Riches to Rags

Casual fans of flim-flam history are already aware that Charles Ponzi, whose surname is now synonymous with “pyramid scheme,” couldn’t dodge the law when his financial house of cards collapsed in 1920. The pint-sized immigrant from Lugo, Italy, born Carlos Pietro Giovanni Gugliemlo Tebaldo Ponzi, never went on the lam, nor did he try to hide his fortune from investigators. He was incarcerated then deported, and spent his final years living in penury in Brazil, dying with $75 in his bank account. Hardly a post-scam rsum worthy of the Hucksters Hall of Fame.

It’s easy to interpret Ponzi’s failure to abscond with the loot as an indicator that he was only half a scammer–excellent at the fraud part of the equation, but not so strong on the endgame. But Mitchell Zuckoff offers a different take in the terrific Ponzi’s Scheme: The True Story of a Financial Legend, portraying the man as more delusional than criminal. His Ponzi never fled because, like Enron’s Kenneth Lay or WorldCom’s Bernard Ebbers, he somehow convinced himself that he could forestall the day of reckoning long enough to make a buck for his investors. His real sin was similar to that of so many failed CEOs of the past few years: Ponzi bought into his own spiel and decided that words were more important than facts.

The whole tale seems ludicrous to modern readers, given our day-to-day familiarity with real-estate infomercials and emails promising a slice of Mobutu Sese Seko’s riches. We’re trained to be wary of too-good-to-be-true offers–a company peddling mortgage rates of 3 percent is obviously not on the up-and-up. Bostonians in 1920, alas, weren’t quite as sharp when it came to separating opportunity from swindle. This was the era in which, much like the mid-to-late 1990s, securities speculation seemed the road to wealth for Everyman, and federal regulation was still virtually non-existent. Ponzi did especially well by targeting people like himself, immigrants and blue-collar sorts who felt entitled to the same financial perks as Boston’s patricians. Zuckoff brings this undercurrent of class conflict front and center by interweaving Ponzi’s tale with that of his blue-blooded nemesis, Boston Post editor

Richard Grozier. Unlike Ponzi, who had to scrape through lean years working menial jobs and enduring a few prison stints, Grozier was the stereotypical scion of privilege–his father edited the paper before him, and Richard ascended to the job despite disastrous careers at Exeter and Harvard. Grozier was exactly the sort of man that Ponzi’s immigrant investors detested, an aristocrat whose very status seemed more Old World than New. This was America, after all, where the streets were supposedly paved with gold (a clich that, Zuckoff notes, inspired Ponzi himself to set sail for the United States in 1903). Didn’t the little guy deserve to profit from the nation’s post-World War I boom, too?

Ponzi’s trademark scheme was, in fact, pegged to World War I’s deleterious effects on European currencies. As Zuckoff expertly explains, his subject’s eureka moment came while examining an International Reply Coupon, a certificate meant to facilitate the flow of mail between countries. Back then, countries did not recognize one another’s stamps, so there was no such thing as the self-addressed, stamped envelope for transatlantic letters. To remedy this problem, an arcane international body called the Universal Postal Union had invented the coupons, which could be redeemed for local stamps. A sender in France would buy a coupon, include it in his mailing to the United States, and the American recipient would redeem it for stamps at an American post office.

Ponzi, who had just failed to launch a business-to-business advertising guide, saw the International Reply Coupon as an ingenious way to take advantage of Europe’s post-war chaos. The coupon’s inventors had made the error of fixing the values long before World War I caused a nosedive in European currency valuations. “By redeeming [the coupons] in Boston rather than Barcelona,” writes Zuckoff, “Ponzi would earn a profit before expenses of ten cents, or ten percent on each dollar’s worth of coupons he bought in Spain and redeemed in the United States.” And the Italian lira had suffered even worse than the Spanish peseta. Ponzi dreamed of conjuring up his contacts in his native land, having them ship over coupons by the boatload, and making a killing.

It was just the sort of arbitrage play that might warm George Soros’s heart. Except that Ponzi made one critical miscalculation–the coupons could only be redeem-ed for stamps, not cash. Ponzi initially believed there was some way around this and began issuing certificates to investors that promised a 50-percent return on principal after 90 days. Even after it became clear that no bank or post office would monetize the coupons–the Universal Postal Union went so far as to issue a statement making clear that the vouchers were not intended for speculation–Ponzi went right on accepting investments at his School Street headquarters. And as the money rolled in, a combination of avarice and fear compelled him to perpetuate the fraud, rather than admit that ruin was the inevitable outcome.

The earliest investors, of course, were the lucky ones. As the people at the top of the pyramid, they were paid their returns out of the principals anted up by latecomers. But Zuckoff argues that Ponzi thought he’d only have to rob Peter to pay Paul in the short term, and that eventually he’d figure out a way to make good on his wild promises. He was a shyster, for sure, but not quite the evildoer of the popular imagination. Once it became clear that his postal coupon strategy would never work, he thought he could stall as he worked out a new get-rich-quick scheme.

Zuckoff bolsters this more sympathetic take on Ponzi by delving deep into the man’s troubled background. Ponzi came from upper-middle-class stock but had washed out of a Roman university thanks to his fondness for late-night parties and gambling. He lived a rough-and-tumble, itinerant life during much of his time in America, occasionally finding a white-collar job that suited his natural intelligence. But he was a born bumbler. He was involved in a shady bank failure in Montreal, for example, though Zuckoff suggests that Ponzi may have been the fall guy for higher ups. He also served time in a relatively cushy federal penitentiary in Atlanta for helping bring several illegal immigrants over the border from Canada. Again, Zuckoff argues that Ponzi got a bum rap and was merely the victim of circumstance and anti-Italian prejudice.

In his efforts to humanize his infamous subject, Zuckoff even goes so far as to dredge up a tale from Ponzi’s days as a nurse to injured miners. Without prompting or reward, he volunteered large swaths of his flesh, so a severely burned woman whom he barely knew could receive critical skin grafts. Not exactly the sort of sacrifice to be expected from a truly larcenous soul.

Though his currency speculation scheme was truly harebrained, Ponzi was not without his talents. He wasn’t the first to use pyramid tactics, but he added some clever flourishes, such as employing early investors to recruit new marks–the foundation for what is now referred to as multi-level marketing. In an even more modern stroke, Ponzi also hired himself a public-relations mouthpiece, an ex-reporter named William McMasters, who deftly assuaged a skeptical media–at least for a few months. (Ponzi would come to regret the hire when McMasters figured out that his boss was essentially insolvent and ratted to the press.)

Ponzi’s Securities Exchange Company–the irony of the venture’s acronym surely wasn’t lost on post-Black Tuesday regulators–made him a very, very wealthy man, rich enough to purchase his own bank, several food producers, and a mansion in a tony Boston suburb. Some Bostonians even hoped that the immigrant millionaire would take the Red Sox off the hands of Harry Frazee, the owner who had traded away Babe Ruth earlier in 1920. They’d rather have a hero like Ponzi at the helm than the man who sold baseball’s greatest player in order to finance his girlfriend’s flop of a musical.

There’s no doubt that Ponzi’s scheme was doomed to fail from the start, but its demise was hastened by Richard Grozier’s Boston Post. Struggling to emerge from his father’s considerable shadow, Grozier saw Ponzi as his own version of the International Reply Coupon, a clever shortcut to his ultimate goal of turning the Post into Boston’s preeminent newspaper. Like its competitors, the Post initially flubbed the story, writing meaningless puff, but Grozier quickly became suspicious of the popular Ponzi. He sicced his best reporters on the case, and they made mincemeat of their target. The hoi polloi who admired Ponzi, however, didn’t believe the Post’s takedowns at first. The SEC’s investors were the sorts of folks who were shut out from more conventional avenues of investment, and most suspected that the Harvard set was furious that Ponzi had outsmarted them. Better to trust the self-made man, they figured, than the one with a silver spoon dangling from his mouth.

Yet class antagonism can only blind people from the truth for so long, and the Post‘s discovery that Ponzi had been involved in the Montreal bank failure was the final nail in his coffin. After his arrest, it quickly became apparent that Ponzi was at least $3 million short, and that the poor latecomers might have been better served by using their hard-earned cash as winter kindling. The folk hero Ponzi ended up in the clink and, eventually, on a boat back to Italy; the aristocrat Grozier and his staff nabbed a Pulitzer.

The inevitability of the scheme’s outcome doesn’t diminish from Zuckoff’s book, which is paced more like a detective novel than a skilled work of financial journalism. Zuckoff took great pains to sift through the primary sources of the day, particularly court transcripts and newspaper accounts, and his details are impressive. Anyone who has ever wondered about Charles Ponzi’s views on human sexual proclivities need look no further. A strict historian might quibble with Zuckoff’s recreations of conversations that no one recorded, such as an exchange between Ponzi and legendary boxer “Gentleman Jim” Corbett, but they ring true enough.

Above all, Zuckoff successfully pushes Ponzi beyond mere biography by making Grozier a co-star. This is not simply a common tale of greed gone wrong but rather a small window onto America’s economic rise and collapse over the 1920s. After World War I, people like Ponzi’s dupes looked around at the wealth being created by the elite and asked, “Why not us?” Unfortunately, people as self-deluded and incompetent as Ponzi–and often far more malicious and powerful–were only too willing to answer that question with a resounding, “Why, no reason at all. If you trust me completely.” That answer, and the navet of the investors who heeded it, played no small part in bringing economic cataclysm at decade’s end.

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