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Who Was Ponzi & What Was His Scheme?

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What is a Ponzi scheme? And why does it bear this name? First, you need to know a little bit about its namesake, Charles Ponzi.

Anyone can work a simple swindle, but you have to be a special kind of con man to have your name become synonymous with "fraud." Ponzi pulled it off, though. After arriving in the U.S. from Italy in 1903, Ponzi knocked around in a variety of unskilled jobs that usually ended when he got into trouble for theft or cheating customers. A few years later, he moved to Canada, where he spent a hitch in prison for passing a forged check. When he eventually drifted back down to the U.S., he needed a way to make some quick cash.

Making Money via Mail

Ponzi eventually found his way to get rich quick using a vagary of the postal system. At the time, it was common for letters abroad to include an international reply coupon "“ a voucher that could be exchanged for minimum postage back to the country from which the letter was sent. Thus, if you sent your buddy in France a letter, you could include a coupon so he could respond. (This practice still exists but is less common.) As exchange and postal rates fluctuated, though, there was an opportunity to make a profit. You only had to purchase postal reply coupons cheaply in some foreign country, send them back to the U.S. to swap them out for American stamps of a higher value, then sell these stamps. This arrangement was perfectly legal; it was just cleverly gaming the system. Ponzi started buying and selling postal reply coupons using agents in his native Italy, and he was making a good living doing it.

Unfortunately, whatever defect made Ponzi steal from his employers and pass bad checks prompted him to get greedy here, too. He started to recruit investors into his system with the promise of 50% returns in just a few days. Investors would pay their cash in, and sure enough, Ponzi would get them the promised return. Everyone was happy with the results, and word started to spread about this Italian financial wizard. Within two years, he had employees all over the country recruiting new takers for this foolproof investment strategy.

Ponzi was pocketing millions, and he enjoyed a sumptuous life outside of Boston. At his peak, Ponzi was raking in $250,000 a day, which enabled him to collect such necessities as gold-handled canes. He became a celebrity investor, almost like the Warren Buffett of his day.

The Scheme

Why is it hard to think of Ponzi's name without affixing "scheme" to the end of it, then? Ponzi's underlying "business" — the arbitrage on the postal coupons — wasn't actually as sound as he claimed. In fact, there wasn't even really a business. However, since so much money was flowing in from new investors, he could just pay off the returns for the old ones from the new cash. In fact, Ponzi didn't even need to pay off the old investors, since many of them wanted to reinvest their returns in this wonderful business. Ponzi's charms made it easy for him to placate any worried customers, and his con looked unstoppable.

Fuzzy Math

Eventually, though, smarter financial heads started looking at Ponzi's business. Clarence Barron, owner of the Wall Street Journal and founder of the financial magazine that bears his name, realized Ponzi must have been a huckster and went on the offensive. While Barron conceded that there probably was a way for a person to make a small amount of quick cash on the postal reply coupon scheme, he figured that Ponzi would have to be moving 160 million coupons around to raise the cash he needed to support the business. Since there were only 27,000 postal reply coupons circulating in the world, Ponzi's story didn't check out. (Things only got worse when the Postal Service reported that there wasn't a huge flow of the coupons from one country to the other.)

On top of that, Barron noted that Ponzi told newspapers he invested his own cash in real estate, stocks, and bonds like any normal investor. Barron pointed out the obvious question here: if Ponzi had this failsafe scheme in which he could make a 50% profit, why was he putting his own money into plain old investment instruments that would give him (maybe) a 5% return? Those certainly didn't sound like the actions of a financial genius.

Barron's conclusions ran as front-page news in the Boston Post in July 1920, which would have been damning for most cons. Ponzi was such a charismatic force of nature, though, that many people chose not to believe the paper's report. Few believed that their hero, the man who had "tripled" their life savings, was anything less than 100% legitimate. In fact, the morning that the Post ran Barron's report, investors lined up around the block outside of his office in an attempt to give him more money "“ even after they'd been told that they'd been scammed. Ponzi later boasted that he'd taken in a million dollars in new investments the day the report ran.

The Unraveling

Things were starting to look less rosy for the scammer, though. Although he'd largely placated his investors after Barron's report, Ponzi must have realized his window of opportunity was closing. He hired a publicist, William McMasters, but the PR man saw through Ponzi's lies and renounced his client in the press. James Walsh reprints part of McMasters' slam of Ponzi in his book, You Can't Cheat An Honest Man. Of Ponzi, McMasters said, "The man is a financial idiot. He can hardly add"¦He sits with his feet on the desk smoking expensive cigars in a diamond holder and talking complete gibberish about postal coupons."

The next month, regulators raided Ponzi's office and discovered that he didn't have a huge quantity of postal reply coupons. Since Ponzi had used the mail to notify his marks of how their "investments" were performing, he faced serious mail fraud charges; in total, the government brought 86 charges against him in two separate indictments. Ponzi pled guilty to one of these charges in exchange for a light sentence of five years.

He served around three and a half years, then got his release to face state charges, for which he received a sentence of nine more years. But before he could go back to jail, he jumped bail and tried to start new scams in Florida and Texas. (You'd think the government would have learned their lesson about trusting this guy.) Eventually, though, his time on the lam ran out, and he served his whole sentence.

Upon his release, Ponzi was deported to Italy and spent the rest of his life in poverty before dying in 1949 in Rio de Janeiro, where he's buried in a pauper's grave.

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Big Questions
Where Is the Hottest Place on Earth?
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The summer of 2017 will go down as an endurance test of sorts for the people of Phoenix, Arizona. The National Weather Service issued an extreme heat warning, and planes were grounded as a result of temperatures exceeding 120 degrees. (Heat affects air density, which in turn affects a plane’s lift.)

Despite those dire measures, Phoenix is not the hottest place on Earth. And it’s not even close.

That dubious honor was bestowed on the Lut Desert in Iran in 2005, when land temperatures were recorded at a staggering 159.3 degrees Fahrenheit. The remote area was off the grid—literally—for many years until satellites began to measure temperatures in areas that were either not well trafficked on foot or not measured with the proper instruments. Lut also measured record temperatures in 2004, 2006, 2007, and 2009.

Before satellites registered Lut as a contender, one of the hottest areas on Earth was thought to be El Azizia, Libya, where a 1922 measurement of 136 degrees stood as a record for decades. (Winds blowing from the nearby Sahara Desert contributed to the oppressive heat.)

While the World Meteorological Organization (WMO) acknowledged this reading as the hottest on record for years, they later declared that instrumentation problems and other concerns led to new doubts about the accuracy.

Naturally, declaring the hottest place on Earth might be about more than just a single isolated reading. If it’s consistency we’re after, then the appropriately-named Death Valley in California, where temperatures are consistently 90 degrees or above for roughly half the year and at least 100 degrees for 140 days annually, has to be a contender. A blistering temperature of 134 degrees was recorded there in 1913.

Both Death Valley and Libya were measured using air temperature readings, while Lut was taken from a land reading, making all three pretty valid contenders. These are not urban areas, and paving the hottest place on Earth with sidewalks would be a very, very bad idea. Temperatures as low as 95 degrees can cause blacktop and pavement to reach skin-scorching temperatures of 141 degrees.

There are always additional factors to consider beyond a temperature number, however. In 2015, Bandar Mahshahr in Iran recorded temperatures of 115 degrees but a heat index—what it feels like outside when accounting for significant humidity—of an astounding 163 degrees. That thought might be one of the few things able to cool Phoenix residents off.

Have you got a Big Question you'd like us to answer? If so, let us know by emailing us at bigquestions@mentalfloss.com.

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Big Questions
How Does Autopilot Work on an Airplane?
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How does autopilot work on an airplane?

Joe Shelton:

David Micklewhyte’s answer is a good one. There are essentially a few types of features that different autopilots have. Some autopilots only have some of these features, while the more powerful autopilots do it all.

  • Heading Hold: There’s a small indicator that the pilot can set on the desired heading and the airplane will fly that heading. This feature doesn’t take the need for wind correction to desired routing into account; that’s left to the pilot.
  • Heading and Navigation: In addition to holding a heading, this version will take an electronic navigation input (e.g. GPS or VOR) and will follow (fly) that navigation reference. It’s sort of like an automated car in that it follows the navigator’s input and the pilot monitors.
  • Altitude Hold: Again, in addition to the above, a desired altitude can be set and the aircraft will fly at that altitude. Some autopilots have the capability for the pilot to select a desired altitude and a climb or descent rate and the aircraft will automatically climb or descend to that altitude and then hold the altitude.
  • Instrument Approaches: Autopilots with this capability will fly preprogrammed instrument approaches to the point where the pilot either takes control and lands or has the autopilot execute a missed approach.

The autopilot is a powerful computer that takes input from either the pilot or a navigation device and essentially does what it is told to do. GPS navigators, for example, can have a full flight plan entered from departure to destination, and the autopilot will follow the navigator’s guidance.

These are the majority of the controls on the autopilot installed in my airplane:

HDG Knob = Heading knob (Used to set the desired heading)

AP = Autopilot (Pressing this turns the autopilot on)

FD = Flight Director (A form of navigational display that the pilot uses)

HDG = Heading (Tells the autopilot to fly the heading set by the Heading Knob)

NAV = Tells the autopilot to follow the input from the selected navigator

APR = Tells the autopilot to fly the chosen approach

ALT = Tells the autopilot to manage the altitude, controlled by the following:

VS = Vertical Speed (Tells the autopilot to climb or descend at the chosen rate)

Nose UP / Nose DN = Sets the climb/descent rate in feet per minute

FLC = Flight Level Change (An easy manual way to set the autopilot)

ALT Knob = Used to enter the desired altitude

This post originally appeared on Quora. Click here to view.

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