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coraaPonzi's Scheme: The True Story of a Financial Legend
, by Mitchell Zuckoff
Yes, I got this book after reading about the Madoff scandal/brouhaha/scam.
More to the point, I got this book because Michelle Singletary (a personal finance columnist whose podcasts on NPR I enjoy) recommended it to help readers understand what a Ponzi scheme – named after Charles Ponzi, the subject of this biography – is. I'd known that a Ponzi scheme was a rob-Peter-to-pay-Paul deal, similar to a pyramid scheme, where the profits paid to early investors came not from actual interest or profits per se, but straight out of the money brought in by later investors. (Despite having been recommended by a personal finance person, this is far more a biography and a history than it is a finance book; it just happens to be a history of a huge financial scam. This to me is a good thing, but then, I'm a history freak.)
(Mild spoilers below the cut. I mean, nothing you probably don't already know or couldn't already figure out, but better safe than sorry.)
To simplify hugely, Ponzi created a massive pyramid scheme -- and then, for reasons that have more to do with personality than money, didn't run with the cash. In Ponzi's eponymous scheme, he claimed to be making the money by taking advantage of interest rates that were fluctuating wildly after World War One, by investing in International Reply Coupons. (International Reply Coupons are essentially a way to send 'stamps' to someone overseas: if you tried to mail a poor relative in Italy a set of American stamps so that they could afford to mail you a reply, their Italian postmaster wouldn't accept them, but you could instead send them an IRC, which could be traded in for the necessary amount in Italian stamps, for example.) Of course, Ponzi wasn't actually doing any such thing. He promised 50% profit to his investors within 90 days, but the investors who came collecting got their 150% return out of the money that came with the flood of new investors, not out of any kind of profits. In fact, Ponzi wasn't speculating on IRCs and exchange rates at all. He was just reaping the benefits of (initial) exponential growth in new investors, thanks to good publicity. (Plus, many of his investors, made confident by his own confidence in being able to make good on his promise of profit, simply reinvested their initial investment plus fictitious 'interest,' thus freeing him from coming up with the 50% interest for another ninety days.)
Very much like in The Informant, the fascinating part wasn't the scam itself but Charles Ponzi's psychology and approach to it. Indeed, though it was clear that he was running a scam – and more to the point, a scam that could only last as long as new investors greatly outnumbered the people trying to withdraw their investment-plus-promised-interest – still, Ponzi seemed to have convinced himself as much as anyone that his business was legitimate, his purpose admirable. Indeed, his ability to convince himself that he numbered among the angels helped keep him out of trouble. Because he was confident (until the very end, at least) that he could pull himself free of scandal, skepticism and investigation, he voluntarily did things that were a terrible idea for a pyramid scheme: he volunteered to stop accepting new donations while he was being audited, for instance, and because he was being audited he suffered something akin to a bank run: so at the same time he was getting an unusually high number of claims and withdrawals, he was voluntarily forfeiting the influx of new account money he desperately needed. Why? Did he genuinely think he wasn't doing anything wrong, that he could somehow dig himself out of the hole he'd gotten himself into?
The answer seems to be 'yes' – Ponzi thought he could do something to make good, that he could think of some way to get around the fundamental flaw in his plan. He was confident right up to the end that something would turn up to rescue him, and until it did, he'd keep laughing, toasting his friends, tap-dancing on the edge of the abyss, smiling, smiling, smiling.
(The funny part: he almost could have managed it. One of the things that startled me, reading Ponzi's Scheme, was how hard it was for officials to prove anything. Ponzi's scheme, or scam, was pretty darned blatant. He didn't have any profitable investments or ways of paying the money. He was just paying old investors with new investments, and at the same time draining those new investments himself by buying a big house, a fancy car, and several other businesses which he didn't understand well enough to run profitably. And yet it still took extensive investigation, a lot of luck, and Ponzi's own self-sabotage to bring him down. And even so, the case had to be made tangentially, with great difficulty. It makes me wonder how often these things go on where the people running them are a bit smarter or more savvy, and they therefore never get caught.)
The thing that surprised me most about the book was how much sympathy I felt. Ponzi was dishonest, ambitious, amoral and grandiose – but also kind of a sad figure. His wife Rose, who loved him deeply and knew nothing of his crimes, was even sadder. Not to mention his mother, who he brought over from Italy....
I don't have much criticism for this one. In some places, it wanders off onto tangents that don't prove to be strictly necessary to the thrust of the narrative; if you aren't fond of tangents, you might get impatient. As with The Informant, the sources are revealed in an afterword and extensive footnotes. I didn't go through them rigorously, but their presence there gives me more confidence in the author's playing fair with history.
If you're interested in scams, finance, or biographical history, I'd recommend this one. It was a quick, enjoyable read, and it gave me a new perspective on what was meant by the term 'Ponzi scheme.'
, by Mitchell ZuckoffYes, I got this book after reading about the Madoff scandal/brouhaha/scam.
More to the point, I got this book because Michelle Singletary (a personal finance columnist whose podcasts on NPR I enjoy) recommended it to help readers understand what a Ponzi scheme – named after Charles Ponzi, the subject of this biography – is. I'd known that a Ponzi scheme was a rob-Peter-to-pay-Paul deal, similar to a pyramid scheme, where the profits paid to early investors came not from actual interest or profits per se, but straight out of the money brought in by later investors. (Despite having been recommended by a personal finance person, this is far more a biography and a history than it is a finance book; it just happens to be a history of a huge financial scam. This to me is a good thing, but then, I'm a history freak.)
(Mild spoilers below the cut. I mean, nothing you probably don't already know or couldn't already figure out, but better safe than sorry.)
To simplify hugely, Ponzi created a massive pyramid scheme -- and then, for reasons that have more to do with personality than money, didn't run with the cash. In Ponzi's eponymous scheme, he claimed to be making the money by taking advantage of interest rates that were fluctuating wildly after World War One, by investing in International Reply Coupons. (International Reply Coupons are essentially a way to send 'stamps' to someone overseas: if you tried to mail a poor relative in Italy a set of American stamps so that they could afford to mail you a reply, their Italian postmaster wouldn't accept them, but you could instead send them an IRC, which could be traded in for the necessary amount in Italian stamps, for example.) Of course, Ponzi wasn't actually doing any such thing. He promised 50% profit to his investors within 90 days, but the investors who came collecting got their 150% return out of the money that came with the flood of new investors, not out of any kind of profits. In fact, Ponzi wasn't speculating on IRCs and exchange rates at all. He was just reaping the benefits of (initial) exponential growth in new investors, thanks to good publicity. (Plus, many of his investors, made confident by his own confidence in being able to make good on his promise of profit, simply reinvested their initial investment plus fictitious 'interest,' thus freeing him from coming up with the 50% interest for another ninety days.)
Very much like in The Informant, the fascinating part wasn't the scam itself but Charles Ponzi's psychology and approach to it. Indeed, though it was clear that he was running a scam – and more to the point, a scam that could only last as long as new investors greatly outnumbered the people trying to withdraw their investment-plus-promised-interest – still, Ponzi seemed to have convinced himself as much as anyone that his business was legitimate, his purpose admirable. Indeed, his ability to convince himself that he numbered among the angels helped keep him out of trouble. Because he was confident (until the very end, at least) that he could pull himself free of scandal, skepticism and investigation, he voluntarily did things that were a terrible idea for a pyramid scheme: he volunteered to stop accepting new donations while he was being audited, for instance, and because he was being audited he suffered something akin to a bank run: so at the same time he was getting an unusually high number of claims and withdrawals, he was voluntarily forfeiting the influx of new account money he desperately needed. Why? Did he genuinely think he wasn't doing anything wrong, that he could somehow dig himself out of the hole he'd gotten himself into?
The answer seems to be 'yes' – Ponzi thought he could do something to make good, that he could think of some way to get around the fundamental flaw in his plan. He was confident right up to the end that something would turn up to rescue him, and until it did, he'd keep laughing, toasting his friends, tap-dancing on the edge of the abyss, smiling, smiling, smiling.
(The funny part: he almost could have managed it. One of the things that startled me, reading Ponzi's Scheme, was how hard it was for officials to prove anything. Ponzi's scheme, or scam, was pretty darned blatant. He didn't have any profitable investments or ways of paying the money. He was just paying old investors with new investments, and at the same time draining those new investments himself by buying a big house, a fancy car, and several other businesses which he didn't understand well enough to run profitably. And yet it still took extensive investigation, a lot of luck, and Ponzi's own self-sabotage to bring him down. And even so, the case had to be made tangentially, with great difficulty. It makes me wonder how often these things go on where the people running them are a bit smarter or more savvy, and they therefore never get caught.)
The thing that surprised me most about the book was how much sympathy I felt. Ponzi was dishonest, ambitious, amoral and grandiose – but also kind of a sad figure. His wife Rose, who loved him deeply and knew nothing of his crimes, was even sadder. Not to mention his mother, who he brought over from Italy....
I don't have much criticism for this one. In some places, it wanders off onto tangents that don't prove to be strictly necessary to the thrust of the narrative; if you aren't fond of tangents, you might get impatient. As with The Informant, the sources are revealed in an afterword and extensive footnotes. I didn't go through them rigorously, but their presence there gives me more confidence in the author's playing fair with history.
If you're interested in scams, finance, or biographical history, I'd recommend this one. It was a quick, enjoyable read, and it gave me a new perspective on what was meant by the term 'Ponzi scheme.'
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no subject
Date: 2009-01-26 04:25 am (UTC)no subject
Date: 2009-01-26 04:30 am (UTC)It certainly wouldn't surprise me that a big enough bailout could prop up a Ponzi scheme, though -- what you'd need to do was figure out what the shortfall was between what they brought in and what they had for payout, and then infuse that much money back into the system.
Not that I would recommend doing that, though. ;)
no subject
Date: 2009-01-26 05:34 am (UTC)