. Joe and Jane will read the rumours and buy in too late when the stock has started to rise, then find the stock crashing again when the big man sells out. They lose! These are not strictly scams because it is all legal since Reagan had his bonfire of the regulations, a reason for much closer new regulation of the money markets. But Republican propaganda has it that regulation is a bad thing. Yes, it is bad for the crooks at the top, but just fine for the rest of us.