Many investors ponder whether we live in an AI bubble. others have gone beyond that and easily ask themselves: until when? But the bubble continues to grow, fueled by the damaging feeling of “fear of missing out.” History and up to date experience show us that financial bubbles often arise from investors' excessive enthusiasm for brand spanking new “world-changing” technologies, and after they burst, they reveal surreal fraud schemes developing under the guise of the bubble.
A Ponzi scheme pays existing investors with latest investors' money moderately than actual profits and requires continuous recruiting until it inevitably collapses. A feature of those systems is that they’re difficult to detect before the bubble bursts, but surprisingly easy to know after the actual fact.
In this text we address the query. We will do that by comparing “Railway King” George Hudson’s Ponzi of the 1840s with Bernie Madoff’s Ponzi, which was made possible by the ICT (Information and Communication Technology) and Dotcom of the Nineties-2000s and supported by the next US housing bubble.
Macroeconomic climate, regulations and investor expectations
The Railway madness in Britain began in 1829 on account of investors' expectations of the expansion of this latest technology and the shortage of different investment vehicles attributable to the federal government's cessation of bond issuance. The promise of railway technology led to an influx of railway corporations, evidenced by the registration of over fifty corporations alone first 4 months of 1845. Cost forecasts for Railway development was underestimated by over 50 percent Revenue forecasts were estimated at £2,000 to £3,000 per mile, although actual revenue was closer to £1,000 to £1,500 per mile. Accounting standards were rudimentary and provided opportunities for discretionary reporting, e.g. B. the delay in expense recognition, etc Responsibility of the director was the responsibility of shareholders and was not delegated to external auditors or government representatives. Hudson, who was also a member of Parliament, promoted deregulation of the railway sector.
George Hudson's Ponzi and Bernie Madoff's Ponzi
Madoff's repute rested on his success within the Seventies with computerization and technological innovation for retail. The dot-com bubble was fueled by the rapid expansion of technology corporations, with over 1,900 ICT corporations listed on US stock exchanges between 1996 and 2000, leading to his BLMIS fund holding $300 million in assets by 2000. Madoff's plan also dovetailed with the rapid growth of derivatives comparable to credit default swaps (CDS) and collateralized debt obligations (CDO), which grew 452 percent from 2001 to 2007. Significant market-wide volatility created a norm for outsized returns that obscured the impracticability Madoff's promised returns. These returns were viewed as moderate by investors because they didn’t recognize the implausibility of the long-term consistency of Madoff's returns – this enabled the plan remain undetected. Madoff's operations were made easier by the incontrovertible fact that before the Dodd-Frank Act of 2010, SEC registration of hedge funds was voluntary; and the reprioritization of presidency security resources after 9/11 resulted in a discount of greater than 25 percent Economic crime Investigations were opened between 2000 and 2003. The impracticality of Madoff's returns was ignored by the SEC, despite whistleblower reports that launched an SEC investigation – reflecting the SEC and other regulators' lack of expertise of hedge fund trading. It could even have been influenced by MadoffHe has a detailed relationship with regulators on account of his previous positions as chairman of Nasdaq and market structure advisor to the SEC.
At the time of the rail bubble burst, Bank of England rates of interest were at a near century low, and similarly, the Fed's rate of interest cuts within the 2000s reduced the price of mortgages, which stimulated demand and thus helped Driving up real estate prices. In each cases, low-cost money prevailed within the markets, and if everyone seems to be creating wealth (or thinks so), no unpleasant questions can be asked.
The form of the perpetrators and their downfall
Both Hudson and Madoff provided scant details about their operations to their fellow directors and shareholders. The former famously raised £2.5m in funding without presenting any investment plans. Madoff employed and overpaid underqualified employees to discourage operational issues and avoided hosting “capital launch” meetings and roadshows to avoid answering questions from well-informed investment professionals – as an alternative he found latest investors through philanthropic relationships and network connections. There is evidence that shareholders had some knowledge of Hudson's corrupt business practices but didn’t initially object.
In each cases, when their respective bubbles burst, their arcane business methods were exposed and it became clear that, in typical Ponzi fashion, they were using fresh capital moderately than investment profits to pay dividends to investors. It was also revealed that they used investor money to finance their luxurious lifestyle. Hudson embezzled an estimated £750,000 (about £74 million today) from his railway corporations, while Madoff's fraud reached alleged losses of $65 billion, with actual investor losses amounting to around $18 billion. Both led to disgrace, Hudson fleeing to France and Madoff dying in goal.
On the trail of the fox
Be wary while you see AI corporations with ever-increasing market value led by charismatic and well-connected executives – it's worrying that the heads of AI giants have such close ties to the White House. In these cases, it’s imperative to investigate the standard of communication with shareholders and potential investors, particularly with regard to capital allocation and disclosure of detailed money flows. It just isn’t enough to depend on audited financial reports; It has to go much deeper into an investment strategy – in fact, the auditors need to do quite a bit more to realize this.
When investors get excited,
There's a Ponzi waiting across the corner.
