Written by: Ian Young
Recessions are a natural part of the business cycle, because what goes up must come down, and nothing lasts forever. Now a lot of people think recessions don’t have a good side, that they are a necessary evil. This is a legitimate argument, since aggregate output and spending of the country drops, investor’s confidence in the markets tumble, and in severe cases deflation becomes present and worrisome. However I am an optimist, and I believe if you look hard enough everything has a silver lining, and I found one for recessions. Stories of fraud come forward into the limelight, and if you ever have had an extended conversation with me you know that I love hearing about fraud cases. Recessions have two ways about bringing fraud forward; they cause the collapse of investing fraud which prompts investigations, and they provide motivation to people to commit other types of fraud.
The 2008 recession caused the collapse of more than 150 different ponzi schemes, including those of Allen Stanford, Tom Petters, Scott Rothstein, Marc Drier, and, you guessed it, Bernie Madoff. The question though, why could the recession stop Bernie Madoff when Harry Markopolos, a person who was informing the SEC of Madoff’s questionable “investment” firm for nearly a decade, couldn’t? The reason is this: people don’t question where their returns are coming from during times of prosperity. Bernie Madoff claimed to use a “Split-strike conversion” technique of investing, which, cards on the table, I don’t completely understand. But the only thing important to understand is that the strategy revolves around stocks, so when the stock prices started to tumble in 2008, a lot of people wanted to sell their investments and convert back into nice stable cash. There was only one problem, there was no cash or investments. The reason why the recessions are so efficient at exposing ponzi schemes is because ponzi schemes are like fires, they constantly need more fuel to stay burning, and the bigger they are the more fuel they need. Since the recession decreases consumer spending it takes away the fuel from the fire, and then it’s lights out for ponzi schemes.
While recessions take away fuel from ponzi schemes it provides it for the “accidental fraudster.” The “accidental fraudster” is a term coined by fraud examiners for people who are completely law abiding citizens, except for maybe a speeding ticket or two, until they commit fraud out of the blue. Make no mistake though, it is no accident that these people commit fraud. The reason why is because all cases committed by accidental fraudsters have three aspects in similar, and these three aspects form what is called the fraud triangle. The first aspect is perceived opportunity, and this is an opportunity for the person in question to commit fraud and get away with it. The next aspect is justification, this is what people tell themselves so they can sleep at night knowing they committed fraud. The final aspect is perceived pressure, because no rational human being steals money when life is great, they steal money because they think it is their only option. A good example of a pressure would be, oh I don’t know, say a recession? That is right, so not only will you see headlines of fraud in newspapers, but if you get lucky, you might just see it in your workplace too. Hopefully though, it won’t be you committing the fraud, because that is just unethical.So the next time a recession hits us, don’t get yourself down. Instead make yourself a glass of hot apple cider, cozy up on the couch with a nice warm blanket, put on the smooth jazz of Louis Armstrong and Ella Fitzgerald, grab the business section of your favorite newspaper, and read all about the crazy fraud cases that come to light.
Works Cited
Anderson, Curt. “The Recession Exposed Ponzi Schemes in 2009.” Richmond Times-Dispatch, 29 Dec. 2009, www.richmond.com/business/the-recession-exposed-ponzi-schemes-in/article_c61db748-8257-5e4c-97ad-5e9ad4b451e7.html.London, Adam Smith /. “The Reasons Fraud Spikes in a Recession.” Time, Time Inc., 20 May 2009, content.time.com/time/business/article/0,8599,1899798,00.html.
Parten, Constance. “Diary of a Scam: The Fall of Power Attorney Marc Dreier.” CNBC, CNBC, 13 Apr. 2011, www.cnbc.com/id/42572204.
PricewaterhouseCoopers. “US PwC.” PwC, www.pwc.com/.
Rice, Douglas. “Invest Like Madoff - Without The Jail Time.” Investopedia, Investopedia, 18 Nov. 2019, www.investopedia.com/financial-edge/0809/invest-like-madoff---without-the-jail-time.aspx.
Vardi, Nathan. “Allen Stanford Convicted In $7 Billion Ponzi Scheme.” Forbes, Forbes Magazine, 8 Mar. 2012, www.forbes.com/sites/nathanvardi/2012/03/06/allen-stanford-convicted-in-7-billion-ponzi-scheme/#63bbdb1d5388.
I agree with what you have said in this blog, that recessions aren’t bad. Being able to spot fraud and get rid of it is a great thing about recessions even though they are pretty bad on the economy. Rooting out these frauds will help the economy even more in the future, especially since we are most likely going to get back on our feet and get past the recession.
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ReplyDeleteI will say, whenever I think of recession, I definitely don’t think of any positives that could come out of this type of situation. We tend to think that because of this economical decline that nothing good can come out of the situation, but you had made great points that it could bring Ponzi schemes and credit card fraud into the light. I love the optimistic outlook, and it really made me think about how a negative could be turned into a positive. Sure, we may experience a recession, but at least we can find the source of theft and undercover schemes within our economy, and root out those problems in the time being.
ReplyDeleteIs there a correlation between the people who were not in charge but involved in the Ponzi Scheme, and people who commit "accidental fraud"? Would someone feel more justified to commit fraud if they were tricked or persuaded into a Ponzi scheme? To me it seems as though the recession revealing Ponzi schemes would put people out of their "jobs", therefore causing people to make more immoral decisions. Overall, a very interesting issue.
ReplyDeleteI wonder which ponzi schemes get exposed first during a recession. In your post you mentioned that the larger a scheme is, the more "fuel" it needs to keep going. If that is the case, then how was Madoff's 20+ year ponzi scheme able to sustain itself through smaller movements in the country's economy? In the case of smaller ponzi schemes, does the more personal dealings, with less people involved, help or hurt the scheme's success?
ReplyDeleteFor your first question Mark, Bernie Madoff's scheme at first was not that big. Also before 2008 there was not a massive recession, so that may be the reason why his ponzi scheme was able to survive smaller recessions beforehand. As to your other question, it is not a question of how many people you have in your scheme, because you could have a couple of people "investing" 40 to 50 million dollars, or you could have a lot of people "investing" around $50,000 each. The vastly more important part of being able to steal a lot of money is confidence. People say Bernie Madoff was the type of person who you would trust when he smiled at you. Marc Drier actually impersonated other people and forged their signatures to get clients. So being a con-man is the true key to being a successful fraudster. I do want to conclude, though, with the fact that fraud is never worth it. Stay in school kids!
DeleteIan, I am amazed by your obsession with Fraud. I would be interested to know if there is a direct correlation between fraud increase and market downfall and if it consistent across the globe.
ReplyDeleteThis was a very informative and well written post. I appreciated how you provided real-world connections on multiple levels and provided a sense of analysis, rather than just relaying information from the internet. This was very engaging to read and I liked how you inserted your take on recession to make it more approachable for students who might not be as familiar with the cyclical trends of the economy. It would be interesting if this correlation was further investigated, with more reasoning behind the trend.
ReplyDeleteDrinking hot apple cider while listening to Louis Armstrong and reading a newspaper, furthermore the business section. Yeah... That's only you boo. You just described your ideal snow day. Back to the main topic at hand, recessions reveal ponzi schemes. So countries that don't have as many recessions, don't have as many ponzi schemes being revealed: Less recession, more ponzi schemes. Australia is an odd country that right now is on fire, though it has so many natural problems it has not had a major recession in 40 years. This phenomenon occurred because of China and its needs for steel and other elements that Australia had in abundance. Australia used this boon effectively and boosted their economy and maintained that growth without a recession(dictionary term of recession). With your logic, Australia should have a lot of ponzi schemes. Does it though? I really could not find news of a ponzi scheme being busted, strengthening your thesis. Although it could mean that there are not a lot of ponzi schemes in AU. I want your thought on this.
ReplyDeleteYour optimism and ability to find light in something that is seemingly devoid of anything positive is truly amazing. I have never thought that a recession could be enjoyed with a newspaper and a little Louie Armstrong. The question I have though, is if the amount of big fraud and ponzi schemes increase even more rapidly right after the recession. So, does a recession inspire more fraud than there originally was before the recession?
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