The Associated Press was abuzz late Thursday night with news that Bernard Madoff, former chairman of the Nasdaq Stock Market and founder of Bernard L. Madoff Investment Securities, had been arrested over an alleged $50 billion fraud scheme.  Madoff founded his small firm in 1960, and has since been regarded as a leader in the financial services industry.  However, even Madoff himself admitted his guilt today, stating:

Basically I created a giant Ponzi scheme, it’s all just one big lie.  I paid investors with money that wasn’t there, there’s no innocent explanation.

A Ponzi scheme is a fraudulent investment operation that attracts investors by promising abnormally high returns on their investments.  Initial investors are paid out by money collected from subsequent investors, and as time passes, investors see their wealth increasing and elect to keep their money invested.  Most Ponzi schemes will ultimately collapse under their own weight, as investment slows and the promoters are forced to start paying out the promised returns. 

Madoff’s Ponzi scheme is believed to have begun in 2005 during a period of strong economic growth, and as the economy began a significant downturn in 2008, the Ponzi scheme collapsed when Madoff couldn’t pay out investors.  If the estimated $50 billion lost in Madoff’s scheme proves accurate, it will mark one of the largest frauds in history, and a considerable blemish on American business ethics. 

News of Madoff’s arrest followed another disturbing story Thursday, accusing insurance giant AIG, recent recipient of an $85 billion government bailout, of unwarranted bonuses of up to $4 million awarded to high ranking company officials.  Though the company’s CEO is taking compensation of just one dollar this year, and the top ranking 60 executives are receiving no bonuses, it’s clear the corruption at AIG hasn’t stopped. 

AIG responded to accusations of foul play by stating that the bonuses to employee salary were ‘retention payments’.  However, to a majority of the population, the payments seem like standard year end bonuses.  Wednesday, Treasury Secretary Neel Kashkari was asked by lawmakers about AIG’s bonus plan; Kashkari stated:

It is excessive for a failing institution.

Though there is an increasing amount of layoffs every month, AIG stated that its top talent is being recruited by competitors.  The company cited two of its best people leaving earlier in the week, in spite of being offered substantial retention payments.  But people like House Representative Elijah Cummings are not convinced.  In an interview, Cummings stated:

These so-called retention payments are nothing less than bonuses.  No one is indispensable, particularly when you’ve got tens of thousands of people being laid off from Wall Street and financial firms every day.

No matter how you look at the situation, AIG is putting money in the pockets of its managers when it should be restructuring and seeking to improve upon the practices that crippled it.  More than putting the taxpayer’s money to good use, the insurance giant seems to be implementing the same corrupt and failing strategies with a little more creativity because they’re under the microscope. 

Madoff’s arrest combined with AIG’s fervor for suspicious practices sheds a dim light on the state of the American business.  Though undoubtedly not all businesses suffer from corruption, the American consumer’s confidence in its own people wanes as each fraudulent scheme comes to visibility. 

Despite Madoff’s dishonest practices, one has to commend him for coming forward and admitting his guilt instead of beleaguering a conviction for several years in court, or simply ignoring allegations of illegal activity like Illinois Governor Rod Blagojevich.  It’s disturbing to think that a well respected 70 year old man who is a legend on Wall Street is capable of one of the greatest frauds of all time.  If Madoff can be a criminal; who can’t?

Though AIG was scorned by politicians and the media when they sent their executives to a luxury resort following the bailout, there have been no real repercussions for the act.  The fact is, AIG is depended on by so many average Americans, they can afford to be careless with taxpayer’s money.  Just as the issue was back in October, if AIG were to go under it would spell disaster for the economy; they’ve got the government in a bind.

If Americans can’t trust respected individuals in the financial community, or the dozens of large corporations who are in danger of going under without government aid, who trustworthy is left to repair the ailing economy?  America prides itself on the ability for its government to remain separate from its businesses, but if businesses can’t be trusted, perhaps it is time for the government to consider intervention. 

America is scared of the word socialism, but in truth all the businesses that are now being subsidized by government bailouts are being supported through a socialist practice.  The real question is, will capitalism be able to resume once those businesses have righted themselves and paid back the money they owe?  The answer is unclear, but it is clear that the government needs to crack down on dishonesty, especially if they’re going to be awarding more taxpayer money to ailing businesses.

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