RENEE MONTAGNE, host:
And, Steve, that massive Ponzi scheme that you and Jim were just talking about, sometimes people call this robbing Peter to pay Paul, or a shell game, pyramid schemes, or close relatives. And as NPR's Yuki Noguchi reports, this particular crime goes way back.
YUKI NOGUCHI: Charles Ponzi, for whom this crime is named, wasn't even the first to perpetrate it.
Professor MITCHELL ZUCKOFF (Journalism, Boston University): A guy who preceded him, who was pretty well known in his day, was a guy named Franklin Miller, who was known as 520 percent Miller.
NOGUCHI: Mitchell Zuckoff is a professor at Boston University and wrote a book about the history of Ponzi schemes. A century ago, Miller promised 10 percent returns on stocks a week - so 520 percent a year. Audacious, but it's Ponzi we remember, not Miller.
Professor ZUCKOFF: It doesn't sort of trip off the tongue quite as nicely, a Miller scheme, as a Ponzi scheme. There's something, I don't know, something sonorous about the name.
NOGUCHI: And so Ponzi it was. Ponzi purported to buy and sell international postage in different currencies at a profit, and that drew huge numbers of investors.
Professor ZUCKOFF: He walked down the street, and it was like a parade started behind him.
NOGUCHI: So many, in fact, the amount of money invested exceeded the value of the stamps in circulation. Instead of paying investors with real profits, he redistributed cash, which is the essence of how these plans work. Let's say I start a Ponzi scheme. I've got this foolproof investment strategy that involves puts and calls and swaps - and anyway it's totally foolproof, OK? OK. And it makes 20 percent returns even in this economy.
I take the money and maybe invest some of it in stocks or Treasuries and, naturally, buy myself some nice cars, boats, and luxury homes. The point is I'm never specific about where the remaining money goes or how it's invested. As long as I keep attracting new investors, it all seems good, even if a few people want to withdraw. But if a lot of people want out, there's trouble. Chris Geczy is an adjunct professor of finance at Wharton.
Dr. CHRIS GECZY (Adjunct Professor of Finance, The Wharton School): Because either I have to raise an inordinate amount of capital in order to pay out, or I have to delay or prevent people from taking their money out, which of course induces examination.
NOGUCHI: Ponzi's famous scheme ran its disastrous course within a year. By August of 1920 his jig was up. By comparison, Madoff's might have spanned two decades. Again, here's Professor Geczy at Wharton.
Dr. GECZY: And that's a long time to perpetrate anything. That might be longer than most people perpetrate their marriages.
NOGUCHI: And, of course, the sheer scale of Madoff's enterprise made it dwarf all others before it. Geczy says it's likely Madoff actually did make money in the market for a long time. Funds like his escaped relatively unscathed during the bust of early 2000.
Dr. GECZY: That almost surely gave rise to the ability to raise more money because investors went through that experience and were looking for hedges.
NOGUCHI: Then his investors rode the credit-fueled boom. And only this month, when investors asked to withdraw $7 billion, did the music stop. Boston University's Mitchell Zuckoff says no one knows when he went from being a legitimate money manager to a guy running an alleged Ponzi scheme. But what often happens to money managers who hit a rough patch is that they don't want to admit they lost their touch.
Professor ZUCKOFF: The world passed him by, and he couldn't accept that he was no longer the man.
NOGUCHI: That was something his predecessor, Charles Ponzi, also struggled to accept.
Professor ZUCKOFF: At the end of his trial, he scribbled a note on a legal pad, and he passed it to the reporters in the front row of his trial. And it said in Latin, "Sic transit gloria mundi," which of course means, "Thus passes worldly glory."
NOGUCHI: Bernard Madoff is scheduled to make another court appearance today. Yuki Noguchi, NPR News. Transcript provided by NPR, Copyright NPR.
NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.
