CLOSE
Original image
LIFE

Who Was Ponzi & What Was His Scheme?

Original image
LIFE

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.

Original image
Rey Del Rio/Getty Images
arrow
Big Questions
Why Do the Lions and Cowboys Always Play on Thanksgiving?
Original image
Rey Del Rio/Getty Images

Because it's tradition! But how did this tradition begin?

Every year since 1934, the Detroit Lions have taken the field for a Thanksgiving game, no matter how bad their record has been. It all goes back to when the Lions were still a fairly young franchise. The team started in 1929 in Portsmouth, Ohio, as the Spartans. Portsmouth, while surely a lovely town, wasn't quite big enough to support a pro team in the young NFL. Detroit radio station owner George A. Richards bought the Spartans and moved the team to Detroit in 1934.

Although Richards's new squad was a solid team, they were playing second fiddle in Detroit to the Hank Greenberg-led Tigers, who had gone 101-53 to win the 1934 American League Pennant. In the early weeks of the 1934 season, the biggest crowd the Lions could draw for a game was a relatively paltry 15,000. Desperate for a marketing trick to get Detroit excited about its fledgling football franchise, Richards hit on the idea of playing a game on Thanksgiving. Since Richards's WJR was one of the bigger radio stations in the country, he had considerable clout with his network and convinced NBC to broadcast a Thanksgiving game on 94 stations nationwide.

The move worked brilliantly. The undefeated Chicago Bears rolled into town as defending NFL champions, and since the Lions had only one loss, the winner of the first Thanksgiving game would take the NFL's Western Division. The Lions not only sold out their 26,000-seat stadium, they also had to turn fans away at the gate. Even though the juggernaut Bears won that game, the tradition took hold, and the Lions have been playing on Thanksgiving ever since.

This year, the Lions host the Minnesota Vikings.

HOW 'BOUT THEM COWBOYS?


Kevin C. Cox/Getty Images

The Cowboys, too, jumped on the opportunity to play on Thanksgiving as an extra little bump for their popularity. When the chance to take the field on Thanksgiving arose in 1966, it might not have been a huge benefit for the Cowboys. Sure, the Lions had filled their stadium for their Thanksgiving games, but that was no assurance that Texans would warm to holiday football so quickly.

Cowboys general manager Tex Schramm, though, was something of a marketing genius; among his other achievements was the creation of the Dallas Cowboys Cheerleaders.

Schramm saw the Thanksgiving Day game as a great way to get the team some national publicity even as it struggled under young head coach Tom Landry. Schramm signed the Cowboys up for the game even though the NFL was worried that the fans might just not show up—the league guaranteed the team a certain gate revenue in case nobody bought tickets. But the fans showed up in droves, and the team broke its attendance record as 80,259 crammed into the Cotton Bowl. The Cowboys beat the Cleveland Browns 26-14 that day, and a second Thanksgiving pigskin tradition caught hold. Since 1966, the Cowboys have missed having Thanksgiving games only twice.

Dallas will take on the Los Angeles Chargers on Thursday.

WHAT'S WITH THE NIGHT GAME?


Patrick Smith/Getty Images

In 2006, because 6-plus hours of holiday football was not sufficient, the NFL added a third game to the Thanksgiving lineup. This game is not assigned to a specific franchise—this year, the Washington Redskins will welcome the New York Giants.

Re-running this 2008 article a few days before the games is our Thanksgiving tradition.

Original image
iStock
arrow
Big Questions
Why Don't We Eat Turkey Tails?
Original image
iStock

Turkey sandwiches. Turkey soup. Roasted turkey. This year, Americans will consume roughly 245 million birds, with 46 million being prepared and presented on Thanksgiving. What we don’t eat will be repurposed into leftovers.

But there’s one part of the turkey that virtually no family will have on their table: the tail.

Despite our country’s obsession with fattening, dissecting, and searing turkeys, we almost inevitably pass up the fat-infused rear portion. According to Michael Carolan, professor of sociology and associate dean for research at the College for Liberal Arts at Colorado State University, that may have something to do with how Americans have traditionally perceived turkeys. Consumption was rare prior to World War II. When the birds were readily available, there was no demand for the tail because it had never been offered in the first place.

"Tails did and do not fit into what has become our culinary fascination with white meat," Carolan tells Mental Floss. "But also from a marketing [and] processor standpoint, if the consumer was just going to throw the tail away, or will not miss it if it was omitted, [suppliers] saw an opportunity to make additional money."

Indeed, the fact that Americans didn't have a taste for tail didn't prevent the poultry industry from moving on. Tails were being routed to Pacific Island consumers in the 1950s. Rich in protein and fat—a turkey tail is really a gland that produces oil used for grooming—suppliers were able to make use of the unwanted portion. And once consumers were exposed to it, they couldn't get enough.

“By 2007,” according to Carolan, “the average Samoan was consuming more than 44 pounds of turkey tails every year.” Perhaps not coincidentally, Samoans also have alarmingly high obesity rates of 75 percent. In an effort to stave off contributing factors, importing tails to the Islands was banned from 2007 until 2013, when it was argued that doing so violated World Trade Organization rules.

With tradition going hand-in-hand with commerce, poultry suppliers don’t really have a reason to try and change domestic consumer appetites for the tails. In preparing his research into the missing treat, Carolan says he had to search high and low before finally finding a source of tails at a Whole Foods that was about to discard them. "[You] can't expect the food to be accepted if people can't even find the piece!"

Unless the meat industry mounts a major campaign to shift American tastes, Thanksgiving will once again be filled with turkeys missing one of their juicier body parts.

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

SECTIONS

arrow
LIVE SMARTER
More from mental floss studios