Pillar of Wall Street Collapses

What do an Italian immigrant, the NASDAQ and 50 billion dollars have in common? They are all associated with a Ponzi scheme. Today, the “Ponzi scheme” seems to have become a part of our every day lexicon and it has once again reared its ugly head in the world of high finance, involving one of Wall Streets most respected personalities.

Named after an Italian immigrant by the name of Charles Ponzi, a Ponzi scheme involves offering abnormally high, short-term returns that entice investors into the scheme. The existing scheme investors are paid off with the money obtained from the new investors, which requires and ever-increasing flow of money into the scheme to keep it afloat.

Late yesterday, a longstanding leader in the financial services industry, and former chairman of the NASDAQ, Bernard Madoff, was arrested and charged with securities fraud involving a Ponzi scheme. The U.S. Attorney for the Southern District of New York, and the Federal Bureau of Investigation allege Madoff was involved in a Ponzi scheme involving over 50 billion dollars.

Madoff currently serves as the founder and chairman of Bernard L. Madoff Investment Securities LLC. It was his dealings over the last decade within this company that led to his arrest. Madoff's assets have been frozen and a receiver has been appointed to run the firm during the resolution of the charges.

Madoff is alleged to have invested and lost investors' money, and then, to cover up his actions, paid off some investors with the principal he received from others. His continued losses and cover ups eventually snowballed into billions of dollars in losses. Madoff began to have a hard time keeping the scheme going and the stress was getting to him.

So, how did this scheme come to light? Well it was apparently Bernard himself that exposed the scheme. The stress from the cover-ups began to overwhelm him. Over the last couple of weeks he is alleged to have made several statements exposing the scheme.

According to reports he is alleged to have told senior employees that he is “finished” and that everything was just “one big lie”. He himself, according to federal prosecutor's statements stated he was running “a giant Ponzi scheme”.

As with all Ponzi schemes, the enormity of it all was its downfall. It is not easy keeping new money flowing in while paying off existing clients. Madoff's firm is alleged to have had a client seeking to redeem $7 billion in deposits and Madoff was struggling to meet that obligation.

Madoff's firm was involved in an investment advisory business with over $17 billion in assets under management. The firm had a number of large hedge fund investment firms and some large European banks on his client list. The effect on the funds and banks could be devastating.

Madoff's lawyer is attempting to minimize Bernard's culpability stating that "Bernard Madoff is a longstanding leader in the financial services industry with an unblemished record," "He is a person of integrity. He intends to fight to get through this unfortunate event."

More information will come to light as this story unfolds. But one thing is for certain, there will be some major fallout from the losses from this scheme.

Read more on the Madoff Ponzi arrest at Market Watch.