What is the most outrageous way someone got rich?
Answer by Gennaro Cuofano:
Charles walked out from the Hanover Trust Bank and he felt like the most successful man in the world. He had managed to become extremely wealthy in a very short time. When he arrived for the first time in U.S. he only had $2.50 in his pocket. Now he was the owner of a bank! The sky was the limit. How did he do that?
Charles one day received an envelope, which contained an international reply coupon. In short, when a person from Italy had to send a letter to someone in U.S., he had to attach to this letter a coupon.
If the person in U.S. wanted to reply to the person in Italy, he had to attach a postage of reply bought in U.S. Yet, due to the high inflation and lower cost of life in Italy, compared to U.S., the value of a coupon attached to the letter coming from Italy, was slightly lower than the value of the postage bought in U.S.
In other words, assuming that the person in Italy bought the coupon for 10 cents he eventually received back a U.S. postage worth 20 or 30 cents (this is just an example). Therefore, the person in Italy would have realized a profit of 200% or 300% without incurring any risk. There was a real arbitrage opportunity there.
Charles had calculated that he could make a 400% profit with this kind of arbitrage. Although, it was a earning of few cents per operation, by sending money to Italy and having people sending over hundreds or thousands of these letters it could have become a huge business.
Charles’ friends understood the potential of this business and started to invest all their money with him. By word of mouth more and more investors joined in. In about three years, Charles was filthy rich. At the point that he owned an entire bank! Too good to be true? How did a man become so rich by investing in international reply coupons?
Charles was a smart man and he knew that everyone liked high returns. Therefore, that is what he did. He promised much higher returns compared to the market and attracted hundreds of investors, which sold everything to invest their money with Charles.
The only problem is that something was wrong. In fact, a financial journalist, Barron had investigated further. According to the amount of money invested in the Securities Exchange Company (Charles’ business), at least 160 million postage replies should have been in circulation. Instead, only 27,000 were circulating at the time. What was going on?
As it eventually turned out, Charles was not really investing money in international reply coupons. Instead, he was using the money coming from new depositors (by promising much higher returns compared to the market) and he was passing them of as returns generated by the business.
In short, it was a fraud; called after the name of its creator, Charles Ponzi. It was a Ponzi scheme!
The Ponzi scheme proved to work repeatedly. From Charles Ponzi to Bernard Madoff the scheme has been running always in the same way. Why is it so successful? Because it leverages on the strongest and most hardwired human feeling, greed.
The shocking part is that Charles Ponzi could have become wealthy enough to have a good life, if he only arbitrated the international reply coupons. Instead, he wanted to become filthy rich, as quickly as possible and that is how the story wounded up…
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