Who Is Ponzi

Some people involved in the recent gold investment scandal argued that it was a new business model and questioned on what wrong was with it, since they were neither stealing nor robbing.

They believed that it was originally a profitable business but, unfortunately, the intervention of Bank Negara and media coverage have ruined everything and broken the golden bowl. No, it is wrong. It is not a new business model, but rather an old-fashioned, repeated ploy. It was started about 100 years ago.

In 1903, Italian Charles Ponzi immigrated to the US with only US$2.50 in his pocket, and a resolution to make big money on that piece of land. He did a lot of jobs, but had faced lawsuits and sent to jail for embezzlement and theft.

After he was released, he decided to do something big instead of just stealing and embezzling.
His mind was quite agile. He targeted at posts sent between the US and Europe countries and started selling postal reply coupons. He set up a company in Boston, claiming that it invested in postal coupons.

He promised clients a 50 per cent profit within 45 days, or 100 per cent profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the US as a form of arbitrage. Many saw it as a windfall. Only a few of the rich tentatively invested in the beginning and, surprisingly, they received the promised high returns and everyone was overjoyed.

The news spread and people rushed to invest. Ponzi rose to become a business tycoon overnight and was highly praised. Together with Columbus and Marconi, they were called the three greatest Italians. Christopher Columbus discovered the New World, Guglielmo Marconi invented wireless telegraphy, and Ponzi created money.

However, no one knew that postal coupon was not a profitable investment. In fact, Ponzi did not invest in postal coupons. Instead, he just used the money of new investors to pay the returns for earlier investors and when more and more people invested, he would then be able to issue returns. The snowball continued to roll as long as the number of new investors was greater than the number of existing investors.

However, Ponzi’s luck ran out one day. He faced a commercial lawsuit and the incident was reported by the media. The investigation found that with the investment amount received, his company should have bought 16 million of postal reply coupons, but only 27,000 postal coupons were sold nationwide over the same period.

The Ponzi scheme was exposed and the Ponzi enterprise collapsed. Tens of thousands of people lost everything and Ponzi was put behind bars.

Similar low-risk, high-return investments could be found over the past 100 years and they were actually elaborate Ponzi schemes, instead of new business models.

The Bernie Madoff investment scandal broke out a few years ago, which was known as the largest elaborate Ponzi scheme in history, and the gold investment scandal are just two among the other Ponzi schemes.