The largest Ponzi scheme in history?

Understanding the environmental impasse through the mechanisms at work in a Ponzi scheme: illusion and cynicism

The Ponzi pyramid is the simplest scam there is: offer to entrust Jane with her money with the guarantee of high interest and actually pay her this interest, paid not by a real investment but by the money obtained from Mary, who will have chosen to invest for the same reasons as Jane, and so on. Sometimes, a Ponzi scheme can be almost involuntary: it starts with a lie, a one-time need for money, and the machine goes into overdrive - this is what drove Xavier Dupont de Ligonnès or Jean-Claude Roman to kill their family: not wanting to be unmasked, maintaining the illusion of success even if it means losing what is most dear to you in order to keep the memory of an esteem, even if poorly acquired.


Two figures of a system

Charles Ponzi, the Italian swindler from the beginning of the 20th century who gave his name to this mechanism, was neither a criminal nor a liar in spite of himself, but a charlatan, aware of the financial set-up he was carrying out, wishing to get rich and not regretting the consequences of his actions: After the discovery of his fraud after one year (about 15 million dollars and 40,000 people involved) and three years in prison, he returned to Italy in 1934 where he continued to set up illegal businesses, before joining the Ministry of Finance of Mussolini's government. He will write his memoirs recounting what he perceived as a success: The Rise of Mr. Ponzi.

In 2008, the largest Ponzi scheme was revealed when Bernard Madoff, whose name at the time evoked all that was serious in finance, confessed to being behind a scam of more than 60 billion dollars, the result of several decades of collecting larger and larger sums of money - with the most experienced investors having great confidence in the man who could have become the head of the SEC, the highest financial market regulator in the United States.

Unlike his Italian predecessor, Madoff never got out of prison, and he died in 2021, having lost his two sons, one to suicide, the other to cancer, both of whom could not bear the new family romance that turned them from heirs to a major Wall Street trading business into the spoiled children of an unscrupulous con man, potentially accomplices - even though they knew nothing and their father had voluntarily separated his investment business, the Ponzi scheme, from the regular trading business for which he had legitimate recognition and which his sons had taken over.

Another major difference is that Madoff did not consciously plan this scam, he started by making a few bad investments, managed to keep up appearances by using the money of some clients to pay interest to others, and then very quickly lost control over his investment activity - which in reality was not investing anything at all, and would rather be called a shell game. Caught in his own trap, there was no solution but to admit and pay back what could be paid back, or to run away, as the Ponzi scheme became more and more important as the years went by, and it is this second option that was chosen.

Different causes, same effects: in these two famous cases, and beyond the differences in the scale of the scam and the popularity of the swindler, there is one thing in common: it was "too good to be true". In one case, because the returns were exceptional (Ponzi offered interests of more than 50%), in the other because they were abnormally regular (for decades Madoff guaranteed gains not only in the high average of the market, but above all very stable: investing with him was considered by all as one of the safest investments). The expression 'too good to be true' is therefore 'too good to be true'.

Understanding the Ponzi scheme: the semi-conscious illusion

It is important to remember that despite the guilt of the person who lied in the first place, the system can only work because the victims believe in it and give their consent. Consent to what? There is, of course, the lure of easy money, the adherence to neo-liberal values that value capital at the expense of work - even going so far as to use the expression "making money work" - and perhaps also the desire to be or even the fear, even stronger, of not to beTo miss out on your chance, to stagnate when others are soaring.

However, once you are in the system, there is much more. Just as Madoff was caught in his own trap and was forced into a perpetual flight of fancy to keep up appearances, his clients could not contemplate, once they had trusted and invested their money, that they might have been wrong. We perpetuate the mistakes of the past to convince ourselves that they were not mistakes. Thus Thierry de La Ville Huchet, head of a hedge fund that had placed billions of his clients' money with Madoff: alerted on several occasions by a financial analyst who had detected the fraud in barely 5 minutes of studying the history of returns, he once clearly explained to his advisor that he could not consider that Madoff could have lied anyway, and that if this were the case (this simple precision sufficiently indicating the fragility of his conviction), he would be a dead man. The prophecy came true in 2008, a few days after Madoff's announcement, and the head of the hedge fund opened his veins in his New York office. Concerned for once about the future, and in an elegant and derisory gesture, he took care to position his wrists over a garbage can so as not to stain the carpet. Less tragically, but equally telling, Harry Markopoulos, the financial analyst in question, had repeatedly alerted the SEC. In spite of its very clear demonstrations giving all the indications to the auditors to carry out their control work, the SEC did not unmask Madoff, the inspectors sent, very young, not having the audacity to oppose the one who could have been their future director.

And it is here, in this shared and semi-conscious illusion, that we recognize the features of the situation in which humans find themselves today in relation to ecological upheavals - climate change, loss of biodiversity, air and water pollution, ocean acidification, disruption of biogeochemical cycles, etc. Indeed, we cannot say that we do not know: as early as the 1970s, the publication of the Meadows report on the limits to growth clearly posed most of the current problems; the impact of human greenhouse gas emissions on the climate was demonstrated decades ago, and regularly confirmed by the IPCC via its widely circulated reports; the loss of biodiversity is a sensitive reality for each of us (where have the insects that we used to find on our windscreens gone? The earthworms that we used to see when we moved the earth?), scientifically established by the IPBES and many researchers. All this is not totally in vain: almost no one disputes the reality of climate change and, in general, the impact of man on the Earth's equilibrium.

Perhaps more surprising and disturbing, however, is that we know, and we act as if we don't know. This is, however, a contradiction in one of the foundations of neoclassical economics: the necessary condition for the optimization of well-being depends on the dissemination of clear and accurate information to all agents, who are by definition rational. This assumption does not offend common sense: who would throw himself under the wheels of a car if he could see it coming? Who would travel to a country for a family vacation if they read in the press that the country is in the grip of a civil war? It is through this prism that ESG (for Environment, Society and Governance) or CSR (Corporate Social Responsibility) issues were first developed in companies: the creation of reports, the establishment of indicators and measures seemed sufficient to fight against the impacts of ecological upheavals. If we knew, thanks to clear and transparent communication, equilibria would spontaneously re-establish themselves, with each agent having an interest in using the information to maximize their well-being.

In spite of this apparent evidence, the facts remain: a comparison of the curves of greenhouse gas emissions and the organization of the COPs dedicated to the climate over the last twenty years illustrates this paradox. In an apparent schizophrenia, the more the world knows and understands the causes and consequences of climate change, the worse the situation becomes. It is no longer a question of blindness but of another vision, as developed by Clément Rosset in The Real and its doubleThis is the common attitude "that says neither yes nor no to the thing perceived, or rather says both yes and no to it. Yes to the perceived thing, no to the consequences that should normally follow". Each is positioned at different degrees on the scale of environmental clairvoyance or denial, just as Madoff's investors varied: from non-professionals who trusted a respected name without knowing the details of the investment strategies to hedge fund managers who mastered financial techniques and might have suspected some form of fraud - insider trading could have explained, for example, Madoff's incredible ability to follow real market performance; easy, by the way, because he followed it in the primary sense, waiting for their outcome to match it. What they have in common is that they were fooled, not so much by Bernard Madoff, but by themselves, by their inability to put information and action together, and by that profoundly human character, although not taught in the economics textbooks: irrationality.

"After us the flood", or how the Ponzi can be rational in a neoclassical theory

While the failure to reduce greenhouse gas emissions and other human-caused impacts on the Earth is obvious, as is the ultimate outcome of a Ponzi scheme, maximizing the welfare of agents may not be so inconsistent, according to neoclassical theory, with environmental inaction or participation in a Ponzi scheme.

One of the characteristics of the tools of current finance is to crush the future: the methods of discounting cash flows make future flows almost zero. Thus, an investor is at most concerned with the returns on his investment in 5 years, 10 years maximum, i.e. a moment in time on the geological scale. Favouring short-term welfare over long-term welfare is therefore part of the definition of a rational agent according to neoclassical economics. Mark Carney, then head of the Bank of England, referred to this mechanism as the "tragedy of horizons" in a famous speech in 2015, reminding us that most of the catastrophic impacts of climate change would be seen in a time horizon beyond that of most leaders, both political, economic, or institutional, as these different terms very rarely exceed 10 years.

Cynically, investors in a Ponzi scheme, just like today's economic agents, have all the more interest in persisting in a system if they actually believe that it is doomed to failure in the more or less long term: present well-being only becomes more valuable. When a reporter asked Bernard Madoff, once in prison, how he thought it would all end before 2008, he replied that he believed the world would end, and that this belief had been reinforced by the September 11 attacks. So he waited to sink with the ship, probably confusing the certainty of the collapse of his house of cards with the hope, masked as fear, of a general stampede of Western civilization that would have swallowed up the past, including fraud, in one fell swoop. On his own scale, and from a purely economic perspective, Madoff was right to be stubborn, not to surrender, neither to the evidence nor to the police. The absolute certainty of his bankruptcy in the medium to long term only gave him reason to enjoy - a house in Montauk, a villa in the south of France, a yacht and other material possessions were consumed as compensation, an advance on the inevitably more austere future.

Is there such a great contradiction in the fact that Madoff was both the greatest swindler in the history of finance, and one of its most recognized figures? Rather than seeing this as an accident, should we not see it as the failure of our values, the organization of our economy and our societies? It's easy to dismiss Madoff as the lone wolf of Wall Street. To speak of Ponzi pyramid or Madoff affair, is finally to make the individual responsible for not thinking about the collective. Madoff pleaded guilty to all charges and the trial did not take place, saving the entire financial world from an embarrassing moment, with most of the major banks and many managers involved in the scam. This is what would have been interesting - to understand how the one who was designated as a criminal fit perfectly into the principles and mechanisms of the neoliberal model. Shouldn't this observation, similar to the one made earlier about the economic justification for the destruction of the Earth, make us look up and contemplate the limits, not only planetary, but also moral, of the system in which we are involved?

Breaking the Ponzi scheme: open your eyes and look to the future

In prison, Bernard Madoff took the measure of his acts, as well as the awareness of the need for others to point the finger of blame (his responsibility going beyond his Ponzi scheme, in the collective mind, to include part of the subprime crisis), as well as the responsibility of his victims: "they were greedy. Considered indecent by many, this reflection invites to step back. Without denying the guilt of a swindler or the real damage caused by his practices to unfortunate investors, it is indeed a question of thinking about the conditions that made the swindle possible rather than evacuating the problem with the simplest solution, the "market failure" committed by a malicious actor, quickly banished from society so that he does not reveal the inconsistencies. In prison, Madoff also said he was finally happier than he was during his years of golden lies. Relief' is the interesting feeling of criminals when they are arrested, because their moral sense, which was well buried, is reassured at that moment: 'the world is not completely crazy since it has understood that I was doing wrong'.

The Ponzi pyramids are not an accident, but rather the revelation of a system that runs away without looking at the future. This is both a moral and an economic problem: to make future generations bear the burden of our decisions is both unfair and inefficient - many studies have quantified the difference between the cost of an ecological transition and the cost of not making it, with ratios ranging from one to five times. One can imagine that in a world gone haywire, these values no longer have any meaning - what is money worth on the Titanic?

Integrating ethics and the interests of future generations into the economic software thus appears to be a necessity to get out of the current spiral. Assigning a cost to the impacts of people and organizations on the planet would allow us to reconnect price and value, to come down from our unstable pyramids and to finally put our feet on the ground.

Share this article

Share this article

Your issues, our issues

Leave a Reply

Your email address will not be published. Required fields are marked *

Also read