The Lighter Side Of….Pyramid Schemes

Hey, some people do profit from them! The Associated Press via Fox News (and not Dave Berg) takes a look at "victims" of the Madoff scheme who actually have already pulled out way more than they put in…and are wondering if they should apply for aid from the Securities Investors Protection Corp (not a government agency) anyway. (They are also wondering if they might be ordered by courts later to kick their winnings back.) Read the whole thing.

Comments

[LurkerBold]

Your whole Capitalist economic theory is a pyramid scheme. Why is this issue even at issue?

[Abdul]

Why can't we bury LurkerBold in a pyramid?

[Taktix?]

Why can't we bury LurkerBold in a pyramid?

Ra would smite us for our sacrilege...

[joe]

Why can't we bury LurkerBold in a pyramid?

Because Mummy LurkerBold would troll us until the end of time.

[Meta-LurkerBold]

Pyramid schemes should be perfectly legal. The owners do us a favor by bankrupting stupid people that will then die of starvation and improve the gene pool

[Meta-LurkerBold]

The Obama campaign was the biggest pyramid scheme in the world. Why no outrage over that? I heard he let people with foreign names donate, too.

Democrat shills!

[LurkerBold]

M-LB, your a funny shrill.

[Meta-LurkerBold]

I don't need any endorsements form a "progressive" who objectively supported Saddam Hussein and Islamofasccism.

[robc]

While its not the same thing, this shows an example of why some of the tax law changes over the last 30 years have been bad - laws that encourage dividends reduce the chances of fraud. Beyond a certain extent, its hard for a company to lie about cash flow when they are making dividend payments. If the dividend check bounces, that isnt a good sign. 🙂

For most of investment history, dividend payments were the indicators of the quality of a company.

My recommendation would be to do 2 (or 3) things*:
1. Eliminate taxes on dividends
2. Treat capital gains as ordinary income
3.(optional) Something that prevents retained earnings beyond a certain point - maybe require a minimum dividend payment of 10% of previous year's retained earnings or something.

Warren Buffett wouldnt like #3, but tough titties. Im not sure if it is a good idea or not. I can be talked out of #3.

*standard libertarians disclaimer - I oppose income taxes and the 16th amendment in general

[scott clark]

robc,

Bad form with that post@3:35pm. #3 is very unlibertarian, btw.

plus that wouldn't prevent fraud at all. Sort of different situation, but Madoff was paying out, hence the Fox Story.
If a firm is paying out dividends it is a signal that they have mostly run out of positive NPV projects to undertake, and so won't be growing in the near term unless the raise new capital, and dilute the ownership of current owners, or unless the borrow and thereby increase bankruptcy risk. But it is nice to own a company that is simple and grinds away day after day generating profits and positive cash flow.

And of course, any decrease in taxes is cool, but dividends as a fraud prevention measure, I am not buying it.

[ucktofu]

robc, 3 is terrible TERRIBLE! I like the first two though. Tis' true, but small companies and younger stocks typically cannot pay dividends at all. It's all crazy and mixed up, but less/simpler taxes and pro-dividend situations would be healthy indeed.

[R C Dean]

If a firm is paying out dividends it is a signal that they have mostly run out of positive NPV projects to undertake,

Or, at least, projects that they think are a better use of the shareholder's money than giving it back to the shareholders.

I think one of the sub rosa reasons corporations don't pay dividends is that a corp that pays dividends consistently is a smaller corp than it would have been if it kept the money, and senior management, all things being equal, wants to be senior management of a bigger corp rather than a smaller corp. So management will always think its better to retain the shareholder's money rather than send it back to them.

and so won't be growing in the near term unless the raise new capital, and dilute the ownership of current owners,

The current owners are always free to participate in the new offering.

or unless the borrow and thereby increase bankruptcy risk.

In which case, the current owners are free to sell their shares and reinvest in another company that has a cleaner balance sheet.

[Nick]

Social Security = Ponzi scheme.

What say you, leftist trolls?

[Lurkerbold]

I like pyramids up my butt, yuck, yuck, yuck

[robc]

I will accept that 3 is unlibertarian and also might suck, but as pointed out, that money can be replaced with additional capital offerings (which any owner can participate in -maybe even via a DRIP) so the better use argument doesnt really matter (although there are some transactional costs, so yeah, #3 has problems).

but dividends as a fraud prevention measure, I am not buying it.

Fraud reduction, not prevention. I have seen this argument made a number of times and it makes sense to me. I havent followed Madoff close enough, but most ponzi schemes get exposed when they cant make the payments anymore, so see, it works.

Maybe it wouldnt have helped out in the Enron/Worldcom type situations, but it might have ended them earlier.

[robc]

RC,

I think one of the sub rosa reasons corporations don't pay dividends is that a corp that pays dividends consistently is a smaller corp than it would have been if it kept the money,

As you pointed out, they can raise additional capital and grow that way.

[robc]

Tis' true, but small companies and younger stocks typically cannot pay dividends at all.

That is fine. They generally dont have earnings either. At least not retained ones that outweight their early losses. Once they are a little more mature they start paying dividends. Microsoft pays a dividend now. They might have started earlier with a different law in place, but they still wouldnt have payed one during the early hyper growth phase.

[R C Dean]

As you pointed out, they can raise additional capital and grow that way.

True, but its a lot easier to use the money you have in the bank than pay it back to shareholders and then go raise more in a competitive capital market.

[Guy Montag]

Nick,

Damn, joe gets enough encouragement around here. Must you add to it?

[libertymike]

Guy-

Why are you complaining? You now have Meta-LurkerBold!

[nobody u no and a big fan of j]

joe wsws has a good story on how this pyramid scheme (the bigger one) is related to the israeli genocide of gaza. did you see it already?

[Guy Montag]

libertymike,

I have a WHAT?

[New World Dan]

Nick

What differentiates Social Security from a typical Ponzi scheme is that it is (kind of) designed to run indefinately. Old beneficiaries eventually die off and are replaced with young workers. The problem is that the system is currently out of balance. Not enough young workers supporting the mass of retirees. If you just make benefits a function on the money comming in then the system can't go bankrupt. But then that would put us on the slippery slope to a flat tax/gmi scheme.