La Casa de Ponzi

Here in Europe, bank interest rates have now been at rock bottom for a few years. In the UK, the Bank of England’s base rate has remained unchanged at 0.5% since March 2009. Consequently, savers’ rates are abysmal. Of course, if one has a mortgage, it makes little sense to have long-term savings, owing to the interest rate differential between debts and deposits. If one is debt-free, however, there are still opportunities to secure a reasonable return with no or minimal risk. Last year, for instance, I took out a no-risk five-year bond which pays 4.5% tax-free. These days, that is about as good as it gets.

Had the offer promised, say, 10%, however, I would have dismissed it as a scam. I think most people would, but greed and desperation can form a mixture potent enough to anaesthetize rationality. An Italian-American called Charles Ponzi (1882-1949) (Figure 44.1) preyed on that truism. He accepted investments from eager individuals, promising an improbably high return, and paid out with funds from newer investors – a so-called ‘Ponzi scheme’. Of course, lucrative returns can be paid out only if the number of investors increases, and at an increasing rate. In reality, this cannot continue indefinitely, and the longer the scam continues, the more shocking will be the eventuality. Either the schemer will scarper with the loot; or investors will withdraw when promised returns can no longer be paid (as with a ‘bank run’); or, most likely, the police will investigate and call time on the whole deception.

Figure 44.1: Charles Ponzi did not actually invent the scheme which bears his name. The earliest known reference appears in the novel Little Dorritt by Charles Dickens (1812-70).

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Ponzi’s investors lost a total of $20 million ($225 million today). The man himself was jailed in 1920 and, eventually, deported. Staggering though that sum was, it was eclipsed with ease in 2009. Former non-executive chairman of the NASDAQ stock market, Bernie Madoff, ran a Ponzi scheme which cost investors $13 billion, the largest financial fraud in American history. Madoff was sentenced to 150 years in prison.

To my personal dismay, the game of cricket was recently tainted by association with Texan banker Allen Stanford. In 2006, the English national cricket board was – forgive the pun – bowled over by Stanford’s offer of sponsorship. $20 million was made available as prize money for a tournament in the West Indies in 2008. Cricketers past and present queued up to endorse the plan (Figure 44.2). Only Michael Holding, a West Indian legend and one of my all-time heroes, remained sceptical, claiming Stanford ‘wanted to boost his own ego, his own companies and, eventually, his own bank balance’. Holding’s doubts were vindicated within months. Stanford was arrested, charged with running a Ponzi scheme worth $7 billion and convicted earlier this year. He, like Madoff, will die in jail.

Figure 44.2: Ponzi schemer Allen Stanford (second left) displays $20 million at Lord’s Cricket Ground to former cricketing greats, including Sir Viv Richards (far left).

Copyright © 2009 Telegraph Media Group Ltd.

Ponzi, Madoff and Stanford contrived to deceive their investors for decades. Each knew that if his strategy became known to the public, it would be ‘game over’. Of course it would. A scam of such magnitude and audacity could never be perpetrated in full view of the world. No? Actually, it can, and it is happening right now. The debt crisis in Europe worsens by the day. Greece is in particular peril, followed by Spain, Italy, Ireland and Portugal. Insolvent central banks are lending money to insolvent banks who buy government debt from insolvent governments who lend money to the International Monetary Fund which then lends it to insolvent governments to pay back insolvent banks. What is this, if not the mother of all Ponzi schemes?

I am not alone in drawing this conclusion. Former governor of Argentina’s central bank and Bank of England adviser Mario Blejer (Figure 44.3) made this accusation in the Financial Times. He argued, most eloquently, that European Central Bank chief Jean-Claude Trichet, European Financial Stability Facility head Klaus Regling and Deutsche Bank chief Josef Ackermann ought to join Bernie Madoff in jail for running a public sector Ponzi scheme which could, in theory, continue indefinitely. Blejer was exasperated that banks and bondholders are deviously hoodwinking, and ruining, future taxpayers.

Figure 44.3: The outspoken Mario Blejer. The truth is out.

Copyright © 2012 Bloomberg L.P.

Why is Blejer’s warning being ignored? Why have millions of Europeans not already taken to the streets? One contributory reason is this. In 100 CE, Roman poet Juvenal, in Satire X, wrote: ‘Already long ago, from when we sold our vote to no man, the People have abdicated our duties; for the People who once upon a time handed out military command, high civil office, legions — everything, now restrains itself and anxiously hopes for just two things: bread and circuses.’

The Romans knew how to distract the masses from their corrupt rule. How eerily coincidental it is that Euro 2012 is currently in full swing.

Enjoy the football.

Copyright © 2012 Paul Spradbery