'Ponzi's Scheme' Will Enrich Your Summer Reading Experience

Ponzi’s Scheme: The True Story of a Financial Legend, by Mitchell Zuckoff, Random House, 2005. One late summer morning in 1920, Charles Ponzi coasted in the back seat of his luxury convertible on his way to work in Boston, showing no signs that his financial empire, and his life, were near ruin. Looks deceived.Indeed, by August 1920, as Boston University journalism professor Mitch Zuckoff explains in his entertaining new book, Ponzi's Scheme, things were far worse than Ponzi, a confidence man and early master of media "spin," let everyone believe.  Ponzi’s company, the ironically named Securities Exchange Commission, was accountable to his investors for millions of dollars, but Ponzi had no sure plan how to make good on his promise to help investors double their money in 90 days. Meanwhile, Boston newspapers began scratching away the veneer of Ponzi’s carefully constructed image as a simple Italian immigrant with a great idea on how to get rich in the New World. Reporters dug up scandalous stories, such as Ponzi’s jail term in Canada for fraud while working for a Canadian bank that failed.  The stories were true.However, even as Ponzi’s world was crumbling, Zuckoff shows how Ponzi still managed to hold on to a loyal group of true believers, especially among recent immigrants living in Boston. "You’re the greatest Italian in history!" a man on the street shouted at Ponzi’s convertible as it approached the Securities Exchange Commission office on School Street in downtown Boston on that late August summer morning. "No, I’m the third greatest," Ponzi replied, as he surveyed the line of people jammed into the alleyway to his office, waiting to buy or redeem investor shares. "Christopher Columbus discovered America and Marconi discovered the wireless." Then Ponzi’s fan–on-the-street cried out, "You discovered the money!" Before Ponzi founded the Securities Exchange Commission, he  believed he had found a way to turn flax into gold.  Ponzi thought he  could take advantage of differences in currency exchange rates and a strong dollar to buy and sell international airmail postage stamp vouchers. Investors then as now have indeed tried to use fluctuations in currency rates as arbitrage opportunities to make money.  However, Ponzi did not initially realize that there was a limit on the number of stamps one could purchase and exchange for cash.To his detriment, Ponzi did not realize his stamp scheme was faulty for quite some time, well after taking hundreds of thousands of dollars that he received from investors who saw his ads to double investor's money in 90 days.  While Ponzi searched for a viable Plan B, Ponzi decided to use new deposits to pay off the original investors, a scheme that would work so long as enough new investment capital flowed into Ponzi’s vault to repay outstanding debts. Upon reading about Ponzi's reckless move, a reader might squirm in his or her summer beach chair at the prospect of what Ponzi would do for the new investors in 90 days after making their deposit.Alas, the plot sickens.  When these early investors actually doubled their money as Ponzi promised, waves of new investments flowed into Ponzi's safe, creating a financial frenzy.  When Ponzi arrived at his Boston office just before 8:00AM on that summer day in August 1920, hundreds of new investors were lined up in the alleyway, eager to double their money in 90 days with the great Mr. Ponzi.Ponzi was responsible for a moment in economic history rivaling tulipmania, the speculation sensation that began in 17th century Holland then spread throughout Europe, convincing investors that $10,000 was a bargain price for a rare tulip bulb. As in the case of tulipmania, Ponzi’s scheme spread geographically, as Ponzi established new branches of his Securities Exchange Commission elsewhere in Massachusetts, New England and New York. Word quickly spread that the "get rich quick" scheme Ponzi was offering at the Securities Exchange Commission actually delivered the promised investment return. Zuckoff helps today’s reader understand the Ponzi madness by demonstrating Ponzi’s efforts to manipulate the media. Soon after establishing the Securities Exchange Commission, Ponzi hired reporter William McMasters to create a winning popular image of Ponzi, mainly to shore up investor trust. In effect, Ponzi hired McMasters to be his spin doctor. In July 1920, McMasters helped a Boston Post reporter craft a mythical tale of Ponzi as an Italian-America Horatio Alger published in the Post under the blaring headlines Zuckoff quotes from the archives: "Doubles Money Within Three Months; 50 Percent Interest Paid in 45 Days by Ponzi – Has Thousands of Investors; Deals in International Coupons Taking Advantage of Low Rates of Exchange." By that point, Ponzi and McMasters both knew the postal scheme would not work. Yet, these two men were able to convince many astute market watchers that it would work, including Clarence Barron, associated with the highly-regarded financial newspaper we know today as Barron’s. However, by August 1920, Charles Ponzi’s financial colossus appeared to be a sand castle on the verge of collapse, and for good reason. The Massachusetts Attorney General’s Office reviewed Ponzi’s company records, and concluded that Ponzi’s firm had obligations to shareholders exceeding assets by more than $3 million, and, no clear way of covering this financial shortfall. Then, New York Postal Official Thomas Patten announced that his analysis revealed that the world had not created a fraction of the airmail coupons Ponzi needed to generate the cash to fulfill his promises to shareholders to double their money in three months. The worst news of all came when Ponzi’s own hand-picked publicist, McMasters, accepted a lucrative financial offer from the Post to write a tell-all account about his dealings with Ponzi. McMasters then exposed, in great detail, how Ponzi’s business plan was nothing more than a "rob Peter-to-pay-Paul scheme." Today, the Securities and Exchange Commission of the US government investigates wrong-doing by financial concerns like Ponzi's Securities Exchange Commission. Yet, even officials from the SEC can be deceived by positive spin in newspapers and company financial reports, as we now know after the dot.com bubble of the 1990s. Given Zuckoff’s writing style and his focus on the image-making in the media, Ponzi’s Scheme will be an entertaining and informative read to those who follow the financial markets as well as a general audience. In other words, if you want to learn more about the man we know today in connection with the phrase, "Ponzi scheme," and why we are apprehensive about any plan called promising us to "get rich quick," Zuckoff’s new book is worth the investment of your summer beach reading time.