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Thursday, December 18, 2008

Ponzi history

Since a Ponzi scheme is much in the news these days, here's some historical background on the original Ponzi, from my recent piece on Boston financial history:

Charles Ponzi , born in Italy in 1882, arrived in Boston in 1903. Then he went to Canada , where he spent some time in prison for forging a check. Not wanting to tell his mother about this, he wrote to her that he’d gotten a job as “special assistant” to a prison warden.
Ponzi returned to Boston in 1917. Two years later, he got a letter from Spain with an international postal reply coupon for mailing a catalog Ponzi was proposing to publish. With that, he came upon the idea of investing in these postal coupons, and making profits from differences in international postage rates.
He started his own firm, the Security Exchange Corporation (not to be confused with the then nonexistent Securities and Exchange Commission) and encountered enormous interest among investors. Unfortunately, Ponzi’s business plan, though legal, was unworkable, involving multiple currency exchanges and postal bureaucracies.
Still, Ponzi promised a 50 percent return on investment in 45 days, and for a while he kept his word. The trouble is that he was paying investors merely by giving them money from later investors. Such deceitful dealing would come to be known as a Ponzi scheme.
More here.

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