Charles Ponzi: The Man Who Named the Pyramid Scheme [Parte II]

Sequel to Charles Ponzi: The Man Who Named the Pyramid Scheme [Parte I]

The pot of gold at the end of the rainbow

It was 1918, and there are reports that Charles had taken up his father-in-law’s business – a grocery store – and had managed to ruin it quickly. After a few more failed ventures, he continued to chase his rainbow. Even he might be a dreamer, but at least he was a persevering dreamer; someone for whom failure never fades. And suddenly, when he came across a guide on international coupons in response, he thought he had found his big opportunity. In an America after the Great War, where money could even appear in spades, Charles Ponzi chased his pot of gold with redoubled enthusiasm and energy. He chased the rainbow’s end, and there he found a direct line to wealth. A wealth of millions and millions. “Should have stopped. Got out while she could have got out as well. I didn’t. Hence this story.” A large part of fraud is based on the principle of credulity, and the Italian Carlo Ponzi (who in the United States would become known as Charles) tested to the limit this ability to believe in the other: to customers, promised 50% profit, in just 45 days. Too good to be true? Thousands of people thought it wasn’t and that Mr. Ponzi could double your money in just three months. After all, Boston in the 1920s was experiencing a period of recovery and prosperity. Everyone could have the ambition to be rich.

Speculate with reply coupons

What, then, was Charles Ponzi’s pot of gold? A loophole in the system: buying postal reply coupons in foreign countries at a discount; then redeem them in the United States at full value. The explanation of the scheme – and subsequent ruination – occupies 15 chapters of Mr. Ponzi. At first, it all seemed too good to be true. But was. With what Charles already knew about exchange rates, there was an opportunity to speculate; a path as simple as it is unexplored. If he bought coupons in Spain and sold them in the United States, the profit from the transaction could amount to 10%. And in other more depreciated currencies, such as the Italian lira? After a few short calculations, he was faced with an unimaginable gross profit margin: 230%.To prove to himself the theory that the depreciation of paper money could affect the selling cost of the coupons, Charles sent three letters: one to Spain, one to France, one to Italy. Inside each one, there was a dollar bill and a sheet with instructions for the recipient: he should exchange the bill in local currency and, with the value obtained, buy as many coupons as possible. By return of the mail, Mr. Ponzi confirmed. And yes, the Boston post office ensured that international coupons could be redeemed locally without any hassle. Thus was opened the way that would make him a rich man.

If the big fish don’t take the bait…

“The most you could say about this coupon traffic is that it was unethical. But a violation of ethics was not a violation of the law,” stresses Charles. The context at the time, by the way, had little to do with ethics. “The only target was the almighty dollar.” However, without equity capital to finance coupon purchase operations, Ponzi needed investors. The attempt to obtain a loan ended in failure; the bank wanted to know more about the business than what Charles was willing to tell… What if, instead of trying to fish large sums, he tried to attract small investors? To guarantee a facade of prestige and stability, Charles hastened to found his company. What was the Securities Exchange Co. really about? A name, an address, scarce furniture; there wasn’t even letterhead. But at the head of the company was a man knowledgeable about human nature. “We are all players. We all want to earn money easily. And we want to win a lot. Otherwise, no get-rich-quick scheme would succeed.” Charles Ponzi’s proposal seemed as incredible as it was irresistible: 50% interest after 45 days. Something that could be tested with a simple ten dollar bill. If it was a risk, well, it was an extremely attractive risk.

From snowball to avalanche

Charles Ponzi had rolled a small snowball. On January 1, 1920, he had only 18 investors, which represented a total of $1,770. In mid-February, when I paid them $2,478, everything accelerated: the number of investors then began to grow quickly and steadily. “When people got $15 at the end of the 45 days, they lost any shred of caution. They dove in with everything they had. They brought friends. Every satisfied customer became a salesperson himself”. The snowball gradually turned into an avalanche. The rest of Charles Ponzi’s story grazes the oft-beaten theme of rise-and-fall. perhaps, it will also be a tale about greed. “The common man is never satisfied with what he has. He doesn’t even notice when he’s doing well in life. If he has one shirt, he wants to have two. If he’s single, he wants to have a woman. If he is married, he wants to have a harem”. Charles also wanted more. “I must have been blinded by arrogance and ambition.” I wanted to open branches; the business asked for it. “I dealt with the most essential commodity of all: money. The world was my market. All of humanity was my clientele.” Read more: Greed is good, according to Gordon Gekko

buy, buy, buy

Investor money kept pouring in. Hungry for power, Mr. Ponzi launched into the purchase of the bank that had refused him the loan. It was revenge, served cold, at the expense of the millions that came through the door. Although, Charles’s appetite had become insatiable: “I wanted to buy everything in sight.” She bought buildings, villas, apartments. He acquired stakes in several companies. He even owned a pasta factory, so that he would never run out of spaghetti at home. Within months, Charles Ponzi, an Italian immigrantwent from poor to millionaire. He lived in a mansion with 12 rooms, was served by servants, traveled in a limousine; had large accounts at about 45 banks. Millionaire off the coupon business? Oh, not so much. If someone were to sit down and do math on the amount of coupons needed to justify all that influx of money, they would arrive at a staggering number: millions and millions of coupons. “Absurd,” agrees Charles. There weren’t even that many in the world; it would have taken months to print the quantities needed to sustain that speculative business.

A genius with a hand full of nothing

In fact, after purchasing the first batch of coupons, Charles was only able to do so again in minute quantities. Faced with the unusual activity around coupons, the postal administrations of the various countries had taken measures to stop, or even suspend, the sale of coupons. The existing stock, by the way, was not enough for the orders. When Charles was faced with the first remittances that, after all, would not reach him, he understood that he would lack money to pay the interest to his investors. What 50 percent! At most, he could return 75 cents of every dollar invested. “What could I do? Declare insolvency and face a lawsuit, or keep the bluff and trust to luck? I kept the bluff, in the hope that I would come across some workable plan that would enable me to pay all that I owed my creditors.”[continua e termina em Charles Ponzi – parte III]Also Read: Bernie Madoff: A Tragedy Worthy of Shakespeare Paulo M. Morais grew up playing street football and listening to proverbs told by his grandmothers. He graduated in Social Communication and specialized in the areas of cinema, videogames and gastronomy. He is the author of novels and non-fiction books. He collects board games and continues to watch many movies. He likes to cook, look at the sea, read. The information contained in the article is not binding and does not invalidate the full reading of documents that support the matter in question.