I used to work for a subsidiary of a company that I believed to be involved in a Ponzi scheme. I was never sure and even if it was going on, I didn’t necessarily think that they knew it. The truth is that it is really easy for an investment company to work its way into one of these. Shortly after leaving Italy, Charles Ponzi ended up working at the Banco Zarossi in Montreal. The bank got into trouble with some bad investment and the president started paying interest with the money from new deposits. That’s a Ponzi scheme. But I doubt that Zarossi thought of it that way. He probably thought he was just taking temporary measures to protect his bank.
What is really interesting is that Charles Ponzi didn’t originally mean to scam his investors. He had a good idea to scam the US government—in a totally legal way. This was right after World War I. Ponzi noted that anyone could buy international reply coupons (IRC) cheaply in Italy and sell them high in the US. There was a 400% margin in this deal. But there was a problem: the overhead was huge. You could only buy and exchange the IRCs individually. So in the end, there was no profit.
That’s when Charles Ponzi became the man we all know and love. He used the plausible story about great profits to be made with IRCs to get investors. And boy did they come. He was offering people 100% return after 90 days. People were very impressed with this given that banks were offering 5% per year. The rest is history. In his later years, Ponzi claimed that it was all about the con, “Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.” But I question this. I think this is all historical revision. I suspect that at the time he thought he was just a businessman.
And I think the same thing about Bernie Madoff. I suspect he eased himself into the Ponzi pool slowly. And once he found himself in the deep end, all he could do was tread water. I’m sure when he was pontificating on CNBC that he thought what he was doing was right; to admit that he was billions of dollars into a Ponzi scheme would have hurt investors.
The truth is that Ponzi was right: he did provide a great show. Madoff didn’t. But here’s the thing. At first, Ponzi was a darling of the newspapers. But after a fairly short period of time, he was exposed. In a time when news runs very fast, it took the financial press over a decade to take allegations against them seriously. Harry Markopolos claims that he proved Madoff was a fraud with a 5 minute calculation. The big banks and investors on Wall Street all avoided Madoff because they knew he was a fraud. Yet it went on and on. When it comes to financial matters both the government and the press are hopeless.
But it isn’t Madoff’s birthday today. It’s Ponzi’s. Happy birthday you magnificent bastard!