The potential "largest Ponzi scheme in history"

The New York Times reports 70-year-old Bernard L. Madoff may have pulled off the "largest Ponzi scheme in history" with losses estimated at $50 billion. According to sources, the list of "prominent fraud victims" is long. The victims may include owners of the New York Mets, chairman of GMAC and the former owner of the Philadelphia Eagles. Madoff remains the only one to be arrested in the scandal so far. 

NYT takes readers inside the 17th floor "epicenter" of Madoff's once "busy stock trading operation" housed in the Lipstick Building, a 34 story red granite building on Third Avenue in Midtown Manhattan. Today, following Madoff's downfall, the Times describes the 17th floor as "an occupied zone" where "investigators and forensic auditors try to piece together what Mr. Madoff did with the billions entrusted to him by individuals, banks and hedge funds around the world." 

But what exactly is a "Ponzi scheme?" NYT's "Deal Book" has that covered as well and describes, in great detail, the "time-honored swindling technique." 

It's called a "Ponzi scheme," a term that refers to Charles Ponzi, who was arrested in 1920 for conning investors through his Old Colony Foreign Exchange Company. In a Ponzi scheme, potential investors are wooed with promises of unusually large returns, usually attributed to the investment manager's savvy, skill or some other secret sauce. And the returns generally get paid, at least for a time, but out of the new investors' principal, not from profits. This can continue as long as new investors line up with cash, and old investors don't try to withdraw too much of their money at once.

The U.S. Securities and Exchange Commission has a simple definition of a Ponzi scheme: "rob-Peter-to-pay-Paul." Moreover, "money from new investors is used to pay off earlier investors until the whole scheme collapses." It's an illegal pyramid scheme.