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Ponzi Scheme Defined
December 12, 2008 1:58 PM
ABC News' Stu Schutzman reports:
"Giant Ponzi Scheme" was splashed across headlines today, referring to the arrest of a New York Banker accused of bilking investors to the tune of $50 billion dollars. That's serious bilking, which would no doubt make Carlo Ponzi proud (more on him in a moment).
A "Ponzi Scheme," says the Securities and Exchange Commission, operates on the "rob-Peter-to-pay-Paul principle." Usually the scam is generated by a less than scrupulous individual who offers investors enormous return, in very little time and with very little risk. Too good to pass up, huh?
Those who do invest early actually can make gobs of money; think of them as the skinny, pointy top of a pyramid. The money paid to them comes from the next rung of investors, a slightly fatter part of the pyramid. They generally come in after the word is out that big bucks are being made. As more investors come in and the pyramid gets fatter, there is more cash for pay offs. But towards the bottom, as the pyramid gets really fat, with no product to be sold or service to be rendered, there are simply too many people to pay off and eventually the entire pyramid collapses. By then, the progenitor of all this often is long gone to some tropical paradise having skimmed his fortune off the top.
Carlo Ponzi, namesake of these schemes, was by all accounts a born liar and swindler. He came to America from Italy in the early 1900s with $2.50 in his pocket having gambled away his life savings crossing the Atlantic. Now "Charles" Ponzi, he was short in stature but long on money-making ideas. After a series of low paying odd jobs, Ponzi began seeking more lucrative employment; like writing bad checks or illegally smuggling immigrants into the country. After his release from prison, Ponzi actually started a legitimate advertising business. The venture failed but his idea eventually became the "Yellow Pages." Even that would have been small potatoes for Ponzi who was looking to make millions -- enter the original Ponzi Scheme.
By 1920, Ponzi had it figured out. Convince wealthy people to invest in his idea to buy and sell postage stamps on the international market. Careful exploitation of exchange rates would result in enormous profits. Investors could make 50 percent profit in less than 2 months. They came running. The money was coming in faster than he could count it.
In February 1920, Ponzi made $5,000; By July he was making $250,000 a day. Overnight he became one of the richest men in America. Mansions, fancy cars, he even brought his family over from Italy. But alas, his hubris and a very dogged investigative reporter for the Boston Post ultimately brought Ponzi down. Stories that Ponzi's investment scheme was a fraud created a run on his company. Angry investors stormed the front door. Ponzi paid many of them off from out of pocket. Eventually he was convicted of mail fraud and sent to prison. His dream, he once said, was to make enough money to buy a Navy Warship and create the world's first floating international shopping mall. Such is the stuff of dreamers…and schemers.
December 12, 2008 | Permalink | Share | User Comments (33)
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I think most of you should be appointed to/as President Elect Obama's cabinet/advisors and maybe we'd get a real, authentic shakeup of our government and money system. These banks (some of them) deserve to go under as well as the Federal Reserve. Go for it!Let the chips fall where they may then hang on tight!
Posted by: Karen | Dec 13, 2008 11:45:43 AM
Hey, this is just like our service/consumer/debtor based economy!
Posted by: Don | Dec 13, 2008 4:25:09 PM
last guy, you didn't get it. ponZi didn't invest in anything, he just said he was going to, just like other pozi schemes and the one at hand. they take one persons money and keep some and give some of it to another pigeon, to keep it going. the banks really do invest, maybe not well at times, but they do.
Posted by: scott | Dec 13, 2008 7:06:43 PM
Comparing price-vs-value of the market as a whole, we still have another 60% decline until stocks become "cheap enough" for investors to return. The Great Crash of 2008 will be recorded not as a failure of sub-prime mortgages, but of the evils of over-leveraging investments and wild speculation on margin-- the lessons we were supposed to learn from '29. Wealth is produced via the creation of goods or services, not by a few clicks on a PC at the Fed Reserve. The only thing they are creating is crippling, insurmountable debt and hyper-inflation. Read 'The Creature from Jekyll Island' for the full history of the private, for-profit bank known as the Federal Reserve.
Posted by: h5mind | Dec 14, 2008 9:58:39 AM
what happened to our economy is only sort of like a ponzi scheme. loans were given to people who could pay them in the beginning. these loans were bundled and sold to the stock market as viable mortgages. futures. the future arrived and there wasn't very many people making the payments cause the notes had ballooned. crash, burn. the ponzi part is where loans were made to people who couldn't pay and then sold as if they could, fictional
Posted by: hfn | Dec 14, 2008 6:04:41 PM
If you want to see a real Ponzi scheme in action, you need look no further than the Social Security system.
Posted by: Publius | Dec 14, 2008 6:19:18 PM
This entire financial collapse has been orchestrated by the world banks. Just like the last two. The Federal Reserve has managed to pull the wool over the eyes of the people since it's conception. The founding fathers fought very hard AGAINST a central bank because of this exact scenario.
This is not a conspiracy...It's your life.
You need to watch this
Posted by: C | Dec 15, 2008 12:46:35 AM
Horrible !!
Posted by: IIIIIIIIII | Dec 15, 2008 1:20:31 PM
There does seem to me to be a lot of similarity between this financial meltdown and a Ponzi scheme in that many, perhaps most, of the mortgage brokers, CDO packagers, bankers, etc. KNEW it was unsustainable, but were compelled to continue lest they lose business to those who stayed. And, also similar to a Ponzi scheme, those who got out early got to keep their money.
Posted by: Joe | Dec 16, 2008 9:44:48 PM
Eric/Anil - great comments...i hope more people see this happening and be aware how not to get cheated...no wonder why some old chinese/koreans carry cash when they shop at costco, I used to wonder
Posted by: raj | Dec 23, 2008 4:23:37 PM
AS the old story goes if "it's too good to be true it probably is!"
We really need to stop glorifying the very rich in this country and laud those who everyday put themselves out the line like Firemen,Paramedics, Nurses, ER Doctors, and yes school teachers, as well people who offer daily selfless acts of kindness and generosity.
Please media! Stop euligising the very rich through top 10 richest people lists and mindless tabloid journalsim such the Barbra Walters specials on the rich as well as the constant inference that if you are not very rich you are then some kind of massive failure.
I would argue that striving for constant success in wealth leads in many cases to criminal activity, broken families,domestic violence and increases in drug and alcohol abuse.
All inpursuit of the myth that money makes you happy.
Posted by: steve | Dec 23, 2008 10:12:43 PM
Banks aren't schemes because you KNOW that they will invest your money when your putting your money into them.
People are free to create deposit-banks and free to participate in them.
Banks that issued currency backed by land (really stable) has even been thought of and tried (somewhat) by Lysander Spooner. Google him. Guess what? Nobody participated.
The real scheme here is the government using my tax-money for things that do not benefit everyone. For example, I don't get a tax-credit for already owning my home and paying my mortgage (keeping the economy going)? I don't benefit from 5 billion going to ACORN for "stimilus?" The real scheme is the ridiculous state of the legislative process. They're bought and sold.
Posted by: dreamdust | Feb 13, 2009 12:28:48 PM
only in america would you get away with saying this kind of stuff about the government... lol
Posted by: Sagar | Jul 16, 2009 2:08:43 AM
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