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DEFINITION of 'Ponzi Mania'

Ponzi mania describes the market atmosphere after the seemingly sudden recognition of Ponzi schemes following the arrest of Bernard Madoff for operating an illegal Ponzi scheme. Ponzi mania took full force in December of 2008 when federal investigators discovered that Bernard Madoff had operated a huge Ponzi scheme over the past decade, defrauding investors of nearly $65 billion.

BREAKING DOWN 'Ponzi Mania'

In the wake of Madoff's arrest, the Securities and Exchange Commission and other federal investigators put their complete efforts into finding and shutting down illegal Ponzi schemes that were responsible for billions of dollars worth of losses to investors. Following the huge losses recognized by Bernard Madoff's investors, individual investors across the world became much more conscious of the signs of potential Ponzi and pyramid schemes, resulting in Ponzi mania.

In hindsight, the mania-like mood in the wake of the Madoff scandal should have been anticipated as it's a usual element to the market's boom and bust cycle. The notion of 'mania' dates back to the very first recorded speculative bubble: The Tulip mania of 1637. During the Dutch Golden Age, contract prices for new and fashionable tulip bulbs passed unthinkable levels before collapsing as people reached their senses. Since this first mania, subsequent bubbles have often been labeled or identified with the manic behavior of crowds. Scottish journalist Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds, first published in 1841 still stands as an early tome in crowd psychology.

What's most interesting about Bernie Madoff's Ponzi and the mania that followed is he duped supposedly sophisticated or at least generally astute investors. Rather than the typical pyramid schemes that catch the everyday "Joe" (person) trying to make an easy buck, Madoff's approach deliberately targeted a well-heeled crowd. Perhaps his brazenness helped propel his scam on for longer than otherwise simpler cons.

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