PONZI
Charles Ponzi (March 3, 1882–January 18, 1949) was an Italian immigrant to the United States who became one of the greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. Although many people have never heard of Ponzi, the term "Ponzi scheme" is a well known description of fraud that continues to this day through its modern version, the "make money fast" schemes that percolate through the Internet.
When Ponzi was released he eventually made his way back to Boston. There he met an Italian girl, Rose Gnecco, who was swept off her feet by Ponzi's charm. Though Ponzi did not tell Gnecco about his years in jail, his mother sent Gnecco a letter telling her of Ponzi's past. Gnecco's love for Ponzi remained unswayed. By 1918 they were married. For the next few months he worked at a number of businesses, before hitting upon an idea to sell advertising in a large catalog to be sent to various businesses, similar to the yellow pages. The idea never got off the ground, and his company failed soon after.
A few weeks later Ponzi received a letter in the mail from a company in Spain asking about the catalog. Inside the envelope was a postal reply coupon, which he had never seen before. He asked about it, and the Ponzi scheme was born. The basic idea behind the postal reply coupon was to allow the sender to buy stamps in the foreign country for reply mail, instead of requiring the recipient to pay for them. For instance, a lawyer could send a document to England for reading, including a coupon that would pay for English stamps to allow the recipient to send it back.
The rates for the coupons had originally been fixed during an international postal union in 1907, setting the local price of each coupon to buy an equal amount of stamps in any country. For instance, one might pay 4 shillings in England for a coupon, or $1 in the US, the two amounts being equal at the time. When the war ended, many European currencies were massively devalued. However, because the exchange rate on the coupons was not changed, one could buy such a coupon for the original rate and exchange it for stamps at the current exchange rate.
Ponzi noticed the postal coupon purchased in Europe for about one cent in American funds could be cashed in for about six American one-cent stamps. The first step was to convert his American money into a currency where the exchange rate was favorable. Ponzi's foreign agents would then use these funds to purchase postal coupons in countries with weak economies. The stamp coupons were then exchanged back into a favorable foreign currency and finally back into American funds. He claimed that his net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or currency trading--such a transaction is not in itself illegal.
Ponzi began to canvas his friends and associates to get backing for his scheme. He offered them a 50% return on their money in 45 days, or a doubling of their money in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. He started his own company, the Securities Exchange Company, to promote the scheme.
Ponzi's sales pitch was smooth and low-key. He managed to get a few investors, and paid them off as he had promised. The word spread, and investors began to come in the door at an increasing rate. He hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was $5,000 USD, a tidy sum for the time. That was just the beginning.
By March, he was up to $30,000. A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. If investors were doubtful, he would overwhelm them with his line of talk. By throwing his impressive pay-off rates at people, he could often persuade would-be investors.
By May 1920, he was up to $420,000. He began depositing the money in the Hanover Trust Bank, in hopes that once his account was large enough he could impose his will on the bank or even be made its president. He in fact managed to get a controlling interest in the bank.
By July 1920, he was up to millions. Widows were mortgaging their homes, people were taking their life savings to invest with the clever Ponzi. Most did not collect their interest, but reinvested.
Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis showed that he wasn't making money, he was losing it rapidly. For every dollar he took in, he went more deeply into debt. As long as money kept flowing in, Ponzi would stay ahead of the eventual collapse.
Ponzi lived luxuriously: he bought a mansion with air conditioning and a heated swimming pool, and brought his mother from Italy in a first-class stateroom on an ocean liner. He was a hero among the Italian community, and was cheered wherever he went.
The Collapse
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By this time, Ponzi was casting about for another deal to get him out of the golden trap he was building for himself, but time was running out. On July 26, the Post started a series of articles that asked hard questions about the operation of Ponzi's money machine. The Post contacted Clarence Barron, the financial analyst who published the Barron's financial paper, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself wasn't investing with his own company. If this was such a good deal, why didn't Ponzi take advantage of it himself?
Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27 thousand coupons were actually circulating. The United States Postal Service stated that postal reply coupons were not being bought in quantity at home or abroad. On paper, there were fantastic profits in trading postal reply coupons, but they were a penny item. The overhead required to handle the trades would have eaten up the profits quickly.
The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him.
There was something clueless in Ponzi's cleverness. He had set a scheme in motion that was sure to collapse sooner or later. He was pulling in a pile of cash, but only at the expense of going into even greater debt. At some point, the sensible thing to do would be to take the money and run to someplace where the law couldn't get him.
Instead, he stayed where he was and continued to pay out. Ponzi wanted to look as honest as possible, and according to his autobiography, he was always hoping he could use the fortune he was accumulating to start a legitimate business that would make enough money to pay back all his investors and make everyone rich. Among the ideas he floated was buying a $300 million American warship and turning it into a floating shopping mall, promoting patriotism and commerce by stocking it with American goods. However, like most of Ponzi's business plans this was wild and absolutely impossible; if he ever had $300 million to spend from his out-of-control scheme, he would be that much in debt ($3 billion in 2006 dollars) before he sold a single thing from his ship.
In the short term, Ponzi had hired a publicity agent, James McMasters. However, McMasters quickly became suspicious of Ponzi's contradictions at board meetings and the ongoing investigation against him. He went to the Post, calling Ponzi a "financial idiot." The paper offered him five thousand dollars for his story, and ran a headline on August 2 declaring Ponzi hopelessly insolvent. On August 10, federal agents raided the Securities Exchange Company and shut it down. No large stock of postal reply coupons was found, and never would be. The Hanover Trust Bank would be shut down as well.
The Post continued their articles, with one revealing Ponzi's jail record and publishing his (smiling) Canadian mug shots. By August 13, Ponzi was under arrest, with a Federal indictment citing 86 counts of fraud. Ponzi's fans were outraged at the officers who arrested him. 17 thousand people had invested millions, maybe tens of millions, with Ponzi. Many who were ruined were so blinded by their faith in the man or their refusal to admit their foolishness that they still regarded him as a hero.
Source wikipedia
posted by Master SylviaTerence @ 4:00 AM
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