Ponzimonium

What Is Ponzimonium?

Ponzimonium is an outbreak of Ponzi schemes. The term is a portmanteau of "Ponzi"_ — named after Charles Ponzi, for which this particular type of fraud was made famous — _and "pandemonium." It is sometimes referred to as Ponzi Mania.

After the multi-billion Ponzi scheme perpetrated by Bernard Madoff was revealed in 2008, many new but smaller-scale Ponzi schemers were exposed. Ponzimonium refers to the growth in the number of people under investigation by the Securities Exchange Commission (SEC) for suspected similar investment fraud.

Understanding Ponzimonium

A Ponzi scheme involves paying past investors with money from new investors. Past investors are none the wiser in a Ponzi scheme if they are paid. The scheme can run for years as long as markets go up, and no one catches on to the fraud. New investors, drawn in by high returns, give money to the schemer to "invest."

These new funds are merely funneled to existing investors, who are pleased with their "returns" on investment. The music stops when the Ponzi schemer cannot raise enough money from new investors to pay off the old investors, or when someone blows the whistle.

The original master of the scheme, Italian immigrant Charles Ponzi, operated his scheme for only a year or so in the Boston area until the local newspaper ran a story about his questionable investment returns in 1920. By then, he had swindled at least $20 million, an enormous sum at the time. Ponzi's punishment was a federal prison sentence for his mail fraud conviction.

The word "pandemonium," the center place, or capital of hell, comes from John Milton's Paradise Lost. The Cambridge Dictionary's definition is a "situation in which there is a lot of noise and confusion because people are excited, angry, or frightened."

The Growth in Ponzi Schemes

Federal, state, and local law enforcement officials have reported enormous increases in tips and criminal activity since the economic calamity began in 2008 with Bernard Madoff's antics.

According to Bart Chilton, commissioner of the Commodity Futures Trading Commission (CFTC) and author of "Ponzimonium: How Scam Artists are Ripping Off America," at any time CFTC staff "are investigating anywhere between 750 and 1,000 individuals or entities for various violations of the law. Increases in tips and fraud cases have also occurred at the U.S. Securities and Exchange Commission (SEC), at the Federal Bureau of Investigation (FBI), in the states, and various localities around the world.

Example of a Ponzimonium

Bernie Madoff caused ponzimonium after his investment fraud that lasted many years was thrust into public view amid the 2008 financial crisis. The dictionary definition is an accurate description of what transpired with the Madoff case and those of other Ponzi punks.

In the wake of Madoff's arrest, the Securities and Exchange Commission and other federal investigators put their complete efforts into finding and shutting down illegal Ponzi schemes that were responsible for billions of dollars worth of losses to investors. Following the huge losses recognized by Bernard Madoff's investors, individual investors across the world became much more conscious of the signs of potential Ponzi and pyramid schemes, resulting in a Ponzi mania.

In hindsight, the mania-like mood in the wake of the Madoff scandal should have been anticipated as it's a usual element to the market's boom and bust cycle. The notion of 'mania' dates back to the very first recorded speculative bubble: For instance, the Tulip mania of the 17th century. During the Dutch Golden Age, contract prices for new and fashionable tulip bulbs passed unthinkable levels before collapsing as people reached their senses. Since this first mania, subsequent bubbles have often been labeled or identified with the manic behavior of crowds.

Scottish journalist Charles Mackay's Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, first published in 1841 still stands as an early tome in crowd psychology.