Ever since Bernie Madoff with all the money -- fifty billion-with-a-b, apparently - the journals and airwaves have all been abuzz with references to his alleged securities fraud as a "Ponzi scheme." But few accounts have delved into the back-story of who "Ponzi" actually was, what he did -- and the crucial role a watchdog press played in ultimately uncovering the legendary swindler whose name has since been enshrined in the financial Hall of Shame. I thought it might prove illuminating, as this dreadful year collapses to a close, to re-examine the original Ponzi scheme, as it sheds light not only on our tattered global economic system, but as well on what has been dubbed our "Ponzi era" - and indeed, on our entire, shattered, pyramid-like, 21st-Century Ponzi democracy itself.
First, though, who was Ponzi, what exactly did he do -- and why, nearly a hundred years later, does he and his eponymous scheme still resonate?
The twelve months that carried America from the summer of 1919 through that of 1920 were laced with lust for a faster and better life -- a lust stimulated by war and an influenza pandemic that showed how fleeting and frivolous life could really be, a lust at any cost. Soon the '20s started to roar, and Edna St. Vincent Millay greeted the new decade with a book of poems called A Few Figs from Thistles, best known for the lines "My candle burns at both ends;/It will not last the night;/But, ah, my foes, and, oh, my friends-/It gives a lovely light."
She could easily have written that line about Charles Ponzi, the man who took that year in American history to churn millions of dollars and give his name to a scam that still plays havoc with investors today. An Italian immigrant hungry for the best in American status, Ponzi perhaps accurately saw corruption as nothing more than his newly adopted country's accepted means to an end. After all, America was the land of opportunity and the builder of confidence -- and Ponzi turned that confidence into a confidence game that would ruin thousands of people and sink six banks.
In June 1919, Ponzi, a 36 year-old clerk at J.P. Poole, an import-export brokerage house in Boston, stumbled by accident upon a racket that would launch his name into history. He opened a letter from a customer in Spain and discovered a postal reply coupon, enclosed to cover the postage for Poole's return envelope. Ponzi found that although the customer had paid the equivalent of only one American penny for the coupon in Madrid, it was redeemable at any U.S. bank or post office for a nickel. Why not buy up these coupons around the world, thought Ponzi, and cash them in here? The possibility for financial growth was staggering. He did enough research to determine that most large countries sold these coupons and promptly quit his $16-a-week job.
In short order, however, his legitimate plan to achieve riches slammed into a wall of regulations. There were international rules that prevented more than $75,000 worth of postal reply coupons to be used worldwide annually, but Ponzi merely viewed this revelation as a momentary setback. Spurred by a galloping ego, he figured that if he knew next to nothing about these coupons, what could the average Bostonian know? He circulated among his Italian compatriots in the city's North End and spun tales of profits to be made with these little known coupons. He told them he had learned moneymaking secrets at Poole's, secrets that made Rockefeller rich, secrets everyone else could use to become rich as well. Invest with me, promised Ponzi, and in 90 days you will get your money back with 50 percent interest.
Although his offer seemed as difficult to believe as it was to refuse, Ponzi opened an office for a foreign exchange investment firm. His first two customers were immigrants bringing him fifty dollars - something approaching their life's savings - but most came with ten dollars or less. Ponzi gave them receipts and kept his word the only way he could, finding a second group of investors whose money he would use to pay off the first group in 90 days. And so started a swindle that would stay afloat as long as there were enough Peters to rob to pay all the Pauls. As Ponzi built a bigger and bigger house of cards, the greed and confidence of his investors aided and abetted in his scam, because the greedy many didn't come back for their money after 90 days -- they came back to reinvest it all
As months went by and the lines outside his office stretched to five blocks long, Ponzi's own greed knew no quenching. He dreamed of running for mayor and owning banks. Eventually, he took control of the Hanover Trust Company and his old employer, J.P. Poole. He began to pay laborers ten cents for every new dollar they could bring him. Soon, Ponzi's investors included waiters, bartenders, stevedores and elevator operators. The American Dream began to look real for the working class people of Boston. Everyone seemed able to make money with this scheme - especially Ponzi, who lived luxuriously in a mansion boasting unheard of luxuries such as air conditioning and a heated swimming pool.
By the spring of 1920, Boston's Brahmin bankers began to worry. Depositors were taking their savings out and giving all the money to Ponzi. At first, the bankers - along with representatives of big business and the press - tried to ignore the little Italian, treating him as a flash in the pan, a man with a crazy scheme that couldn't last. True, Boston publisher Clarence Barron, a financial expert who published the Barron's financial paper, called the scheme ridiculous in his own paper, but reporters at the other papers continued to fight their way through the crowds outside Ponzi's office, completely disregarding the biggest story in New England, to invest their own money
Finally, however, one of one of the editors of the Boston Post became suspicious and assigned investigative reporters to check Ponzi out. Soon panic led to a run on the company. Ponzi bought time by paying out $2 million in three days, but as the Post ran a series of articles, the swindle soon unraveled. By August Ponzi was under arrest, 17,000 people had been cheated of millions, maybe tens of millions.
"By the time this is over," the Washington Post recently editorialized, "'Madoff scheme' may be the new name for mass financial fraud." Unlike Charles Ponzi, the paper noted, Bernie Madoff "operated in a modern regulatory environment in which numerous authorities, state and federal, were supposed to keep an eye out for such scams" - something other people, such as Madoff competitor Harry Markopolos, observed years ago. Markopolos even told the Securities and Exchange Commission "Madoff Securities is the world's largest Ponzi scheme." But as the Post accurately concluded, "the regulators slept."
So too did our recently deregulated media. Is it possible, I wonder, that there may be a connection between the deregulation of the media and the fact that the same media never warned us of the dangers of financial deregulation? The dots aren't so hard to connect
If the current "Ponzi" scandal tells us anything, it is this:
-Even the most sophisticated investors are easily fooled;
-The general public therefore needs robust government regulation;
-The public also needs a robust, vigilant media system to safeguard both the marketplace of commerce and the marketplace of ideas and democracy;
-And without aggressive financial regulation and a vigilant press, markets, politics, and our entire society inevitably devolve into corruption for which we all pay the price.
For decades, we have been sold a bill of goods and told incessantly that government isn't the solution - it's the problem; that markets are efficient and rational and will self-correct; and that personal wealth, no matter how obtained, matters above all else.
And that's what I call a Ponzi democracy.