Tuesday, June 8, 2010

On Ponzi Schemes

I’ve been thinking lately about Ponzi schemes. Maybe it’s all those discussions from learned people about the economy, and about the role played by bankers, the go-to Ponzi guys of the Bush years. So what am I thinking about Ponzi’s, and what the hell are Ponzi’s anyway?

Charles Ponzi (March 3, 1882 – January 18, 1949) was an Italian swindler, who is considered one of the greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. The term "Ponzi scheme" is a widely known description of any scam that pays early investors returns from the investments of later investors.

Bernie Madoff receives credit for hosting perhaps the largest Ponzi scheme on record, larger in financial terms than the original. But I take exception to awarding old Bernie the prize. Consider for a moment what is going on in a Ponzi scheme. The Ponzi Master seeks to extract wealth from potential investors by promising them returns on their investments that are unreasonable on their face. In short, the investors should really know better, but their greed gets the better of them. They invest because they want so badly to believe the Ponzi Master knows something nobody else knows, so they give him their money. Initially, the greedy ones are repaid; they seem to get rewards, paid out of new sucker money.

Eventually, the scheme collapses and all of the investors realize that they are dopes and they have lost their investment capital. These schemes collapse because the supply of fresh money begins to dry up, preventing the Ponzi Master from paying out the grand returns from the fresh money. Typically, the schemes collapse rapidly, once they begin unraveling.

Why do these schemes work? Two things seem to drive Ponzi schemes:

1) Faith in the Ponzi master. People know the person and consider him (they all seem to be men) as a person of integrity, and a person who is shrewd within this domain, i.e., finances.

2) Greed. People basically know better, but their basic greed gets the better of them. They want so desperately to “grab the brass ring” that they will do truly stupid things to get on board.

Now, what does this have to do with anything? Yeah, yeah, we know about Ponzi schemes. Bernie taught us all. Well, I have been thinking lately that Bernie was really a piker. Compared with, say, the Pope, or the Grand Ayatollah, or other figures of like stature, Bernie was just a bit player in the grand world of con-men.

Organized religion has functioned for a couple of thousand years, the grandest Ponzi scheme ever devised. What happens in organized religion?

1. A priest basically promises, in exchange for money and authority over your personal affairs, that he will deliver to you a certainty about your afterlife. Whether it’s that you will be able to meet and greet the Maker, or that you will acquire wings and a harp, and fly around on clouds, or that you will be able to chat it up with your long dead family members, it’s all guaranteed. Plus, they toss in certainty about what will happen if you don’t pony up. Eternal damnation and the “fires of hell.” Now, some of the promises get a little bizarre. Consider what Islamic terrorists promise the poor bastards who strap on dynamite vests so they can blow up innocent children in a marketplace. If they are willing to do that, hey, they are going to get 71 virgins in their afterlife. Not sure what they promise the real virgins who promise to blow themselves up, but what the hell, it must be good.

2. Once you sign up, the priests devise continued rituals to keep you within the fold—they devise, for example, theatrical performances of song and dance that would delight almost anyone. They also devise rules to keep you within the group—rules of behavior that prevent straying. The rules are complex and multifold, so that people routinely break them, but then go to the priests for absolution. Sometimes, absolution is granted for a fee, mostly though the absolution requires little more than agreeing with the priest that you were naughty and won’t do it again. Sometimes, of course, the priests torture and then kill you, just to show they’re serious.

3. And then, just before you die, the priests put on another ritual show by granting you absolution for all your past sins, allowing you to relax just before relaxing forever. As the assembled onlookers gape, the priest performs the final ritual, ending just after the person passes forever from their grasp. These final rituals are intended to reassure the onlookers that the priests still retain ultimate authority over your earthly existence and your passage into the next life (or afterlife as the case may be).

4. But the rituals and the theatre are simply devices to keep the faithful entertained until they die. At that point, the ultimate payoff should occur, except for one little problem. Nobody ever comes back to talk about it, so the Ponzi Masters never get outed as charlatans. It’s the sweetest con in the history of the world. No one can ever sue them, because no one can ever discover the con. You need to die first and then, well, who will ever know?

So, I think we need to take our hats off and give a Stephen Colbert Tip of the Hat to the grand Ponzi Masters of the world—priests everywhere. You rock guys!
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