Watch out for a Ponzi scheme hatching near you…
“In financial history, Ponzi schemes – the fraudulent enterprise of paying off old investors with money collected from new ones – are the most peculiar of crimes. Before they are detected, they seem exquisitely pleasing to perpetrators and victims alike. The fraud appears to be a bountiful gift that the confidence trickster, a generous soul and a financial wizard to boot, has bestowed on a grateful world. Investors frequently revere the schemer, endowing him with magical properties. The schemer, in turn, may come to believe that his scheme isn’t altogether shady and that he will someday generate the sensational returns advertised.”
RON CHERNOW, The New Yorker (March 23, 2009)
Who was this fellow that Ponzi schemes are named after? Charles Ponzi was an Italian immigrant who arrived in Boston, USA in 1903. He was a grocery clerk, dishwasher, bank teller and serial jailbird. His famous scheme, hatched in 1919, promised investors a 50 per cent return in 45 days. By 1920 he was raking in a million dollars every week. Don’t even try to think what that means in today’s money.
Bernie Madoff is Ponzi’s great successor, having vaporised something like 65 billion dollars of money his clients thought they had with him. Madoff refined Ponzi’s approach, offering not outlandish returns in a short space of time, but modest, consistent returns year after year. He thus sucked in a wealthier, more sophisticated crowd – major fund managers, banks and tycoons amongst them.
Ron Chernow’s recent article attempts to look at the similarities between swindlers. One that is immediately notable is that these crooks often have most success within their own communities: Italian immigrants in the case of Ponzi, the global Jewish elite in the case of Madoff. That is very interesting to us in Kenya, for we often see the same thing happening here.
Many of our dodgy and defunct stockbrokers similarly targeted their own communities – often gathering the most money from their clans and districts, not just tribes. Pyramid schemes are often hatched within extended families, and grow from there. Trust Bank took off by offering suspiciously high interest rates to certain parts of Kenya’s Asian community. All these fraudsters misused the money, and left broken lives in their wake. Big lesson: your biggest enemy is not always the outsider; he is often that charming, nice fellow from within, who’s “one of us” and therefore above suspicion. Many fools are created under the delusion that “our people” are better than the rest.
A second observation is the ease with which people become beguiled. How educated people can be taken in by Ponzi schemes beggars belief, for they are mathematically certain to fail. As Chernow points out, the incoming money cannot keep pace with the outgoing claims, and so the fraud must unravel. It would seem you have to be an idiot to believe in returns that are too high, or too consistent, or lacking in any underlying logic. Yet sophisticated, seasoned people regularly fall for them, not just rural bumpkins.
Greed, it seems, fogs even the sharpest mind. Particularly when we think we’re being allowed into something special, something unique, something that isn’t available to everyone. Why would anyone believe in the soundness of stockbrokers whose principals are seen everywhere throwing big money around, or in ‘political’ banks so obviously engaging in sharp practice? But thousands did, and will regret it all their lives.
Even as I write this, a huckster is hovering somewhere around you, hoping to draw you into some pyramid scheme, a timeshare or two, or a job in which you sell hot air for great returns. Most likely, that person is some charming insider you feel inclined to trust. Could you please do us all a favour and keep your brain switched on, and your greed switched off?
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