Recently uncovered Ponzi Schemes – indicator of a coming crash?


The largest ponzi scheme ever, namely the one of Bernie Madoff, was finally uncovered on December 10, 2008 – so amid the Financial Crisis. The Enron scandal, another famous ponzi scheme, came to the light in the end of 2001 – hence amid the dot-com bust.

So, it might not be a too far-fetched idea to be on the look-out for a new round of ponzi-scheme discoveries when searching for signs for the next crash, would it?

And, indeed, lately we saw some „nice“ examples: in the case of Ezubao, Chinese authorities at the end of January 2016 discovered a ponzi scheme with damages of over 7.6bn USD done to more than 1m investors! In March 2016 then, the FBI raided the offices of United Development Funding IV on ponzi scheme- allegations. And finally, yesterday, with investigations going on about the whereabouts of its chairman, it is not excluded that the Chinese „Wangzhou Group“ is also nothing but a ponzi scheme, too.

The next question is, are there other ponzi schemes or the like out there (And, no, I do not mean central bank policies here, which are from time to time given similar names, like „the red ponzi„)? When looking into the New Economy’s history, some of the investment stories there later looked like the legal versions of ponzi schemes. So, in „modern“ times it might make sense to look at the so-called Unicorns of Silicon-Valley start-ups. And indeed, when you google the now embettled „Theranos“ together with „ponzi scheme“, you end up with an investigation of the Wall Street Journal already published in 2015. On the other end of the spectrum, hence „old economy“, you may tumble over Valeant, which was not only on one occasion compared to Enron. Even if these later cases do not turn out to be „true“ (hence criminal) ponzi schemes, as an investor or creditor one should now be on alert.

However, apart from this practical advice, are such downfalls indeed a sign for a coming economic crash? Indeed, as pointed out already at the beginning, there is a pattern of ponzi schemes crashing when economic conditions tighten: As Wikipedia quite eloquently puts the common knowlege of forensic experts: „External market forces, such as a sharp decline in the economy, cause many investors to withdraw part or all of their funds“ – and since these „funds“ do not contain actual profits but most of the time only the payments of other investors and the criminal will not be able to obtain credit under the tightening financial conditions, the ponzi goes up in flames.

So, ponzi schemes going belly-up in a shoal, could indeed be an indicator of a coming crash. So, be aware!