The article doesn’t mention a really important dynamic here — a LOT of the madoff IOUs were purchased by hedge funds for pennies on the dollar, from Madoff investors who needed liquidity for e.g. retirement and couldn’t wait decades to get their money back. Dunno if there still is, but there was an active and liquid market for Madoff receipts for a while. A fund could tell an individual who was wiped out by Madoff “we’ll pay you $0.20 on the dollar for your claim against Madoff”, and then collect the $0.80+ that’s been recovered over the past 10 years. I don’t have an estimate of what % of the recovered dollars are going to the original investors...but it’s not 100%. A lot of the claims have been traded.
That's sort-of how it's supposed to work? The price at the time was the market-determined value considering the uncertainty of recovery. As you mention, there were multiple hedge funds, so they would have been competing to buy up these coupons, making me suspect the price at the time reflected the best knowledge of the fund's situation and the law available at the time.
It sure seems unjust post-hoc. But I can't really think of any improvements. The rate of recovery is somewhat extraordinary, as demonstrated by the appearance of it in the press. And it would not have happened without giving organisations with deep pockets the incentives to try to effect it.
1. The article shares a bunch of anecdotes about individual investors receiving their money back, which is surely true, but not necessarily representative of what’s happening overall.
2. Unfortunately it probably wasn’t priced strictly by “odds of recovery” (and also I suspect there was information asymmetry there) but also based on liquidity needs. Large institutions can wait for cash. Retail investors can’t necessarily. Yes, yes time value of money blah blah. Still seems asymmetric.
This "asymmetry" is one of the reasons why having capital makes you powerful, and living paycheck-to-paycheck (maximum need for liquidity) makes you powerless.
It's supposed to work that way for oil futures, but I'm not sure 'justice futures' are a good thing. People have a right to be made whole; their need, and the justice system's unreliability and delay in delivering it, shouldn't be exploited by people with deeper pockets, IMHO; not everything should be priced on the market. It could become (or be) another way the poor or non-wealthy are excluded from justice and are practically denied their rights.
This article then makes those trades more valuable, which gives an incentive to pursue fraud. It’s an interesting effect against the legal strategy to wear down claimants.
A similar issue I have is with the clawbacks themselves. Should the people who didn't have suspicions and/or didn't act on them have the same outcome as those who got out early?
Doesn't this perversely incentivize leaving money in questionable investments? Or at least reduce the incentive to do one's own due diligence?
The more people who pull their money, the faster a pyramid scheme collapses. So even a marginal change in the number of withdrawals can make or break such a scheme.
As far as I can tell the clawbacks are of profits taken, not principle. Since the profits were fictitious they represent money stolen from downstream victims of the scam. It doesn't really matter that Madoff stole it and then handed it to someone else: it's still stolen money.
>> Doesn't this perversely incentivize leaving money in questionable investments?
If anything, it seems to incentivize spending money quickly, because only those with something left were in a position to have it clawed back. It isnt clear from the article, but i dont think claw-backs forced people without anything left to say, take out a loan to pay back what was spent.
Imagine you invest in a hedge fund, and get some amount of returns back. But then, years later, a lawyer comes and tells you to give him the profits because the fund was illegitimate (without you knowing this) and therefore they don't belong to you.
This is exactly what is happening to all these people.
It does feel somewhat unfair, but it's long-settled law on stolen goods: if you buy a car and it turns out to be stolen, or a house with an improper title, you don't get to keep it. In both cases the buyer is supposed to check and beware of "too good to be true" offers.
Note that they get to keep the principal, so they're not even out the money they might be if they bought a stolen car.
Public auctions are one way that this chain is broken. Must have been from the old days when movement of objects was more difficult, but something put up for a public auction can be inspected and claimed by someone as stolen, but afterwords people get to keep what they bought. Thus auctions for lost luggage, police stuff, car auctions, etc.
Also there is a special rule for cash. Stolen cash is not treated this way, so if a bank is robbed and has all the serial numbers, they can't take the money from you if you happen to get one of the bills in a transaction.
Curious if this approach was tried on behalf of those who lost BTC at Mt Gox -- could other BTC holders have their holdings taken away if it originated from the Mt Gox theft (or other theft.)
BTC was 'found' by Mark Karples (~200k). When the price increased, the custodian started selling it to lock in enough money to pay off the creditors [0]. Now the question is how to do the payouts due to the way Japanese law works [1].
I agree. This also sets an important precedent that future investors in different funds must consider. If something seems too good to be true, there might be consequences for them. They are disincentivized to look the other way.
Actually, I think it is. It sounds like they're clawing back the investment profit, but it is likely those profits were invested in something else which also earned a profit. That additional profit is yours to keep as far as I can tell.
Alternatively, they could have spent the original profit or lost it on another investment... In other words the end result was similar to a loan. I'm curious whether the claw-back included a risk-free interest rate.
>It does feel somewhat unfair, but it's long-settled law on stolen goods: if you buy a car and it turns out to be stolen, or a house with an improper title, you don't get to keep it.
I agree with your first line, but wanted to nitpick the legal statement.
That's not the law on passage of title. Things are a whole lot more complicated than that.
The rules are jurisdiction specific and civilian and common law systems deal with this issue differently. Historical common law treats property as a series of tiered claims, not as a singular entitlement.
Sometimes there are brightline rules regarding registration requirements. Sometimes there are multiple sale good faith caveats. Sometimes there are confounding evidence requirements. etc.
Generally speaking, you never get to keep the item if you knew or ought to have known it was fishy. Beyond that, things vary.
True if you buy a car in a private sale. But if you buy a car from a regulated professional dealer and it turns out to be stolen then things get a little bit more complicated than just you have to give it back. I would expect in that situation that the dealer makes everyone good (and possibly goes to prison).
This isn't my understanding of how it works. I thought that if you bought a stolen car from a dealership, the police could still tow the car and give it back to the rightful owner. You would get your money back, and you would sue the seller if necessary. I don't see how buying from a dealership makes this any different, except a dealership is easier to sue and recover damages from.
"I didn't know I was benefiting from a crime, so I should be able to keep the profits I made instead of them being used to repay people that actually lost money" doesn't feel fair either.
I think a somewhat useful comparison is trade in stolen goods: even if you didn't know that something you bought was stolen, you still can be forced to return it to the actual owner. This situation is actually better than with physical goods, since they're only going after profits (which arguably were stolen from others), whereas in the case of stolen goods the buyer can be left hanging trying to recover the money they paid.
As per the article, the mechanism here is clawing back "profits" from people who withdrew money from Madoff's fund over the years. It's literally reversing the basic mechanism of this Ponzi scheme.
I think your objection would be valid if, for example, they sued contractors that were paid to renovate Madoff's office (and being paid with customers' money).
But as it is, I think the veil of ignorance might serve as a guide. Consider: You are informed that, before his untimely death in a completely unnecessary re-enactment of Wilhelm Tell's apple-related stunts (only this time with LSD), your great-granduncle invested $10,000,000 of the profits made from his seminal literary addition to the comin-of-age canon into Madoff's funds. You do not know if he ever found the clarity of mind to withdraw any funds. Would you choose the $10 million, or prefer a 50% chance at $20 million?
(the diminishing marginal value of money also comes into play here).
I don’t know if any of the 10 investments i made in 2018 are Ponzi schemes. I have to rely on regulations and hope companies like Lending Club are legit, I don’t pour over their paper work or hiring private investigators to figure out how they do their business. It would be silly to confiscate my profits because Lending Club turned out to be shady. Me hiring a fund to produce returns on investment is no different than hiring a painter to paint a room.
update
all good points in replies. i stand corrected on my understanding of this issue :)
> all good points in replies. i stand corrected on my understanding of this issue :)
Madoff's fund wasn't regulated, too. If you buy a house or stocks, you are into a regulated market.
Edit : by "regulated" I probably meant public. Not sure if the english term is correct ; one may want to check Shiller's course about hedge funds on youtube. My point being, those funds are only accessible to the very rich who will never spend their principal.
I think it honestly depends. to make an admittedly weird example: suppose you go to a dealership to buy a used car. you decide on one that's going for close to the KBB value, do all the paperwork, and drive the car off the lot. a year later you find out the dealership owner is a shady guy and some of the cars he sold were somehow stolen. the business no longer exists and the guy is nowhere to be found. should you really be out $10k and your ride to work?
the case for returning the property in this situation is more practical than moral. that is, it's probably just easier to just find the guy with the car and take it than to extract money from a deadbeat car salesman who probably doesn't have it anymore. I find these sorts of legal things distasteful, but I guess I can see why we have them.
in an ideal world, I think there should be some sort of safe harbor protection for people who make a reasonable effort in good faith to check that a transaction is bona fide.
This is why a lender for a house purchase requires title insurance. The insurance kicks in to make you whole if it turns out the house was not the prior owner's to sell. I don't think the same things exists with cars, but requiring it in some way seems like a way to handle the problem in general. In state-level social fund equivalent. This happens with insurance too. One of the costs baked into premiums are state mandated contributions to common insurance solvency pools. If a carrier goes out of business, the insured is still covered by the common pool that is used to fund claims (that have now be transferred to a solvent firm or trustee).
Someone has to eat the loss: the original owner or the last purchaser. The question is, between the two who is the "least cost avoider"? That is, the one who we can most easily incentivize in order to arrive at the best overall outcome.
In short, if the last purchaser got to keep the car, that means he would be less risk averse to buying from car dealers with risky reputations, effectively increasing the market for stolen cars. And this increase in the market would result in more stolen cars overall.
The existing default rule is, of course, based on a judgment that we won't be worse off in a world where people can fraudulently claim that their car is stolen and then get it back while also capturing the sale profit. Considering that most people are law abiding and have very good reason already to protect their car from theft regardless of which default rule we choose, it's not a bad rule on its face.
> in an ideal world, I think there should be some sort of safe harbor protection for people who make a reasonable effort in good faith to check that a transaction is bona fide.
It sounds like you may have a legal education given the language you're using. IIRC this is how the rule for real estate works in the presence of land registration systems. We flip the default rule to incentivize recordation. If two fraudulent sales are made by a seller back-to-back before title is recorded, it's the last purchaser who gets the property. This incentivizes each purchaser to record his purchase as quickly as possible, and to do so in a manner that closes the window for a fraudulent sale, such as by keeping payment in escrow until recordation is successful. (See, e.g., https://en.wikipedia.org/wiki/Bona_fide_purchaser)
no formal legal education, I'm just an armchair philosopher who occasionally reads about legal issues. thanks for sharing the bit about real estate, I will have to read more about the motivation for flipping the default rule there.
There’s a major difference in that it’s not possible to unpaint a room, but it’s trivial to undo a money transfer. A painter can’t be returned to his previous state, but an investor can.
Some Madoff-touched money is going to be invested at a profit, some at a loss, some spent, some beneficiaries will be dead with assets left to heirs, etc.
Unwinding /anything/ from a decade ago is non-trivial.
It's even possible (likely?) that some direct Madoff investors were also customers of the funds that have money being clawed back.
They all are. That’s the point. This is taking Money from those who got out of Madoff’s fund soon enough, and giving to those later investors who paid for the imaginary profits.
>> that some direct Madoff investors were also customers of the funds
> that some Madoff investors.
You omitted the word "direct" (why?)
Person X invests in a fund Y that invests with Madoff and gets out soon enough. Person X then invests those gains "directly" with Madoff. Person X loses money with Madoff. How much does Person X deserve (or owe)?
Another example would be Person A who invests $N in the scheme. Takes out $10N principal & profits (as a test that the scheme is authentic). Invests that $10N and even more in the scheme, loses it.
How much do you claw back for (or from?) Person A?
Madoff's funds weren't exactly exchange-traded, generic investment vehicles. As mentioned in the article, part of the money is clawed back from "feeder funds". Those were sales or regulatory vehicles that passed 100% of their capital on to Madoff.
As to your examples:
Person X is irrelevant. You claw back the money from fund Y. Fund Y may, in turn, have arrangements with person X requiring them to return any money, but that's actually tangential. (this is like 1st-semester law again, yeay!)
Person A owes <total sum taken out> - <total sum put in> (this is like 10th grade math again. yeay!)
So Person X makes off as a pure winner in the clawback (doesn't lose Fund Y profits, gets "made whole" of direct losses in clawback) Not "fair" but "legal". Yay!
In real-world experience, rather than 10th-grade story problems, the devil is in the details. Dates are important (you're eligible for recovery of losses from date range, you're liable for recovery from other date range), and Person A is likely to be vulnerable to clawback of earlier profits, even if reinvested and later lost. The profits from the scheme are separate transactions from the later losses in the same scheme. In this case, your simple math would be more fair, but probably not how the legal system would work. Yay!
You can see examples of this in capital gains taxes on people who made and lost a lot in cryptocurrency boom/bust cycles. Arbiters may have a lot of discretion in evaluating claims in these big cases, but I'd rather have the law on my side than relying on the discretion of an arbiter.
Sure, that simplifies things and is how the law treats it. But there is still complexity. You have some cases where a single true owner invested via a family office, via different trusts, via feeder funds all at different times with different amounts taken out and different profit and losses. Sometime the profits from one venue are compensation to another. In these scenarios, you can treat them all as separate cases, or you can pull them together and negotiate an umbrella settlement. My understanding is that this has been done when possible, including with some hedge-funds who have purchased a variety of positions and even feeder funds themselves.
Or course it’s unfair. There is no ‘fair’ outcome to something like this. Everybody got scammed. The entire ordeal is reprehensible, but what are you going to do?
It's hard to say, from just TFA. As I read it, their goal is for everyone to at least get back their principal. But the only way to manage that is to claw back withdrawals.
Put another way, they've constructed a but-for world where everyone just invested, but took no returns. Then they distribute everything that's available in proportion to those investments. So as a result, everyone simply lost the same percentage of their investment.
Isn't that fair?
What's confusing, I think, is the idea that they're somehow punishing people who withdrew profits. Because maybe they should have known that they were too good to be true. But I don't think that's relevant. They're just unwinding the thing.
I don't think that is fair exactly as described. Someone who invested $1MM in 1988 should get back more than someone who invested $1MM in 1999, IMO, because their alternative investment would have grown substantially in the interim. IOW, on a then-present-value basis, the 1988 investor invested more.
If there were actual earnings to distribute, adjustments such as you describe would certainly be appropriate. However, it seems likely that, in the aggregate, all investors (as a group) lost. So maybe getting back X% of principal is the only workable approach. And I don't know specifics. Perhaps they are doing it all on a present-value basis, adjusted for inflation, but-for returns, etc.
It doesn’t work like that. If their alternate investment had gone bankrupt, they would have lost everything instead. Nobody has a right to a risk-free rate of return, if they are chasing higher-risk return rates.
Giving everyone back their capital is about as even-handed as you’re going to get.
Most of the claw-backs involve investors who were heavily involved with marketing the fund and got extra-high returns from it. Stanley Chais, Madoff's front man in Beverly Hills, Jeffery Picower, Madoff's front man in Palm Beach, and J. Ezra Merkin, Madoff's front man in New York's Fifth Avenue Synagogue were the three main individuals. They were not innocent victims.
Not really.
The 'profits' were illusory, and effectively the proceeds of crime. What seems fairest here is to try to unwind the entire thing, and return as high a percentage of everyone's money paid-in as possible over the life of the scheme.
Unfortunately it's never going to work out well for everyone - it was a massive fraud.
It’s even more unfair to invest in a fund and get wonderful returns and then years later you’re told that the fund was illegitimate and all of your money is gone.
A crime was committed with numerous victims. It’s not possible to achieve a completely fair outcome for all involved.
It is unfair, and may be financially devastating to some people. I would imagine that at least some of these people took their profits, invested them in other things that didn’t pan out, and now are faced with being sued by the trustee for money they no longer have, many years later, through no fault of their own. There should be legal limits on clawbacks in those cases where the target was unaware of the fraud and paying it back will cause them financial ruin.
In light of how regulated hedge funds are, it doesn’t seem so bad.
I think that if you’re ever insentivized to be ignorant, then that suggests some ethical shenanigans. If someone like Madoff can live the charmed life he had and pay the price while other investors that profit from it can just keep the profits, it creates some very perverse incentives in the market.
Well, it is also unfair to invest in a fund and have your money go out as phantom profits to other investors to boost the very fund. (disclosure: I haven't been in either situation, to my knowledge).
So lets say it is unfair on both sides, but we want to come up with a policy that will optimize behavior in the future. What is the effect of this policy?
This is a fairly straightforward application of the principles behind the law of restitution and unjust enrichment. Here, an early Ponzi scheme participant was enriched at the expense of a later Ponzi scheme participant. The remedy is to disgorge the profits of the first so as to make the second whole again.
Here we're upset because we don't believe that the act of investing was 'unjust', but functionally being 'unjust' in this area doesn't necessarily mean 'wrong'. It can mean unjustified, or lacking a proper basis.
Viewed in this way, one's timing within the ambit of a Ponzi scheme would need to be the justification to entitle early participants to outsized profit. Should our legal system lend force to this type of arrangement, or unwind them as best it can?
It may seem unfair on the surface, but it's a lot less unfair than losing your principle to the same scam that paid out the stolen money as fake returns.
Sure, that sucks. This is why Madoff is in prison. There's no particular reason you shouldn't get just as fucked as everyone else who was invested, just because you took profits at a certain time though.
it does seem unfair, and I think this is why crpyto currencies may see more adoption, because they are immune to claw-backs. Instead of keeping $100k in a bank, where creditors can take it, put in a crypto, although there is much more volatility.
How exactly do you envision this to work? The government won't care where the client ferreted away the proceeds, they'll just want them back.
Unless the entire funding structure including the currency and all parties in the transaction are completely anonymous and it is impossible to trace the funds to any one person, but then this raises further problems.
People have bought stock in companies which violently subvert democracy and do irreparable damage to nature, with no consequence. It is good that accountability in finance at least comes this far.
The lawyers don't seem to have had to prove that the investors knew that the fund was illegitimate at. My understanding is that the fund was regulated so the assumption should have been that it was legitimate.
I would not be surprised if results in people losing their retirement funds.
Generally, if you receive stolen goods, there are two possibilities: you knew they were stolen (read: a prosecutor can convince a jury you knew), in which case you lose the goods and get prosecuted. Or you didn't know they were stolen (read: prosecutors can't convince a jury you knew), in which case you merely lose the goods.
This may seem unfair from the perspective of the unknowing recipient of stolen goods, but letting them keep the goods is equally unfair from the perspective of the original victim, and would feel like the law giving its blessing to the theft (it would also encourage schemes to knowingly but with plausible deniability receive stolen goods). So there's no solution that is guaranteed to appear fair from all perspectives. But the law generally sides with returning the goods to the original owner, effectively undoing the original theft.
In this case, the "investors" who are being targeted by the suits are also getting to keep their own original capital; they're just being required to hand back the ill-gotten gains. So the remedy is effectively undoing the Ponzi scheme.
If you buy the stolen goods from a big box retailer that is routinely regulated then this analogy might be useful. As it is it does not apply very well to this situation.
Considering the amount of counterfeit goods sold on Amazon I suspect at least some of it was simply stolen. In such a case I would expect the items to be clawed back if possible. Though with the possibility of Amazon making the buyer whole.
That also seems like the correct approach here where anyone running a feeder fund should be on the hook.
Hedge funds are not regulated the way you think. Mostly the SEC requires the generation of a lot of paperwork and various filings. The SEC does conduct inspections of funds but mostly this is not that big a deal. Remarkably the SEC did inspect Madoff Investments and did not conclude it was a fraud even though it obviously was. I will leave the reader to judge the competence of the SEC but if you are thinking that this was hard to see I would recommend Harry Markopolos's book 'No One Would Listen'.
Ultimately as a potential investor this would have been easy to spot as at least suspect. The first couple of due diligence questions to ask are about custody arrangements and their auditor. Understanding that if you are not an accredited investor you are not allowed to invest in hedge funds also makes it obvious that a fund willing to take your money may be acting fraudulently.
Finally it did result in people losing their retirement funds, for some people absolutely everything.
> Remarkably the SEC did inspect Madoff Investments and did not conclude it was a fraud even though it obviously was.
> Ultimately as a potential investor this would have been easy to spot as at least suspect.
You think that even after the SEC failed to spot the fraud investors with far less power should be able to? I don't quite follow your argument here. A little more clarification would be nice.
> Finally it did result in people losing their retirement funds, for some people absolutely everything.
Taking money that people have received 20 years ago off people will also result in some people losing everything. (I know that they say that the people they are extracting the money from are keeping the original investments but what if some of the money has been spent?)
Sure. So simply asking who their auditor is and what the custody arrangements are will tell you a lot. Hedge Funds and other asset managers use a relatively small number of accountants to do their auditing. Madoff used a small family accountancy.
This is not to excuse the SEC or let them off the hook. The SEC proved to be ultimately grossly incompetent at best, if not negligent or actually complicit. Investors should no more rely on the SEC to protect them than the hens should rely on the fox to protect the henhouse. This has been demonstrated repeatedly.
Finally there is a statute of limitations when clawing back money that people received. I believe in Madoff's case it was two years. Additionally there were a number of lawsuits against a subset of investors that allegedly new about the scheme and profited from it.
I guess what I am really asking is did the SEC not spot this because it was not their job or because it was their job and they didn't do their job properly?
It is probably considered their job but I don't have any confidence in the SEC to proactively investigate anything of real substance. However they did not even have to spot it since Mr. Markopolos turned up with a ton of evidence that it was a Ponzi scheme. They did not even do basic things like verify that he was actually trading.
I listened to a good podcast series on Madoff a couple of years ago. There was good evidence that many of the investors knew that he was running a scam, and were looking the other way as long as they kept getting returns.
If the investors couldn't have known it was a scummy practice, then no; if it was approved by the SEC, then the SEC should be responsible for this money because they signed off on it. If the SEC or a similar organization wasn't involved however, then it was the investors' own risk and IMO law enforcement can seize the investments.
I cannot imagine how its possible for a regulatory body to be financially liable in place of the actual players for wrongdoing. The economics are wacky. The SEC doesn't get a portion of the profits how is it supposed to secure investors against malfeasance by the actual players?
You are basically asking for the government to insure that nothing bad ever happens and accept unlimited liability if it ever does.
Victim here. Note that Picard's efforts only help direct investors, or investors in feeder funds that reached an agreemnt with him.
The DoJ separate fund help infirect investors, but after the first refund of 25% of the principal invested, they decided to do not refund customers of feeder funds (or at least of some feeder funds) arguing that we may recover something through Picard.
Some of you commented on the follyness of investing in something that sounds too good to be true. At the time, I had diversified my portfolio in 8 funds. Kingate (the Madoff's feeder fund were I invested) had the lowest average return of all the funds. I ran a correlation test of these funds, and they all had an R of 0.7 - 0.95, except for Kingate, it had a correlation of ~0 with all the other funds across the years. I also compared with the major stock indexes, and it was completely uncorrelated. Its volatility was also super low. I plotted the average returns over a 3 month period for as many years as I had data, and it was a straight line at 9.8% annual return.
It was my first investment and I thought it was fantastic: uncorrelated, stable, a bit low on the returns side compared to the other funds.
Hindsight is 20/20, I guess. I had null previous experience and I just didn't knew how ridiculous these results were, and that this fund had SCAM sprayed all over it.
I was advised by "professionals", which turned out to be nothing more than sellers in fancy suits.
Be careful about the "victim" label. Lots of Madoff's clients had very quiet discussions with lawyers.
"I had 5 million in invested with Madoff, now it is gone".
"No. You gave him 2 million 20 year ago. He told you that had grown to 5 million. He also paid you 2.5 million over those 20 years."
"So I only lost the original 2 million?"
"No. You were paid that 2 million back, plus an additional 500$ stolen from other people. That 500k was stolen money. You received and spent stolen money. If the FBI or IRS calls SAY NOTHING before talking to me again."
Where are the bankers, the regulators, the politicians, the businessmen, the CEOs, who cost trillions of dollars, millions of jobs, hundreds of thousands of lives throughout the world after 2008?
You realise those people didn't break the law, right? You can't just throw someone in prison because you don't like what they did, their actions actually have to be illegal.
So this has some interesting implications: the SEC has started going after the most fraudulent ICOs, and will no doubt start working their way backwards. Cryptocurrencies provide a permanent record of all transactions, and exchanges are obliged by KYC to map that to real people. This means that people who've already profited from crypto bubbles (and maybe even spent the money) might find themselves the target of recovery actions.
If I were to describe a scheme that disproportionately rewards early adopters[0] and requires a constant addition of new adopters just to sustain the price[1] - would an ordinary reasonable person[2] think "the future of money" or "traditional pyramid scheme"? And then if I were to describe a second scheme extending the first scheme where the main attraction is the supposedly constant pressure for buying into that scheme in order to participate in other new schemes launched with that scheme[3] - would an ordinary reasonable person think "new financial paradigm" or "traditional ponzi scheme"? And then if I was to describe those new schemes based on the second scheme based on the first scheme...
[0] Both via difficulty adjustments every 2 weeks (mostly increasing) and rewards halving every 4 years
[1] To counteract the deflationary nature of new coin generation
[3] i.e. buying into the "platform" in order to "invest" in tokens for subschemes issued with the "platform" (no one advertised that the subschemes would eventually have to dump their "shares" of the platform afterwards)
If something like bitcoin was getting exactly enough users to counteract generation, the goal would be something like "eventually we'll triple the userbase!" or "eventually we'll add 25% to the userbase!" which is stupendously far from a pyramid scheme's infinite exponential growth.
Once a coin is mature, the amount of user growth to match or even beat inflation on the dollar is... zero.
So what you're left with is "rewards early adopters" and "makes new subunits" and that... is a pretty ordinary startup.
Bitcoin has a lot of problems but a need for a constant flow of new users isn't one of them.
-
From the other comment thread: "I used the term "at the top" to allude to the original point about what geometric shape a reasonable person would be likely to use to pictorially represent such a scheme."
Nah. You have early adopters, and you have everyone else. The early price is super cheap, and the later price is based on demand. The best analogy is baseball cards.
> 'what you're left with is "rewards early adopters" and "makes new subunits" and that... is a pretty ordinary startup.'
While you could argue that a startup and a ponzi scheme can be considered similar because they both benefit earlier investors/members more than later ones, I'd argue that they are fundamentally different due to both the intention and the method - (i) the intention of a startup is extrinsic, i.e. it is to provide a real product or service based on a genuine or perceived customer need, while the intention of a ponzi scheme is intrinsic, i.e. it is solely a money making scheme with no product or service outside of the scheme, and (ii) the method of the startup is such that it will typically try to benefit most or all investors and customers to a greater or lesser degree, while the method of a ponzi scheme is such that it will benefit the earlier members at the expense of the later members (necessarily because nothing exists outside of the scheme).
The critical part of a ponzi scheme is using new investment to pay interest on old investors.
Something that you can model as a collectible doesn't do this. No matter how many promises of revolution you attach, it's still a commodity where you can buy and sell units based on supply and demand, and everyone profits or loses based on where the price goes. And they're generally aimed at a perceived customer need, at least.
For an honest believer, the value of their coins remaining stable is fine, they just want to be able to purchase things easily with them and/or do smart contract stuff.
The word 'scam' is appropriate for some coins. The words 'ponzi' or 'pyramid' are very rarely appropriate.
On a side note, the smart contracts set up to do a ponzi were interesting. It turns it into straightforward gambling, without the risk of someone taking the money and running.
>"requires a constant addition of new adopters just to sustain the price[1]
[...]
[1] To counteract the deflationary nature of new coin generation"
I think you've got some confusion going on here.
1) There is no requirement to "sustain the price" for any (normal) cryptocurrency.
2) New coin generation is "inflationary" in the sense that the number of coins is increased. This "inflationary" attribute would put the downward pressure on price you are referring to.
1. There's nothing at the code and protocol level about sustaining the price, but at the human level the early adopters (i.e. the 4% owning 97% of assets) are incentivised to try to sustain or increase the price through whatever means they can (e.g. funding pro-crypto press, social media, lobbyists etc.).
2. There's a big debate about whether it is inflationary, or deflationary, or hyper-deflationary, or different things at different times (e.g. inflationary wile new coins are being mined and deflationary from when the maximum number of coins has been reached). But whatever you call it, the point is that if there are the same people holding assets and there are more of those assets enabled, then all else being equal each of those assets would naturally be worth less, and as per point 1 the people at the top are incentivised to take action to counteract this, e.g. by introducing more people into the system below them.
>"There's nothing at the code and protocol level about sustaining the price, but at the human level the early adopters (i.e. the 4% owning 97% of assets) are incentivised to try to sustain or increase the price through whatever means they can (e.g. funding pro-crypto press, social media, lobbyists etc.)."
Ok, but this is trivial. It is true for everything for which there is a market. And both early and late adopters have the same incentive to increase the price. Why does the timing matter to you?
>"There's a big debate about whether it is inflationary, or deflationary, or hyper-deflationary, or different things at different times"
Who is debating this? It seems pretty straightforward that creating new coins is inflationary.
>"if there are the same people holding assets and there are more of those assets enabled, then all else being equal each of those assets would naturally be worth less"
Yes, this is literally the definition of inflation, I don't understand how someone can debate that this is actually an instance of deflation. "Worth less" == Prices (of other things denominated in the cryptocurrency) go up. I see no room for any disagreement about this: https://en.wikipedia.org/wiki/Inflation
>"the people at the top are incentivized to take action to counteract this"
Isn't anyone holding the currency incentivized to do the same? What does "at the top" matter?
>Who is debating this? It seems pretty straightforward that creating new coins is inflationary.
It is enabling coins within a fixed supply of 21M - this is not the same as creating new coins with no upper bounds. It isn't my intention to debate terminology - as I said "whatever you call it, the point is..."
>Isn't anyone holding the currency incentivized to do the same? What does "at the top" matter?
Those with more wealth to lose are disproportionately incentivised to protect it, and those with more wealth are also disproportionately empowered to take action to protect it. I used the term "at the top" to allude to the original point about what geometric shape a reasonable person would be likely to use to pictorially represent such a scheme.
The fixed coin supply is totally different from the inflationary pressure you are concerned about. There seems to be some kind of confusion here but I can't figure out what your are trying to say now.
>"Those with more wealth to lose are disproportionately incentivised to protect it"
I'd think a billionaire with $1 million worth of cryptocurrency would be less incentivized than someone with no other "wealth" but $10k worth of cryptocurrency. Also, the people with the most non-cryptocurrency wealth are going to be most empowered to take "protective" action. The "cryptocurrency wealth" is tied up in cryptocurrency... So I can't really follow this argument of yours either.
>"what geometric shape a reasonable person would be likely to use to pictorially represent such a scheme"
Yes, you seem to have started with the conclusion that you have problem with cryptocurrencies, and then are coming up with false arguments to call them a pyramid scheme.
> 'I'd think a billionaire with $1 million worth of cryptocurrency would be less incentivized than someone with no other "wealth" but $10k worth of cryptocurrency.'
Precisely. And in the context of this discussion, almost all crypto is held by people who have most of their wealth in crypto (e.g. 97% held by 4% of addresses) - using the percentages in your example, there aren't any crypto billionaires who have a trillion in cash. Linking this back to the original point, the are forced to keep most of their wealth in crypto because if they sold large amounts they would crash the market, hence one of the reasons for the need for new buyers so they can sell in a trickle.
> 'Also, the people with the most non-cryptocurrency wealth are going to be most empowered to take "protective" action. The "cryptocurrency wealth' is tied up in cryptocurrency...'
If you've a billion US$ worth of crypto, selling the odd million US$ worth to fund whatever you need to do in order to sustain the scheme (or "build the ecosystem" to use the euphemism) isn't a big issue. Not to mention that in many cases the people you are paying have been converted into "true believers" (perhaps even as a result of your own earlier efforts) and can therefore be paid in crypto.
A bubble is, in some ways, a self-organizing Ponzi scheme, in that the apparent growth has essentially nothing behind it but the inflow of new funds. Promoting something you know to be a bubble may be morally equivalent to running a Ponzi scheme, but you have to make some specific and clear-cut misrepresentations for it to be a crime. I would not be completely surprised if it turns out that some ICOs crossed the line, though ordinary take-the-money-and-run fraud seems more likely.
The comparison is that a fund run in contravention of the law has been at least partially unwound, with investors who are out of pocket being reimbursed.
If some of the larger ICOS are found to have been in contravention of the law, it's possible some sort of unwinding via lawsuit could occur.
What some ICOs have done, and what many more may be found to have done in future, is sell illegal unregistered securities.
On June 29, 2009, Judge Chin sentenced Madoff to the maximum sentence of 150 years in federal prison.
I vaguely remember the economic collapse of 2008, partly because at the time I was just getting out of a rough patch in my life and I'd bought a starter home. Granted, it was a mobile home, but it was 50,000 i'd made sure I could pay off at the bank and start building some equity. Then out of nowhere I lost my job, the machine shop I worked at closed, and after about 3 months I was effectively homeless.
People like me dont have "hedge fund" investment money. I had to give my dog away because i couldnt afford to feed it and sell my car for a deposit on a studio apartment. I guess Bernies bones will bleach for those hundred some odd years of biblical retribution, but for me I never saw any justice.
As far as I can tell, nobody, not one person responsible for crashing the economy and taking everything from me, was arrested or jailed. Im just supposed to imagine that the economy "got better" and everything is OK now. Madoff just seems like 'millionaires getting a few million back' to me.
You need to have six months of buffer to have a low risk of disaster.
Nevertheless, the vast majority of people purchasing their first homes in Canada and the US do not have six months of buffer. No bank has ever denied my application for a mortgage for not having six months of mortgage and tax payments in a savings account. My government backs certain kinds of loans for first-time buyers, and it does not require this buffer.
So while I agree with what you're saying in a logical sense, in a practical social sense, you are asking the vast majority of people who buy their first home to pass on buying a home, in the face of all social evidence that seems to contradict your advice.
It's good advice of a sort, but recognize that this is not accepted wisdom. It's highly conservative and contrarian. Which is smart, but if you want people to embrace it, you'll need to wrap it in a lot of justification and other mechanisms for explaining why they should zig while all around them, people are zagging.
(FWIW, My very first real estate purchase was a loft condo where I actually had cash for the entire thing, but took out a small mortgage to kick-start my credit rating. It was paid off in two years. From that point on, I have not had six months buffer in cash, but I have had more than the nose-bleed minimums in equity, and that's another kind of risk management. So I do empathize with your message, but I suggest it needs a lot of selling to get people to adopt it in the face of a trillion-dollar industry convincing people otherwise.)
I don't want to weigh in on whether they overextended themselves or not. 2008-2009 were rough years, and financial situations that didn't work out during that period would probably have been fine any other time. Also, let's cut some slack and presume that they were doing the best they could with a difficult set of circumstances.
With that out of the way, I think it bears mentioning that, while it isn't illegal to encourage people to overextend themselves, that's what everyone related to the housing industry seems to be doing. Realtors don't want you to be conservative with your money because they earn a percentage of how much you spend. Bankers don't (or didn't) because they don't (or didn't) give a rat what your chances of covering the mortgage are -- they just needed you to be able to make payments long enough for them to sell the loan to Fannie or Freddie or whoever. There are all sorts of do-gooders who have decided that homeownership is not a mark of prosperity, it's actually the path to it, and consequently have (or had) a tendency to get a bit too cheerleader-y. Even other homeowners, the victims of the housing boondoggle if ever there were any, are a part of it, because thinking of your house as an investment goes hand-in-hand with believing that of course home prices should be taking a one-way trip to the moon.
(Tangentially, that last aspect has me starting to suspect that the house and condo market is something of a Ponzi scheme that we are collectively pulling on ourselves.)
I don't know where I'm going with this, so I guess I'll throw one last thought out: The contrast does seem pretty stark to me. The rich are getting justice, and everyone else gets victim blaming.
> Tangentially, that last aspect has me starting to suspect that the house and condo market is something of a Ponzi scheme that we are collectively pulling on ourselves
In some markets, yes. I sometimes suspect that NIMBYism is an unconscious way to prop up the ponzi scheme.
The overwhelming majority of first time home buyers do not have enough cash on hand for a down payment and a 6mo long emergency fund. It's just not possible for most first time home buyers to amass that kind of cash in any reasonable timeline while paying for the existing roof over their heads. You save for a down-payment, blow your savings on the down-payment and closing costs then rebuild your savings over the next year or two while putting up with the increased risk as a result of less savings during that time. People buying their 2nd through Nth home can generally roll the money made on the sale of their own home into the down payment and closing costs of the home they're buying without obliterating their savings. Sure, it would be nice if everyone were wealthy enough to have a down payment and emergency fund but so long as renting is the financial equivalent of lighting your money on fire people will stretch themselves as thin as they need to in order to buy.
It takes most people a lot more than 6mo to save up a 6mo reserve. Delaying a house purchase by a year or two is not a practical option for most people. You have external things constraining your timeline to buy.
Sometimes people do get put into situations where buying earlier than optimal seems like the only option. However, people often use a variety of excuses to buy a house simply because they want to buy a house (even if they don't have the necessary funds for risk management).
-We are having a baby, so we need to move out of our 2 bedroom apartment and get a 3 bedroom house
-Our rent is increasing so we need to buy a house (even though the mortgage is often more than rent)
-We need a garage for our cars, so let's buy a house
-We have money in our savings that isn't earning anything for us, so let's buy a house and put it to work.
-We don't like sharing walls with neighbors, so we need a house.
-Our parents say we are throwing money away at rent and should buy a house so we can build wealth.
Each excuse has some validity to it, but none of them really mean you need to buy a house RIGHT NOW.
6 month reserve is not 6 months of income. It's 6 months of making basic expenses; and is much easier than most people think.
- We (US) loose about 1/3rd of our income to taxes. These aren't paid when you have no income.*
- A certain portion of income goes to retirement and saving for a rainy day... Well, you don't save for a rainy day when it's a rainy day.
- Major purchases can be deferred
- Major expenses, like vacations, can be skipped.
- Some banks will let you switch to interest-only in hard times
- ect
So, roughly speaking, 6 months of reserve is much less than 6 months of pre-tax income.
* If you have the misfortune of an extended unemployment, it will shift your tax bracket and you pay even lower taxes.
In an upmarket, In the meantime, the house goes up in price and you're even further away from owning the house and even more over-extended if you decide to bite-the-bullet and buy.
6 months emergency fund is for normal economic situations. When you get a situation like the financial crisis where companies aren't hiring for more than a year, then 6 months doesn't help much. Especially when businesses in your town shut down or your entire industry is suffering. The financial crisis wasn't your normal recession. It hurt a lot of people who followed the rules.
I see what you mean and I agree, but those buying overpriced homes with too good to be true mortgages should bear no responsibility? Especially in a country like US where people don't like to be limited/controlled (read protected) by laws.
They can lobby the government to change laws. They hire PHDs in the thousands develop attractive, tricky products. They hire million dollar marketing firms to influence us to buy.
On the other side you have busy people trying to get by in a confusing world. They dont hire anyone to help them, but they trust the rules that allowed their parents to get by (how credit is allocated). Many of them are essentially innumerate, especially when compared to a quant at a bank or even an engineer.
We’re talking about taking candy from a baby here. Is it the baby’s fault it can't defend itself?
We dont live in a fantasy of every human having 100% self reliance where every person can handle every tricky situation thrown against them. We need laws and moral standards- and when those are revoked it is not enough to understand the consequences as “the victim’s fault”
I completely agree with you, but the parent's comment is saying that the very people who need to be protected are the very ones who don't want government involvement.
> Especially in a country like US where people don't like to be limited/controlled (read protected) by laws.
Not sure what a good solution is, but it's difficult to help those who don't want to be helped.
Individuals have a responsibility to act realistically. But the ultimate responsibility for due diligence lies with lenders. And when banks commit fraud on an industrial scale, and get away with it, it stops being a problem of individual misbehaviour and becomes a problem of institutionalised corporate corruption.
Most people don't have the financial wisdom to judge "too good to be true" on a macroeconomics basis. Specially not before the bubble burst, when even most experts regular people had access to thought there was nothing wrong with it. Someone offered them a great deal and they took it, simple as that. If a bank offers me a loan with very low interests should I consider the state of the whole economy and the impact of my loan on the country in 10 years before I take it?
Compounding to that the fact that these people weren't even benefited by the whole scam. They lost their houses, their savings, everything. If they knew what was at stake they might bear some responsibility, but they didn't.
I don't think it's fair to say that people who defaulted during the 2008 mortgage-backed securities crisis did so because they lacked sufficient macroeconomic knowledge to make prudent financial decisions. Some were offered loans (for a variety of bad reasons) that they could not repay if they encountered even the slightest setback in their current financial decisions. Those people should bear some responsibility for that poor choice as should those who offered them the loans for which they shouldn't really have qualified. Others exploited the process by strategically defaulting on mortgages after extracting money due to appreciation on the underlying property. IMO, that's unfair and borders on the fraudulent if they never intended to pay back the mortgages they took out.
There were other problems that contributed as well, but none of the causes are so easily characterized that anyone who lost money should expect to see someone jailed as a consequence of their misfortune.
The greatest recession since the 1930s, caused by the similar wild west speculative innovation, and the victims on the lower end get depicted as strategic wolves somehow.
The people buying the houses they couldn't afford took a bath financially. The companies did to a degree. The people running the show whose malicious actions an idiot could have predicted would lead to eventual collapse got a bonus.
You can say people bear responsibility and they do but we rely on our professionals to use their greater education, and their expertise to manage systemic risk by making informed choices and creating systems that manage not create risk.
No degree or number of idiot customers could have created the collapse because banks wherein the bank intends to hold the loan isn't insentivized to give out loans wherein it has a poor chance of being paid. Foreclosure is unlikely to yield but a fraction of the face value of the debt. In order to crash and burn you need an entire mechanism whereby banks can originate bad loans, get paid, and sell them off en mass as securities by outright lying about the nature of the loans being sold while securing this whole endeavor with insurance that can't possibly afford to pay for the collapse you are engineering. Then you need to pump the gas on the stupid until you run the economy into a ditch.
The economy collapsed because a bunch of dumb people bought houses they couldn't afford is a myth that conservatives and the financial industry is retconning in hopes that we are too stupid and uninformed to read. There have always been idiots willing to sign on the dotted line for dumb financial products. There are a million idiots now. We expect the adults in the room not to sell them the same way we don't expect the invisible hand of the market to keep people from eating melamine in their food.
Then to add insult to injury quantitative easing to fix the problem was simply a fancy way of saying “let’s give those banks that profited from this situation trillions of dollars so they can trickle the wealth down”.
The incentives in capitalism "crash the economy". Yes, there was bad behavior. However focusing on individual behavior misses the forest for the trees.
Here's how it works.
Banks start off conservative. Banks only offer loans that pay themselves off. There's a run of good years. The incentive in capitalism is to make more money, and based off the recent history of good years, Bank A realizes they can offer more aggressive loans (e.g. interest only), take market share, and make more money. So Bank A does that.
Bank B now has the choice of matching Bank A, or losing market share (and maybe their business). So Bank B matches and maybe also offers less money down. This cycle continues with progressively more aggressive loan offerings until there's a run of bad years and things and people are stuck with too aggressive financing.
That sounds like an evasion of agency and responsibility that wouldn't be accepted from a lowly soldier, burglar, or even athlete for why they massacred a village, robbed houses, or cheated to get ahead respectively so why the hell should we accept that excuse from the privileged who had myraids moral alternative options?
The US housing market is a ponzi scheme. It isclearly unattached from economic reality, and is just Vegas, as is the stock market. Gambling is about all they got, those money folk.
That isn't what a Ponzi Scheme is at all. An investment bubble certainly in many areas but merely earlier holders benefitting from new traffic does not a Ponzi Scheme make. A Ponzi Scheme is a fraud first off. Estimates may be wrong for value but they are getting what they (over)pay for.
If tommorow the housing market had a massive collapse in value people would still get the house promised and would need to keep paying to avoid repossession - if they could pay say $2.5k to get a comparable house and move they could voluntarily default and their liability would be limited. Given such extremes and shaky risk curves many if not most banks would ageee to a middle ground if they thought the crash would endure. One can argue ethics of all parties but there is no inherent fraud here.
Continuing to sell shares beyond 100% of a gold mine and using sales proceeds to make prior customers think they are getting returns is a Ponzi Scheme. If people stop buying it collapses and when the dust settles a 20% share is only a share of 1% rationalized to true percentage. That is fraud.
Is it possible to argue that Bernie Madoff did a lot less direct fiscal harm than many (most?) legitimate investment companies that were unwound at that time?
I suggested this at the time and got a lot of flak (from family members).
The judicial process focuses on how “purely” what you did was harmful, rather than the overall impact. Otherwise, no one could scale any project: you’d do too much harm right away.
What kills the most people around the world are more likely treatments for common, dangerous disease, cures that have known secondary effects (most likely chemotherapy). Pharmacists who develop those know that and test them against the (considerable) harm that would happen without it; those with a seemingly positive balance are approved, not those that are the least toxic.
Same thing: the bank that does the most terrible decisions is probably the one with the most customers, not the one built with nothing but criminal intent. Otherwise: you are probably right, but it’s not relevant to judge banks overall.
If you find clusters of bad behaviour (even in large banks) you probably want to focus on those, but not blame the whole institution right away: people, companies still need banks, and you wouldn’t find an honest banker if your criteria is “no harm at all”.
I think it is possible and also very true. IMO, the reason this is treated different is two fold. One, it gives everyone a fall guy and is intended to be a deterrent for any other individual to try to do the same thing in the future. Two, the large investment companies and companies that rated their vehicles have lots of culpable people but it was all systemic. Which of the 1000 people involved should go to jail? I know it would have caused major problems but we should have let them fail. We are in an even worse position now with companies that are even much too big to fail and they've been trained that the government will bail them out if mistakes are made.
His brother and niece (in compliance and legal) also worked there, if I recall. He did time. She was married to someone from the SEC the year before his arrest. Its all these weird coincidences that are so strange.
> Madoff’s wife, Ruth, is living in a rented home in Connecticut. The government allowed her to keep $2.5 million after Madoff’s plea.
That whole paragraph felt so odd when I read it. Very callous mentioning of people hanging themselves and others dieing to cancer, and that the state apparently allowed his wife to keep $2.5 million of the stolen money. The whole thing sounds insane from a justice perspective.
For the kind of person who would steal all that money in the first place? It probably was worth it. How much do you think he really cares about his family?
A lot of people make the mistake of thinking that all bad people are mustache-twirling stab-your-grandma-for-a-nickel types. There are evil bastards throughout history who loved their family and friends deeply.
If you think this way, then you'll logically conclude that anyone who genuinely loves his family must be a decent guy who won't screw you over, and that's a very dangerous mistake.
They way the money is being recovered, seems, from suing the investors whose money did not get stolen, and taking the early profits from them.
That also included funds that invested into Madoff's scheme (knowingly or unknowingly that it was illegitimate at the time).
"...
Picard filed hundreds of lawsuits to “claw back” phony profits from a wide range of customers, including individuals, families and estates that invested with Madoff for years. The trustee also went after offshore “feeder funds” that collected cash from their own customers and funneled it to Madoff to tap his unusually consistent returns.
…"
is anybody else reading this differently?
Because this was a Ponzi scheme, this seems to be the only way to 'make fair' so to speak. Are there other ways?
This seems to be unfair to the investors who did not know the scheme was illegitimate. They lost opportunity to invest into somewhere else, it is not like any other investment was unprofitable at the time.
I was shocked reading it — truly horrified: I once hesitated to invest in what proved suspicious companies, and I definitely thought about the possibility of getting out. Experiencing claw-back after that because others were not as considerate… Wow. However, the article names people who definitely should have known better: people who know what are reasonable returns, but also what you need and can do to get unreasonable ones. People who absolutely could have decided this was fishy.
There is a principle in banking around your level of expertise: you can’t invest too much if you are not knowledgeable enough. It’s a little unfair to the young aspiring investors, but it allows to put strict requirements on large institutions without hurting people who legitimately couldn’t have known.
That decision does introduce a precedent and a new level of responsibility: if it is too good to be true, you are liable for it all. This might also introduce interesting trickle-down decisions: you could be on the hook for alerting authorities if you come across one of those because you have to check, and if you found something uninspiring, you can’t claim deniability.
It’s uncomfortable at first, but as long as that responsibility is carried by reasonably large investors only, it makes sense. Whether it might have negative consequences (typically, gatekeeping the best opportunities) is debatable.
You are correct. Since the profit or capital gain in a ponzi scheme is stolen money, the fair thing is to return everyone's principle as much as it is possible.
Of course this will come as a relief to the late investors and it will be heartbreaking for the early investors whose profits are clawed back since those profits are stolen property.
I do commiserate with the early investors who had to return their profits, but stolen property is stolen property whether they knew it was stolen or not.
I can't imagine booking profits for years or decades and having to return all of it. As you noted, the opportunity costs are immense for these people.
They did lose that opportunity. Shame for them, but in the end what happened here was a massive criminal action and it seems unlikely it can be repaired in such a way that everyone is recompensed, including for potential other uses of the money.
Something that has always puzzled me is why anyone would invest without SIPC insurance? Either they didn't understand what SIPC is or they wanted to avoid some kind of SEC scrutiny.
I think it's not just unintuitive but also slightly misleading, because you have to be aware that surface increases exponentially. The grey square, for instance, has 1.4 times the surface of the red one, but the difference looks smaller than that.
Graphics are so often intentionally manipulated to convey the authors intent. I don’t like graphs that show large differences until I realize that the origin of the graph is at say (0,1000) instead of (0,0); this can make a change from 1001 to 1010 seem huge.
(One little edit to your comment, I think you meant quadratically instead of exponentially.)
I think they used it because, in that little space in the middle of the article, vertical space is more precious than horizontal space. So they traded off a little of one for a little of the other.
Why does it feel less intuitive than regular bar graphs? I thought the criticism of bar graphs was exactly that people substitute area for height so the visuals are misleading.
I like it when you express a different concept in each dimension (typically, likelihood and amount of a payoff) but in this case, it’s odd. You can have horizontal bars if you are tight for space.
It shows that the crooks which have participated in Bernie Madoff's scam have been getting richer. It seems that crime pays if you can find someone else to take the fall.
