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Mitchell Zuckoff

Madoff and Ponzi: Reflections of their times

By Mitchell Zuckoff
December 21, 2008
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BEYOND a taste for expensive suits and fancy financial footwork, Bernard Madoff and Charles Ponzi might at first seem to have little in common.

During his brief heyday, Ponzi was an outsider whose open-door policy allowed him to collect relatively modest sums from thousands of people, many of them poor. Over his long career, Madoff was the consummate insider, a former Nasdaq chairman known for turning away would-be investors as he catered to the elite.

But a closer look reveals that the two men are reflections of their financial eras and of each other. Although Madoff's crimes are only alleged, he and Ponzi shared a keen sense of investor psychology and tribal loyalty, a penchant for mystery, and a belief that nothing beats word-of-mouth advertising from satisfied investors.

Ponzi gained fame in 1920 in Boston on a simple promise: Double your money in 90 days. He claimed that he had discovered a secret profit recipe involving foreign exchange rates, using obscure financial instruments called International Reply Coupons. Few investors understood what he was talking about, but like patrons at a magic show they ignored the smoke and mirrors and focused on the payoff.

Ponzi deluded himself, too; for a time he believed he could carry out the deals he had designed on paper. Only when he proved unable to transform coupons into cash did Ponzi resort to what had long been called "robbing Peter to pay Paul" - paying early investors with money from later investors.

But from the start he was clear-eyed about the best way to gain trust. "Never crowd a prospect," Ponzi told his salesmen. "Any attempt to force (Ponzi promissory notes) on a prospective investor would have been to create suspicion rather than confidence."

Although Ponzi served all comers, a majority of his customers shared his Italian roots. He never advertised and spoke to reporters only after he was a huge success, relying instead on his paisanos to spread news of his wizardry. As Ponzi walked through a crowd one day, a woman yelled: "You're the greatest Italian in history!" Ponzi demurred, saying he was only the third-greatest: "Christopher Columbus discovered America and Marconi discovered the wireless." But another fan answered: "You discovered the money!"

If the allegations against Madoff are true - he reportedly admitted that his $50 billion business was "basically, a giant Ponzi scheme" - he borrowed key ideas from Ponzi and tailored others to fit a different age.

Like Ponzi, Madoff established his business with his landsmen, fellow Jews, who passed word of his acumen. And like Ponzi's clientele, many admitted they had no idea what he was up to, simply marveling at his metronomic returns amid market syncopations. Madoff reportedly offered only vague explanations of his practices, and overly curious investors were unwelcome. A top Madoff employee, believed to be one of his sons, told an FBI agent that Madoff was "cryptic" about his methods.

Equally telling is the way both men allegedly exploited investors' motivations, using mirror-image strategies.

Ponzi maximized post-World War I populist resentments against Boston Brahmins, telling reporters: "The truth is, bankers and businessmen have been doing plenty for themselves under the present banking systems, but they have done little for anybody else." His investors cheered and rained money.

Madoff took a 21st-century approach, tapping into an anti-populist desire for exclusive access. His arrest unleashed stories of wealthy people who begged to invest and others who joined his country clubs to win his favor. The absence of volatility in his returns further convinced his select investors that they were in on something special.

Ponzi was exposed by The Boston Post, which goaded do-nothing regulators into action. Likewise, regulators long ignored warnings about Madoff, who reportedly confessed only when he approached the breaking point of every Ponzi scheme: the moment when more investors withdraw than deposit, and the money runs out.

In the end, what Madoff might share most with Ponzi is prison time and an unwanted legacy: His name, once a synonym for Midas, is becoming a new word for fraud.

Mitchell Zuckoff is a professor of journalism at Boston University and author of "Ponzi's Scheme: The True Story of a Financial Legend."

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