Mitch Feierstein - Planet Ponzi

PLANET PONZI

How the world got into this mess

What happens next

How to save yourself

By

Mitch Feierstein

Published by Glacier Publishing
Copyright Mitch Feierstein, 2012
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All rights reserved. Except as permitted under the U.S. Copyright Act of 1976, no part of this publication may be reproduced, distributed or transmitted in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

I am not a champion of lost causes, but of causes not yet won.
Norman Thomas, 1930
I wish my mum were still alive to enjoy and support Planet Ponzi .
This book is for her; shed have loved it.

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.
US Securities and Exchange Commission
If the maintenance of public credit, then, be truly so important, the next enquiry which suggests itself is, by what means it is to be effected? The ready answer to which question is, by good faith, by a punctual performance of contracts. States, like individuals, who observe their engagements, are respected and trusted: while the reverse is the fate of those, who pursue an opposite conduct.
Alexander Hamilton, first US Secretary of the Treasury, 1790
Either Im dead right, or Im crazy!
Jefferson Smith (James Stewart) in Mr Smith Goes to Washington (Sidney Buchman, 1939)

Acknowledgments

My greatest debt of love and thanks is due to my two brothers Mark and Marty, my sister-in-law Lauren, my dad Alan, my dearest cousins in AustraliaBen, Jen, Jessica, and Abbyand of course Dave and Pat in New York.

My additional thanks to Sally Gaminara, Patsy Irwin, and Janine Giovanni at Transworld, to Harry Bingham for his exceptional editing skills, and to my fantastic yet vastly overpaid agents at AM Heath: Bill and Jennifer, all of whom made this happen.

I also want to acknowledge my supportive friends who have been there for me over the decadesYVV and Melissa, Ben and Marie Vallieres, Dr D. M. Rheims en Paris, Jeff, Donna, Jayme Zwerling (the little sister I never had but always wanted), Frank, Maria, Alessandra and Daniela DeCostanzo; and MVF for being MVF.

Finally, a word for many of my golfing pals. Unfortunately, thosegolden days on the links, when I recorded slews of eagles and torrents of birdies, have largelybar the odd flash of brilliancepassed away. I am now, it seems, the worlds worst putter (and thanks, Peter Chalk, for that accolade). So a word of thanks is due for the golfers. For Shar-Pei Sammy, my only room-mate: he never talks back or argues, is always well behaved, and has a handicap lower than mine. Thanks to Leonard Fung for losing loads of money to me 93% on the time; Dr Johnny Gaynormy second oldest friend in the UK with a lovely family who nobly tolerate his golf and my visits. JG, I await my invite to the MemberGuest tournament at St Andrews or Swinley Forest. And lets not forget a big thanks to Vittorio Grigolo and James Cameron for being true friends!

The scheme

Not many men have left their names to history. Bill Gatess most famous product does not bear his name. Google is named after a mathematical quantity, not the names of its founders. The most valuable IT company in the world today is named after a type of fruit.

Unlike the entrepreneurs behind these companies, Italian American Charles Ponzi did not allow history to pass him by. In November 1903, equipped with just $2.50 in cash and $1 million in hopes, he landed in Boston. He did a series of odd jobs. In one restaurant, he rose from dish-washer to waiteronly to be fired for short-changing customers. He worked for a bank that collapsed. He went to jail for forging a check. He got involved in a scheme that smuggled illegal Italian immigrants into the US and he was jailed for that too. He was a grifter, and not even a good one. He got married. He started an advertising business. The business collapsed.

Then destiny beckoned. One day, Ponzi received a letter from Spain that happened to enclose some International Reply Coupons. The purpose of these couponsor IRCs, as they are still known todayis to allow somebody in one country to purchase postal services in another. So if you were based in Spain, you could buy IRCs in your local Correos and send them to the US, and whoever was dispatching you your goods could use those IRCs instead of US postage stamps. To most people, this would have seemed like a neat little idea, but one of no particular significance.

But Charles Ponzi was no ordinary person. World War One had just ended. Inflation, debt, war, and flu were wreaking havoc on the old international systemand in the process the prices of these IRCs had become seriously misaligned. Ponzi found that in Italy, for example, the land of his birth, an IRC could be purchased for approximately 25% of the face value of the equivalent US stamps, implying that $10 invested in Italian IRCs would yield over $40 worth of US stamps. Thinking like a financier, Ponzi scented profit.

He quit his job. He borrowed some money. He wired that money to his relatives in Italy and told them to buy IRCs and send them to him. As soon as he received them, he sought to cash them.

And there, alas, is where his trade fell apart. Although the IRCs were technically saleable, Ponzi was thwarted by bureaucracy and red tape. Most men, at this point, would have given up. But not Ponzi. He was only just starting.

He went to friends in Boston and asked to borrow money. He explained the vast wealth available from his IRC scheme, and promised to double their money in ninety days (implying an annual interest rate of approximately 1,500%). Some people thought the offer sounded too good to be true and kept their money to themselves. Others couldnt resist and handed over their cash. Ponzi was in business.

With the money that was now flowing in, he started up the Securities Exchange Companya grand title for a venture which, after all, was only meant to be dealing in postage stamps. He promised fantastic interest rates. He paid sales agents large commissions for every new client they brought in. In the five months to May 1920, Ponzi made over $400,000about $20 million in todays terms. If investors wanted to get their money back, they got it. They werent paid out because Ponzi was trading in IRCsin fact, he never made any use of his original scheme. Instead, retiring investors were paid out from the money paid in by new investors. Needless to say, everyone who exited the scheme having made money from it acted as a perfect advertisement to newcomers. Look at those guys, the message went, they made moneywhat the hell are you waiting for?

Money continued to pour in. Ponzi deposited $3 million in a Boston bank, then bought a controlling interest in it. He lived luxuriously. He had a mansion, air-con, a swimming pool. When a local writer wrote a piece claiming that there was no legal way in which Ponzi could deliver returns on the scale advertised, Ponzi sued and won. Another $500,000.

So far, everything looked OK. Ponzi was rich. Anyone who wanted to withdraw their money was able to do so, and did indeed get paid out with the promised crazy interest rate. But thats the thing about any such scheme. It looks OK. For a while, it goes all right. But under the surface, the arithmetic is catastrophic.

What were Ponzis assets? Forget about the IRCs, the 400% profits, the whole postal angle. Those things might have sparked Ponzis idea in the first place, but they had nothing to do with the way the scheme actually operated. In actual fact, Ponzi just took the incoming money and placed it on deposit at the local bank. Interest rates at the time paid about 5%. Given Ponzis extravagant expenses, however, those interest rates were no more than theoretical. In fact, the assets were constantly eroded by Ponzis lifestyle.