ABSTRACT
Bernie Madoff was using the money from later investors to pay back earlier investors, a classic robbing-Peter-to-pay-Paul Ponzi scheme that required constant infusions of new funds to keep the ship afloat. Like all Ponzi schemes, Madoff's was based on trust. The 1920s, like the 1990s, were a high-flying time on Wall Street, when anything seemed possible and every shoeshine boy could get rich. It was finally Charles Ponzi's time to shine. Charles Ponzi's scheme was based upon his discovery of a simple arbitrage opportunity—or so he thought. Much like Ponzi's scheme of buying postal coupons in weak-currency countries and redeeming them in strong-currency countries, this strategy is credible and legitimate. However, like Ponzi's scheme, this one too requires a deep, liquid market for the options allegedly used to hedge the portfolio. By far the most important enablers who allowed Madoff's fraud to prosper for at least two decades worked for the government.
