SINCE last December, when rogue financier Bernard Madoff was arrested for swindling investors, including close friends, of close to €50 billion, press accounts of his fraud have repeatedly referred to his crime as a giant “Ponzi scheme”. The same term has been applied to several Irish cases where, though the sums have not been as big, the circumstances – and the greed – have been similar. But who was Ponzi, and what was his scheme?
Charles Ponzi was a dapper, well-educated Italian immigrant who arrived in Boston in 1917, married into a failing fruit and vegetable business and, within two years, came up with an investment idea that, for a few heady months, transformed him into a celebrity, a millionaire, and the talk of the American financial world. Invest with me, his prospectus announced, and within 45 days you’ll be paid 50 per cent interest. In December 1919, 15 investors gave him a modest $870 each and in February were paid as promised. Those who kept their money with Ponzi for 90 days saw their investment doubled.
By June 1920, hundreds of investors were queuing outside Ponzi’s office on School Street, just below Boston City Hall. On one day alone, New England residents deposited $2.5 million in cash in Ponzi’s cleverly named Securities and Exchange Company, receiving 45- and 90-day notes in return. By the end of the month his intake had levelled off at $500,000 a day, he was paying $200,000 daily, and traffic in downtown Boston had come to a standstill.
How did he do it? International reply coupons, he claimed. He had conceived his scheme when he received a business letter from Spain enclosing a postal reply coupon that cost one cent in Spain but could be redeemed for six cents in the US. It all had to do with manipulating rates of exchange, he told a Boston Post reporter at the height of his success. His agents were buying and selling massive bundles of coupons across nine unspecified countries. He had set up 30 branch offices in New England and was preparing to open an office in New York.
But the Boston working men and housewives, the policemen and city workers who formed the massive lines on School Street had no interest in the detail of Ponzi’s scheme – not when they were doubling their money in three months. News of the fabulous rates of return spread, and throughout the summer of 1920 the bubble grew and the lines stayed long.
Ponzi bought a mansion in the expensive suburb of Lexington and commuted into the city in a chauffeur-driven Locomobile limousine. He carried a gold-headed Malacca cane and smoked Turkish cigarettes in an ivory holder. He distributed doughnuts and coffee to waiting customers, ushered pregnant women to the front of the queue, and tucked a certified cheque for a million dollars behind the twin-pointed handkerchief of his coat pocket. His image filled the newsreels and illustrated magazines, and the legend grew.
As quickly as it had expanded, the bubble burst. City, state and federal officials began investigations. The Boston financier Clarence Barron asked publicly why, if Ponzi was paying 50 per cent interest to his investors, he was putting his own money into Boston banks at 5 per cent. There was a run on the Securities and Exchange Company, but Ponzi kept paying out. Then Boston district attorney Joseph Pelletier ordered Ponzi to suspend acceptance of further investments. When deposits closed in late summer, Ponzi had collected $10 million from more than 30,000 people, an average investment of less than $350.
His own publicist turned on him, writing an article for the Post that declared Ponzi “hopelessly insolvent”. Nine days later, the newspaper broke a bigger story – 10 years before arriving in Boston, Ponzi had served time for fraud in Montreal, where he had attempted a similar scheme.
His fall was predictable. He was indicted on 22 counts of conspiracy and larceny and sentenced to five years in Plymouth County Jail. Of course, the investment plan was nothing but a pyramid scheme: he had simply turned money over, using new deposits to pay notes as they fell due. Over half the money he had collected was never recovered, and when his assets were finally distributed, note-holders received 12 cents on the dollar. Two banks, the Hanover Trust and the Tremont Trust, collapsed when Ponzi defaulted on large loans.
After the first World War, the US had a financial landscape that sounds eerily familiar. Banks were unregulated, credit was easy to come by, corporations were highly leveraged. Economic power was concentrated in a small number of financial institutions, which used interlocking directorates and large holding companies to control industries and bring fabulous wealth to a small number of men.
Plus ça change. Is it any wonder that Ponzi flourished in such an environment? Or Madoff and his Irish counterparts nearly a century later? The glitter of easy money can make an otherwise prudent culture lose the run of itself, and though the perpetrators often wind up in jail, it is ordinary people – inside and outside the schemes – who are left footing the bill.