Ponzi banks?

Just beware of any proposal, whether from bank or individual, that smells strongly of Ponzi!

By TP Saran

The several Ponzi schemes that have exploded on the world scene in the past few years have all had machiavellian individuals as their originators. To all intents and purposes, they were highly intelligent, successful and extremely presentable gentlemen who seemed to enjoy the respect of their peers and society at large, in which they moved seamlessly, with practically all doors open to them. Until the crashes came, no one in their entourage let alone their unsuspecting clientele – who soon enough became victims – had any inkling about what was going on behind the scene, namely the workings of the wily cook-ups that were in fact a time-bomb ticking down to D-day!

The cascade of schemes came in the wake of the financial crisis that started in Wall Street, with the collapse of corporate giants such as the Lehman brothers, and carrying banks along in the exploding bubble. Bank involvement and collapse, with consequential losses to the credulous investors, was also a feature of the first Ponzi scheme to bear that name. In fact, it is highly instructive to go into some details about that scheme, which Wikipedia provides, starting with the person himself, introduced as follows:

‘Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was an Italian businessman and con artist in the US and Canada. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. Born in Italy, he became known in the early 1920s as a swindler in North America for his money making scheme. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States. In reality, Ponzi was paying early investors using the investments of later investors. This type of scheme is now known as a ‘Ponzi scheme’. Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.’

It is even more revealing to learn that he was inspired by a predecessor!

Ponzi first came to the US with, in his own words, ‘$2.50 in his pocket and $1 million in hope.’ However, in 1907 he ‘moved to Montreal and became an assistant teller in the newly opened Banco Zarossi, a bank started by Luigi “Louis” Zarossi to service the influx of Italian immigrants arriving in the city. Zarossi paid 6% interest on bank deposits – double the going rate at the time – and was growing rapidly as a result. Ponzi eventually rose to bank manager. However, he found out that the bank was in serious financial trouble because of bad real estate loans, and that Zarossi was funding the interest payments not through profit on investments, but by using money deposited in newly opened accounts. The bank eventually failed and Zarossi fled to Mexico with a large portion of the bank’s money.’

Sounds, familiar now isn’t it?

Ponzi got involved in fraud and trafficking of illegal immigrants, and was imprisoned. He found his way to Boston in the US where, after getting married and dabbling in various businesses which failed, he started a company, the ‘Securities Exchange Company’ to promote his now infamous scheme. With investments coming in at an ever-increasing rate, ‘Ponzi hired agents and paid them generous commissions’ and ‘investors were being paid impressive rates, encouraging others to invest.’

He was rolling in money and ‘began depositing the money in the Hanover Trust Bank of Boston, in the hope that once his account was large enough he could impose his will on the bank or even be made its president; he bought a controlling interest in the bank through himself and several friends after depositing $3 million. By July 1920, he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.’ He started to live luxuriously, and maintained accounts in several banks besides Hanover Trust.’

But Ponzi’s rapid rise naturally drew suspicion, with the realisation that Ponzi was merely ‘robbing Peter to pay Paul’, although ‘an initial investigation into Ponzi’s banking practices found nothing illegal’. Still there were fears on the part of Bank Commissioner Allen ‘that if major withdrawals exhausted Ponzi’s reserves, it would bring Boston’s banking system to its knees.’ Soon it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal 13 years earlier—including his forgery conviction and his role at Zarossi’s scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books.’

What happened next was that ‘the news brought down five other banks in addition to Hanover Trust. His investors were practically wiped out, receiving less than 30 cents to the dollar. His investors lost about $20 million in 1920 dollars ($225 million in 2011 dollars); as a comparison, Bernie Madoff’s similar scheme that collapsed in 2008 cost his investors about $18 billion, 53 times the losses of Ponzi’s scheme.’

We would recall that even here a major scandal was that of the NPF funds which were in deposit at the MCB. To date, the scandal has not been elucidated to the satisfaction of the various stakeholders and the population. Nobody knows what has happened to the N’Tan report by Singaporean experts. Besides Ponzi or Ponzi-like schemes, we find that banks are advertising fantastic and alluring monthly interest rates on their ‘super’ credit cards, encouraging people to lead lives well beyond their means.

People must also be cautioned about Ponzi banks, and be very careful to read and study in between the lines and scrutinise the small print before they decide to place their hard-earned moneys where the attractive terms may turn out to be more of a trap. As Alexandre Dumas said. les affaires c’est l’argent des autres’ , and there are unscrupulous schemers hiding behind decent-looking facades who are out to dig as much as possible into the pockets of unsuspecting les autres.

Just beware of any proposal, whether from bank or individual, that smells strongly of Ponzi!


* Published in print edition on 27 April 2013

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