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'Ponzi's Scheme'

By Jonathan Yardley
Sunday, March 27, 2005; Page BW02


The True Story of a Financial Legend

By Mitchell Zuckoff

Random House. 390 pp. $25.95

"A form of fraud in which belief in the success of a fictive enterprise is fostered by payment of quick returns to first investors from money invested by others." That is how the ever-dependable Oxford English Dictionary defines "Ponzi scheme," though it really should have gone further: "A way to get very rich very easily and speedily by taking full advantage of the infinite gullibility of homo sapiens."

Incredibly -- and no other word will do -- in the more than half a century since the death of the eponymous Charles Ponzi, not a single full-dress biography has been devoted to the man whose name, as John Kenneth Galbraith noted in his A Short History of Financial Euphoria, "is durably associated with investment operations" that gleefully bilk those who are both credulous and greedy, a scheme also known -- as a somewhat chastened Ponzi acknowledged in the memoir he published after his fall -- as robbing Peter to pay Paul. Not merely did Ponzi acquire his own place in the lexicon of the English language, not merely was he perhaps the greatest swindler in American history, he was also a free-spirited and engaging guy, easy to like and, as his devoted wife, Rose, readily attested, easy to love.

So thanks to Mitchell Zuckoff, a journalist from Boston -- headquarters for Ponzi's operations -- who has given Ponzi exactly what he deserves: a thorough account of his life and a candid but sympathetic portrait. Every once in a while his grasp of narrative gets a bit unsteady -- one chapter begins with two paragraphs about a wealthy Bostonian named Richard Grozier, then completely abandons him and veers off into a discussion of Grozier's father -- but for the most part he moves Ponzi's story along briskly, eschewing psycho-biographical nonsense and sticking to the facts as best he has been able to discover them.

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi was born in Italy in 1882 into a "comfortable but far from wealthy family," the only child of a doting mother. He paid little attention to his studies, "preferring to sleep away his days" at the University of Rome, declining any sort of mundane work. An uncle suggested that he should try his luck in America, where "the streets are actually paved with gold," so "his family provided him with a steamship ticket and $200 to get established in America and begin collecting his gold." He arrived in Boston aboard the S.S. Vancouver and discovered to his dismay that its streets were lined with "sticky, black mud."

It was all downhill after that. Ponzi found his way to Montreal and into the employ of a crooked banker who gave him useful instruction in the fine art, to borrow Galbraith's description, of paying "handsome dividends to earlier investors from the money coming in from later ones." Short on cash, Ponzi swiped a check from an account at another bank and filled it out "in the legitimate-seeming amount of $423.58." For his pains he was sentenced to three years in prison for forgery, though he got out after 20 months for good behavior. He then wandered south and was run in on charges of "smuggling aliens into the United States," which landed him at the federal pen in Atlanta for a two-year stretch, plus a fine of $500. He did the full two years, "with an extra month tacked on for his inability to pay his five-hundred-dollar fine."

By then the pattern was firmly established: Motivated by a mixture of naiveté and guile, Ponzi invariably took the short cut to the riches that he was certain awaited him. Once he got out of the penitentiary in 1913, he drifted this way and that, finally ending up back in Boston in 1917, a city accustomed to rogues but willing to let them go only so far -- "awash in scandal and distrust," James Michael Curley failed to win re-election as mayor that year -- and with a rule for "every ambitious man in the city: Boston would tolerate, even celebrate, a rogue who made his own rules and lined his own pockets, as long as he knew the limits. But if he grew too bold or too flashy, or if his spoils became too big to ignore, he would be made to pay."

Ponzi never quite got the message. He stumbled across something called the International Reply Coupon, a device that had been dreamed up at a conference in Rome in 1906 to make it easier to send mail across national borders. The coupon was "a system of international postal currency, paper that held a fixed value from one country to the next and could be redeemed for stamps in any post office of a country belonging to the Universal Postal Union." What the framers of the system could not have anticipated was World War I and the devalued currencies that lay all about in its wake. Ponzi took one look at it and saw "a global currency whose value fluctuated wildly depending on where it was used." The light that came on over his head was strictly megawatts:

"Sitting at his desk, Ponzi could hardly contain himself. The whole calculation had taken him less than five minutes, but he was certain of the conclusion. If he bought coupons in bulk in countries with weak currencies, converted them into stamps, and cashed them in the United States or other countries with strong currencies, he would soon be richer than Rockefeller."

This idea occurred to Ponzi at a moment in American history when "Get Rich Quick" schemes were flourishing all over the land. "By the time Ponzi appeared on the scene . . . fast-talking salesmen had promised fortunes from silver-fox fur farming and from engines that supposedly used water for fuel. . . . What they'd all had in common was a three-step playbook: splash, cash and dash. That is, make a big impression, grab as much money as possible, and disappear before being exposed." What made Ponzi different was that he was in it for the long haul, and at first really seems to have thought that what he was doing was legal, or at least within the elastic boundaries of the law.

The problem was that in order to underwrite his currency exchanges, he needed money to buy coupons, and he was in the hole. So he set up the Securities Exchange Company (most definitely not to be confused with the Securities and Exchange Commission) and promised investors a 50 percent return on their money after 90 days. That 50 percent was of course his downfall. Within weeks the gullible and greedy were pouring into Ponzi's small office, to the point that by the summer of 1920 business was booming: "All told, in July alone Ponzi had taken in nearly $6.5 million. . . . In the remarkable seven months since it had opened for business, the Securities Exchange Company had amassed thirty thousand investors and $9.6 million. All Ponzi had to do to keep them satisfied was to pay them nearly $15 million in return."

The rest seems in hindsight a foregone conclusion, but for a while it looked as if Ponzi might just pull it off. To the mobs that gathered outside his office he was, in his own words, "the realization of their dreams," and he successfully fobbed himself off as "a man of the people." Even as the authorities closed in, even as investors began to understand that their life's savings were at risk, they cheered him:

"When the Locomobile pulled up in front of 27 School Street and Ponzi stepped out, the swarm of people began to cheer. He wore a freshly laundered, perfectly pressed copy of his outfit of the day before of blue coat and white pants, but this time he spiced it up with a blue-and-white striped silk shirt and a complementing cravat. Many in the crowd still wanted their money, but something about the elegant little financier had captured their hearts. They had doubts, but they were rooting for him."

In the end he was brought down by the law, by his own exceedingly shaky ethical compass, and by the Boston Post, which ran story after story about him and eventually won the Pulitzer Prize for public service for exposing his misdeeds; the story of its young publisher, the aforementioned Richard Grozier, is fascinating, and Zuckoff tells it well. Ponzi copped a plea in federal court on one of the 86 counts against him and got a five-year sentence. Later he was convicted on state charges as "a common and notorious thief" and got seven to nine years more. Finally, in 1934, he was deported as an undesirable alien, and in 1949 he died at a charity ward in Rio de Janeiro.

An apt verdict on Ponzi, perhaps more apt than those pronounced in court, came from an anonymous editorialist at the New York Times, who described him, after his guilty plea, as "an egregious falsifier and a wholesale betrayer of simple confidences," but then went on to say: "There was something picturesque, something suggestive of the gallant about him, and it is almost possible, though not quite, to believe that he was as credulous as his victims and deceived himself as much as he did them. Perhaps the disinclination for being harsh in characterizing Ponzi is due to lack of any sympathy for those whom he robbed . . . They showed only greed -- the eagerness to get much for nothing -- and they had not one of Ponzi's redeeming graces."


Jonathan Yardley's e-mail address is yardleyj@washpost.com.

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