Carlo “Charles” Ponzi didn’t invent the con that bears his name. Far from it. The scam goes back at least as far as robbing Peter to pay Paul.
Also known as a pyramid scheme, Ponzi just copied others. For example, William Miller made a name for himself running a pyramid scheme in Brooklyn that netted a million dollars in 1899, just four years before Ponzi arrived in America from his native Italy. And after moving from Boston to Montreal in 1907, Ponzi got firsthand experience in the game while working for Luigi Zarossi.
Zarossi owned a bank that catered to Italian immigrants. He lured them by offering twice the going rate of interest on deposits. But when Zarossi got into trouble with some bad real estate loans, he started using the money from new deposits to pay the interest on established ones. Ponzi had worked his way up from assistant teller to bank manager by that time, giving him a front row seat to watch the cash shuffle from here to there.
And when the bank neared collapse, Zarossi took the remaing money and ran, all the way to Mexico.
Before orchestrating his own version of this shell game in 1920, Ponzi established himself as a lifelong grifter. His known crimes to that point earned him two prison sentences for theft, check forging, and immigrant smuggling.
Eventually returning to Boston, he put together his short-lived master piece by promising investors 50% returns on arbitrage of international postage stamps; it was essentially small-time currency trading.
The business proposition was a rather dubious, but perfectly legal. The problem was that Ponzi made no attempt to actually engage in it. Instead, he put all the money in banks, spent lavishly on his new lifestyle, and just paid off old investors with money from new investors.
For a while it worked, and new investors flocked to him. So many in fact, that Ponzi was soon handling millions of dollars, and he gained a little wiggle room by purchasing a controlling interest in the Hanover Trust Bank of Boston.
Of course it soon unraveled.
It only took about half a year from start to finish, but by the time it was over, five banks had collapsed and the remaining investors got back only thirty cents on the dollar.
Ponzi’s version of the scheme had been the largest to date, and he was also quite the charismatic figure. A charming sociopath who bore a broad smile and a sparkle in his eye, the press loved him until they hated him, showering Ponzi with attention all the way.
His lasting legacy is that the age-old pyramid scam is now known as a Ponzi scheme.
The term re-emerged as a buzz word when Bernard Madoff’s long running, multi-billion dollar Ponzi scheme collapsed in 2008. One result is that “Ponzi scheme” is now used inaccurately and irresponsibly as a smear and a political weapon.
Just yesterday, the U.S. Justice Department referred to FullTiltPoker.com as a Ponzi Scheme.
The USJD’s accusation is not only pretty dishonest, but to the tiny extent that it’s kinda sorta now true, the USJD itself had as much a role in the matter as the people at Full Tilt. Let me explain.
Full Tilt was one of three poker-playing websites that the feds shut down on gambling charges in April. Now they’re calling Full Tilt a Ponzi scheme on the grounds that: the owners paid themselves too much; the company hasn’t had enough money to payoff all players’ accounts since August 2010, despite promises to the contrary; and that it was moving money around to do so.
Hmm, that does sound suspicious.
But unlike an actual P
onzi scheme, which has no income beyond investor deposits, Full Tilt had been operating with a legitimate business model since 2004. It charged fees to players for providing the service of online poker, and it actually made tidy profits doing so, something many “legitimate” websites would be envious of.
What’s more, for the USJD to now bandy about that term Ponzi scheme is some pretty rich irony. Why? Because Full Tilt’s inability to secure all of its players’ accounts is the direct result of the government harassment. The United States threatened and coerced the third-party money processors that Full Tilt relied on. As access to them withered, and some of them even absconded with funds, Full Tilt’s ability to payoff players declined.
Oh yeah, and one more thing. When the federal government shut down Full Tilt last April, it also seized well over $100 million of its assets. That also made it really hard to cover all its financial obligations.
So while the company probably did break several laws along the way (the entire venture skirted federal gambling prohibitions), Full Tilt was clearly not a Ponzi scheme. At best, the Justice Department’s use of the term was theatrical. At worst, it was a bold faced lie.
And maybe I’m a hopeless romantic, but I still think that if there’s one federal agency that should never, ever lie to the American people, it’s the goddamned Justice Department.
Journalists and guest blogger Bill Ordine will get deeper into the Full Tilt case for us on Friday. But first, on Thursday Brown University Political Economist Mark Blyth will get to the heart of a much more serious, dishonest, and potentially damaging misuse of the term Ponzi scheme: People who are trying to undermine the credibility and public faith in Social Security by disingenuously smearing it as such.