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Ponzi? Who's Ponzi?

 
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Raekuul
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PostPosted: Mon Feb 02, 2009 12:29 pm    Post subject: Ponzi? Who's Ponzi? Reply with quote

Glenn Beck wrote:
Charles Ponzi was a guy who ripped people off in the 1920s who was so bad they named this thing after him. And he did what Madoff did. Madoff took money from some person and said he was investing it, but he really wasn't.

He was taking that money and giving it to other people that trusted him the month before. Like, "What a good month it was! Look at all this profit!" And then he just kept doing the same thing to new people until all the money dried up.

That's a Ponzi scheme.


Wikipedia wrote:
A few weeks later Ponzi received a letter in the mail from a company in Spain asking about the catalog. Inside the envelope was an International reply coupon (IRC), something which he had never seen before. He asked about it and found a weakness in the system which would, in theory, allow him to make money.

The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after the First World War had much decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps to a higher value. The process was: send money abroad; have IRCs purchased by agents; send the IRCs to the U.S.A.; redeem the IRCs for stamps to a higher value; sell the stamps. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher, which is not illegal.

Ponzi canvassed friends and associates to back his scheme, offering a 50% return on investment in 45 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. He started his own company, the "Securities Exchange Company", to promote the scheme.

Some people invested, and were paid off as promised. The word spread, and investment came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was US$5,000, (approximately US$54,000 in 2008 dollars).

By March he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time investors were being paid impressive rates, encouraging yet others to invest.

By May 1920 he had made $420,000 ($4.59 Million in 2008 terms). He began depositing the money in the Hanover Trust Bank of Boston (a small Italian American bank on Hanover Street in the mostly Italian North End), in the hope that once his account was large enough he could impose his will on the bank or even be made its president; he did, in fact, buy a controlling interest in the bank.


Discuss.[/quote]
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TwinHamster
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PostPosted: Mon Feb 02, 2009 12:58 pm    Post subject: Reply with quote

Huh? Discuss what?

Quote:
By July 1920 he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.

Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only source Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.[6]


They're the same story. Neutral
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TMC
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PostPosted: Wed Feb 11, 2009 5:53 am    Post subject: Reply with quote

Sheesh Twin, we're discussing a topical idea for the Sixth Annual Epic Marathon Contest. Sounds like an interesting twist to me.
Although my grasp on the rules is a bit too sketchy to decide to what extent discussion of plot details is allowed.
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