You Can't Cheat an Honest Man - James Walsh [8]
International Monetary Fund officials had warned the Albanian government about the schemes in 1995. Two years later, the same economists worried that the government could only meet its moral responsibility by printing money...and courting hyperinflation. “There can be very serious implications,” said one IMF official. “There are risks to the stability of the currency and to the long-term economic stability of the country.”
Albania wasn’t alone in these troubles. In Romania, more than 500 pyramid schemes were hatched in the five years following 1989’s overthrow of Nicolae Ceausescu. The biggest fund, known as Caritas, promised 800 percent profit within 100 days. In early 1994, the scheme collapsed with more than $1 billion in debts to three million investors.
“People are Greedier than They are Smart”
As the eastern European countries develop their economies, they may find—as the West has—that people have short memories when it comes to get-rich-quick programs. As one investor in a New Jersey real estate pyramid said, thinking about all the money he lost, “People aren’t stupid. They’re just greedier than they are smart.”
And perps are forever coming up with variations on Ponzi’s scheme. In the precedent-setting Ponzi scheme decision Kugler v. Koscot Interplanetary, Inc., the New Jersey State Supreme Court wrote:
Fraud is infinite in variety. The fertility of man’s invention in devising new schemes of fraud is so great, that the courts have always declined to define it.... All surprise, trick, cunning, dissembling and other unfair way that is used to cheat anyone is considered as fraud.
Almost all modern Ponzi frauds contain some semi-plausible business “explanation” for the astounding growth of the initial investors’ money. It might be quick gains made from equipment leases, bridge loans, mortgages or currency futures. These things are echoes of Carlo Ponzi’s Great Idea.
Also, the schemes always have perpetrators and promoters desperate enough to sell hard. These people are echoes of Ponzi himself.
CHAPTER 1
Chapter 1: The Mechanics Are Simple Enough
A Ponzi scheme isn’t a complicated thing, mechanically. The perpetrator collects money from investors, promising huge returns in a matter of months or weeks. He has to do one of two things:
1) return a portion of the invested money as “profit” while convincing investors to keep their “principle” (which is dwindling fast) invested; or
2) recruit new investors, whose money is used to produce the promised windfall to the earlier ones.
Even if the perp does the first thing, he’ll eventually have to do the second.
Finding the second level of investors is usually the hardest part of the scheme. Once they are recruited, the scheme often drives its own growth. This is why a certain level of word-of-mouth publicity is essential to a scheme’s success. When word of early profits and ritzy investors spreads, new investors pour in. With more dollars, the Ponzi perp is able to pay off more people.
Basically, a lot of cash is moving around but none...or very little...actually goes to anything that could legitimately turn a profit. The Ponzi perp can maintain the charade and skim off money for himself only as long as new suckers are feeding him with dollars. When this cash flow dwindles—even slightly—the whole scheme collapses.
The schemes can yield large returns for those who start them or join early on. As long as there are enough people to support the next level of the scheme, people above are safe. In financial circles, this is known as the “greater fool” theory. As long as you find someone willing to take your place in the scheme—a greater fool—the fact that you were a fool to invest doesn’t matter.
The greater fool theory applies to more than just crooked schemes. Paying $40 million for a French Impressionist painting, $500,000 for a baseball