Ponzi Scheme
Charles Ponzi
An IRC is a coupon that can be exchanged for stamps in any member country of the Universal Postal Union to send a reply. Ponzi realized that IRCs bought in countries with cheap postage could be exchanged for stamps in countries with expensive postage to earn a profit. This has the same structure as arbitrage, where the same product is bought and sold to profit from regional price differences.
For example, 66 IRCs were worth only $1 in Rome, Italy, but $3.30 in Boston, USA. If you bought IRCs in Rome and cashed them in Boston, the return would amount to 230%. Ponzi, expecting to make a fortune from IRC investments, bought his wife Rose a mansion, purchased luxury cars, and invested in banks and businesses. But there was a problem: not enough IRCs were issued or circulated to warrant investing such huge sums. By the time he realized that IRC arbitrage was only theoretically possible, it was already too late.
In the end, Ponzi managed the funds by attracting other investors to pay the returns promised to existing investors. This fact was exposed by a newspaper reporter in 1920.
Topics: Fraud
Category: Wiki/Economy