Speaker 1: Pushkin.
Speaker 2: Hello, dear listener, Tim Harford, here have some very exciting
Speaker 2: news to share with you. On the evening of Tuesday,
Speaker 2: the twenty first of May, I will be bringing a
Speaker 2: special live edition of Cautionary Tales to the stage in London.
Speaker 2: There will be music, there will be actors, hello, and
Speaker 2: there will be plenty of hair raising, spine tingling, twists
Speaker 2: and turns. Tickets are on sale now through the link
Speaker 2: in the episode description, so get them while they last.
Speaker 2: Once again, Cautionary Tales will be live in London on Tuesday,
Speaker 2: the twenty first of May. I can't wait to see
Speaker 2: you there. Do you know your Ponzi schemes from your
Speaker 2: pyramid schemes? The following episode digs into the pitfalls of
Speaker 2: get rich Quick scams. It was recorded in front of
Speaker 2: a live audience at the Bristol Festival of Economics. Gosh, wow,
Speaker 2: are you already excellent? Okay, so we will begin. Sophie
Speaker 2: and Julia were relaxing on the riverside terrace of a
Speaker 2: fancy London spa, two rich girls joined by an even
Speaker 2: richer one, Tatiana, the glamorous wife of an investment banker.
Speaker 2: Tatiana ordered another bottle of champagne and launched into her
Speaker 2: sales pitch.
Speaker 3: You simply must buy our heart.
Speaker 2: Julia and Sophie looked at each other and sighed. This
Speaker 2: wasn't the first time they had heard the spiel. It
Speaker 2: was the summer of two thousand and three, and hearts
Speaker 2: with a capital H were all the rage among the
Speaker 2: champagne drinking, horse riding, banker marrying ladies of Great Britain.
Speaker 2: Here's how it worked. You donated three thousand pounds to
Speaker 2: buy a heart and join the scheme at the bottom
Speaker 2: of a pyramid that's about six thousand dollars in today's money.
Speaker 2: Your money would go to the person at the top,
Speaker 2: called the receiver. They'd leave the pyramid. The two people
Speaker 2: on the next level down would be promoted to the
Speaker 2: top roll of receiver. In fact, the pyramid would then
Speaker 2: split into two, so that both of them would be
Speaker 2: at the top of their own pyramid. Everyone would move
Speaker 2: up a level, and everyone on the lowest layer, including you,
Speaker 2: would recruit two people to buy a heart and fill
Speaker 2: in the newly vacant layer beneath you. Six weeks later,
Speaker 2: you would be a receiver and would get twenty four
Speaker 2: thousand pounds, the equivalent of fifty thousand dollars today, and
Speaker 2: a huge return. No matter how you measured it, the
Speaker 2: money just grew like a snowball rolling downhill until it
Speaker 2: became an avalanche. If you're not halfway through your second
Speaker 2: bottle of lunchtime champagne, you can probably spot the problem here.
Speaker 2: This is transparently a pyramid scheme, and pyramid schemes don't
Speaker 2: make money, they just move it around. If someone's going
Speaker 2: to make twenty four thousand pounds, then that money must
Speaker 2: come from other members, So eight other people must lose
Speaker 2: their investment of three thousand pounds. It's really that simple.
Speaker 2: In order to persuade people to join a pyramid scheme,
Speaker 2: there's often some sort of story designed to obscure this
Speaker 2: implacable arithmetic. This one about buying a heart was marketed
Speaker 2: as feminism. The whole project was called Women Empowering Women.
Speaker 2: Men weren't allowed.
Speaker 4: Men are more corruptible, they can't be trusted.
Speaker 2: As Tatiana explained. She also added that she had spent
Speaker 2: her first wind fall on a little intimate plastic surgery
Speaker 2: that she preferred not to discuss with her husband. Julia
Speaker 2: and Sophie were tempted, as Julia later recalled in an
Speaker 2: article for the Mail on Sunday newspaper. Then Tatiana whispered
Speaker 2: that apparently the supermodel Claudia Schieffer had been spotted at
Speaker 2: a women empowering women party at a mansion in central London.
Speaker 2: That was the clincher. Sign me up, said Julia. Things
Speaker 2: moved quickly. The next day, Julia received a phone call
Speaker 2: from a lady called Elfie, who was collecting her boy
Speaker 2: Archie from an exclusive London school.
Speaker 4: Darling, I must be quick, but I couldn't wait to
Speaker 4: tell you the news. You've already moved up a line.
Speaker 4: You're one step closer to become a receiver.
Speaker 2: Wonderful, replied Julia.
Speaker 4: So now you must send me three thousand pounds.
Speaker 2: I'm Tim Harford and you're listening to Cautionary Tales live
Speaker 2: at the Bristol Festival of Economics. This is a cautionary
Speaker 2: tale about investment scams and about the way that they
Speaker 2: snowball out of control, often flattening not only the victims
Speaker 2: but the fraudster too. Some of those fraudsters are anonymous figures. Julia, Sophie,
Speaker 2: and even Tatiana had no idea who set up women
Speaker 2: empowering women, But some of them are not. Few people
Speaker 2: are less anonymous than Samuel Israel, the third. Let's call
Speaker 2: him Sam Israel for short. Sam came from a wealthy
Speaker 2: family of commodity traders in New Orleans, but was determined
Speaker 2: to make his own way in life. He started at
Speaker 2: the bottom in nineteen seventy eight, dropping out of college
Speaker 2: to run errands for one of Wall Street's most famous
Speaker 2: share traders. Sometimes those errands merely meant fetching pizza. Sometimes
Speaker 2: they involved going to a particular room in the Pierre
Speaker 2: Hotel on the Upper east Side and speaking a code
Speaker 2: phrase to a Swiss gentleman.
Speaker 1: The weather is nice for this time of year, yes,
Speaker 1: but today it looks like rain.
Speaker 2: The Swiss man gave Sam a satchel. Sam didn't look
Speaker 2: inside it until his boss showed him that it was
Speaker 2: filled with one hundred dollar bills, well over one hundred
Speaker 2: thousand dollars at a time when one hundred thousand dollars
Speaker 2: was real money. Odd things like this tended to happen
Speaker 2: from time to time, and through it all Sam Israel
Speaker 2: watched and learned and kept his mouth shut, and he
Speaker 2: began to thrive on Wall Street. Sam married a childhood sweetheart,
Speaker 2: an ice girl called Janie. She was sensible, training to
Speaker 2: be an accountant. It wasn't the ideal match.
Speaker 1: I hid everything from Janis.
Speaker 2: Sam Israel confessed to the Rolling Stone journalist Gee Lawson.
Speaker 5: I've been hiding things from her since we were kids.
Speaker 5: She was the responsible worker. I was the fuck up.
Speaker 5: I smoked weed and snorted coke. I couldn't talk to
Speaker 5: her about what was really going on because I couldn't
Speaker 5: confide in her.
Speaker 2: And what was really going on? That depends on when
Speaker 2: you asked the question. In nineteen seventy eight, Sam was
Speaker 2: quietly being a courier of satchels full one hundred dollar bills.
Speaker 2: The night before he married Janis, Sam was having a
Speaker 2: threesome with two expensive call girls, paid for by his
Speaker 2: Wall Street trader boss as a wedding gift. In nineteen
Speaker 2: eighty seven, Sam was making a small fortune by fortuitously
Speaker 2: betting that the market would fall just before the largest
Speaker 2: one day crash in Wall Street history. Sam always swore
Speaker 2: he could have made more if the Federal Reserve hadn't
Speaker 2: swooped in printing money to prop up the market. In
Speaker 2: the early nineteen nineties, Sam was winning and losing huge
Speaker 2: sums several times over by trading on insider tips, some
Speaker 2: good and some bad. Sam couldn't talk to Janis about
Speaker 2: any of this, of course, But what Sam really couldn't
Speaker 2: talk to Janis about was by you capital tit was well,
Speaker 2: it was a con. But let's come back to that.
Speaker 2: Let's talk about a simpler con first. An early example,
Speaker 2: if you like, of women empowering women. In eighteen seventy eight,
Speaker 2: refined ladies of Boston, Massachusetts were intrigued to hear of
Speaker 2: a wonderful investment opportunity. A new bank, founded by women
Speaker 2: for women and called the Ladies Deposit Company, paid interest
Speaker 2: of eight percent. Eight percent a year would be a
Speaker 2: solid enough offering. The Lady's Deposit Company, however, paid eight
Speaker 2: percent every month, deposit one hundred dollars, and by the
Speaker 2: end of the year you'd have earned ninety six dollars,
Speaker 2: nearly doubling your original investment. There were no rumors of
Speaker 2: sus supermodels back in eighteen seventy eight, but the gossip
Speaker 2: suggested something even more reassuring. The Ladies Deposit Company was
Speaker 2: said to be backed by a Quaker charity doing many
Speaker 2: unspecified good works. Only unmarried women need apply. Such unprotected
Speaker 2: women who lacked the security of a husband's income were
Speaker 2: in a precarious position. Either they were poor and trying
Speaker 2: to earn a wage in a world where women were
Speaker 2: barred from well paid jobs, or they were of a
Speaker 2: social background where they were expected to live off an inheritance.
Speaker 2: The investment return on that inheritance, then was a matter
Speaker 2: of huge importance. An eight percent a month too good
Speaker 2: to miss, or alternatively too good to be true. The
Speaker 2: Ladies Deposit Company was not founded by Quakers, but by
Speaker 2: a stage psychic and professional fortune teller named as Sarah Howe.
Speaker 2: The company had some similarities with a pyramid scheme like
Speaker 2: the Hearts of Women Empowering Women, but also some differences.
Speaker 2: The grim arithmetic of the scheme was concealed. Money poured
Speaker 2: into the Lady's Deposit Company, money poured out, and the
Speaker 2: mechanics of how it all worked were conveniently obscure. One
Speaker 2: intrepid reporter even disguised himself as a woman. One can
Speaker 2: only presume that no female journalists were available in order
Speaker 2: to gain entry to the Deposit Company's headquarters, but he
Speaker 2: didn't learn much.
Speaker 4: We never disclose the methods by which we do business, was.
Speaker 2: All that the company's employees would say. Sarah Howe had
Speaker 2: established what we'd now call a Ponzi scheme, named after
Speaker 2: Charles Ponzi, a flamboyant Bostonian whose own cover story was
Speaker 2: something to do with international postage coupons. Sarah Howe had
Speaker 2: the same basic idea in the same city nearly fifty
Speaker 2: years earlier, but women never seem to get the credit
Speaker 2: for inventing anything, even investment fraud. The local press soon
Speaker 2: concluded that the Ladies Deposit Company was an obvious scam.
Speaker 2: The Boston Daily Advertiser published an illustrated explainer, some articles
Speaker 2: highlighting the stage psychic How's rather questionable qualifications, and a
Speaker 2: prediction that the whole thing would collapse in short order.
Speaker 2: In the face of this negative publicity and some twitchy depositors,
Speaker 2: Sarah Howe decided that the best way forward was bluff.
Speaker 2: She announced that anyone who wanted their money back with
Speaker 2: interest in full could have it immediately. She hoped that
Speaker 2: the ladies of Boston would be so reassured by this
Speaker 2: offer that they wouldn't take it up. Alas, the ladies
Speaker 2: of Boston were not reassured at all. They asked for
Speaker 2: their money back, and when Sarah Howe didn't have it,
Speaker 2: she went to jail. The Lady's Deposit Company is a
Speaker 2: wonderful illustration of what Dan Davies in his book Lying
Speaker 2: for Money, calls the snowball effect. These scams need to
Speaker 2: suck in an ever growing number of dupes to keep going,
Speaker 2: and eventually that snowball of money rolling downhill, becoming bigger
Speaker 2: and bigger, simply falls apart. It's too big. Remember, Sarah
Speaker 2: Howe was offering to almost double your money in a
Speaker 2: year if you invested with her, So let's watch the
Speaker 2: snowball from a safe distance. Imagine that Sarah receives an
Speaker 2: investment of one hundred dollars from a little old lady
Speaker 2: and steals it. By the end of the year, that
Speaker 2: little old lady expects her one hundred dollars back, on
Speaker 2: top of ninety six dollars in interest. So Sarah finds
Speaker 2: two more investors, steals their money and gives it to
Speaker 2: the little old lady. But by the end of the
Speaker 2: following year, Sarah Howe needs to have given nearly two
Speaker 2: hundred dollars to both of her investors. To do that,
Speaker 2: she needs four new investors, who shouldn't be hard to
Speaker 2: find if they think they're going to double their money.
Speaker 2: When the four new investors want a total of eight
Speaker 2: hundred dollars back, she just needs to find eight new
Speaker 2: investors to join the Ladies Deposit Company. Now you can
Speaker 2: see the trap here. Eventually there will be no more
Speaker 2: lady depositors for the Lady's Deposit Company. But what's perhaps
Speaker 2: less immediately obvious is that in this little story, Sarah
Speaker 2: Howe will soon owe sixteen hundred dollars to eight investors,
Speaker 2: and yet she only ever stole one hundred dollars for herself.
Speaker 2: The growing snowball of fraud is huge, and it needs
Speaker 2: to keep getting huger, the profit for the fraudster as
Speaker 2: well as every tiny No wonder that so many fraudsters
Speaker 2: eventually get caught, And no wonder perhaps that when they
Speaker 2: do get caught, so many of them weep with relief.
Speaker 2: There will be tears of plenty, but not much relief.
Speaker 2: After the break in the summer of two thousand and three,
Speaker 2: Julia started to try to recruit investors to buy hearts
Speaker 2: for women empowering women. Julia had been signed up by Tatiana,
Speaker 2: the banker's wife, over champagne at the Spa. She'd sent
Speaker 2: three thousand pounds to Elfie, the mother of Darling Archie
Speaker 2: from the Fancy School, but Julia's own recruitment efforts were
Speaker 2: going nowhere. Her rich friends sneered at her that had
Speaker 2: already been approached so many times to invest in a
Speaker 2: heart that the whole affair had become a boring joke.
Speaker 2: Horror friends were less likely to have heard about the scheme,
Speaker 2: but they were also less likely to have the money
Speaker 2: to invest. I mentioned that, as a matter of simple arithmetic,
Speaker 2: for everyone who makes twenty four thousand pounds in a
Speaker 2: pyramid scheme, there must be eight people who lose three
Speaker 2: thousand pounds. But how can it be that so many
Speaker 2: people lose out? Well, that's simple too. Every time a
Speaker 2: new group of recruits is brought in, the entire operation
Speaker 2: has to double in size. Every recruit finds two more recruits,
Speaker 2: and every pyramid becomes two pyramids. The rolling snowball becomes
Speaker 2: a vast snow boulder, then collapses into a destructive avalanche
Speaker 2: of disappointment and loss. Pyramid schemes fail because they run
Speaker 2: out of recruits just after becoming huge, when a vast
Speaker 2: number of people have recently joined but not yet cashed out.
Speaker 2: Julia was one of those people. In growing desperation, Julia
Speaker 2: went to a recruitment party in the hope of recruiting
Speaker 2: new investors. She'd been told tales about parties in central
Speaker 2: London mansions, champagne being quaffed with supermodels as suitcases of
Speaker 2: cash were handed to people who'd reached the top of
Speaker 2: the pyramid. That this recruitment party was in a hairdressers
Speaker 2: instead of champagne. On ice. There was warm white wine
Speaker 2: and a growing sense of irritation that Julia's failure to
Speaker 2: recruit was letting down everyone above her in the pyramid.
Speaker 2: There was, of course, no sign of Claudia Schieffer. The
Speaker 2: brilliance of women empowering women is that it seems to
Speaker 2: have been largely self organizing. Many scams, in contrast, require
Speaker 2: a lot of hard work. Just ask Sam Israel. He
Speaker 2: set up his ill fated hedge fund by you Capital
Speaker 2: in nineteen ninety six, assisted by an accountant named Dan Marino,
Speaker 2: who lived with his mother and dreamed of greatness. Apparently,
Speaker 2: Sam actually intended to run an honest hedge fund, or
Speaker 2: if not quite honest, a hedge fund that would make
Speaker 2: money for investors. His business plan, by You Capital, would
Speaker 2: use a new computer algorithm he had developed, plus the
Speaker 2: skills of a Wantz Great trader whom Sam had hired
Speaker 2: after he had fallen on hard times, plus a few
Speaker 2: insider tips like in the old days when he'd collect
Speaker 2: bags of cash from the Pierre Hotel. That should do
Speaker 2: the trick, thought Sam.
Speaker 1: But it didn't.
Speaker 2: The Wantz Great trader was washed up, He made a
Speaker 2: lot of bad calls, the computer algorithm seemed to misfire
Speaker 2: as often as it worked, and Sam didn't have the
Speaker 2: same insider access that.
Speaker 1: He used to.
Speaker 2: After a couple of lackluster years in which Sam loudly
Speaker 2: told his few investors that the funds results were great,
Speaker 2: he pondered his options. The results were not in fact great,
Speaker 2: and if he simply published the firm's accounts showing a loss,
Speaker 2: the investors would yell at him for all his empty boasts,
Speaker 2: and Bayou Capital would collapse. Or alternatively, Sam and his colleagues,
Speaker 2: the washed up trader and the accountant who lived with
Speaker 2: his mum could lie, could publish audited accounts which claimed
Speaker 2: Stella results. Like Sarah Howe, they'd be offering fantastic returns.
Speaker 2: Unlike Sarah Howe, who would simply steal money from new
Speaker 2: depositors and pay it out as interest, they'd need to
Speaker 2: show some kind of evidence that they were making profitable investments.
Speaker 2: To do that, they'd need a fraudulent auditor. No problem,
Speaker 2: Dan Marino simply set up his own audit firm, marking
Speaker 2: his own homework. Nobody ever checked that the auditor who
Speaker 2: was verifying that Dan Marino was telling the truth was
Speaker 2: a Dan Marino. It probably didn't hurt that if anyone
Speaker 2: ever tried to search for Dan Marino on the still
Speaker 2: young Worldwide Web, they were sure to get Dan Marino,
Speaker 2: the unimaginably famous Miami Dolphins quarterback, rather than Dan Marino
Speaker 2: the crooked accountant. For a while, the plan was that
Speaker 2: Sam would go on a profitable streak and actually make
Speaker 2: the profits that Dan Marino's fake accounts were claiming. But
Speaker 2: the snowball was starting to grow. The more profit they
Speaker 2: said they were making, the larger the fictional pot of
Speaker 2: money was growing, and the harder it was for Sam
Speaker 2: and his partner to catch up to their own lies.
Speaker 2: It didn't help that Sam kept claiming to outperform the market.
Speaker 2: Dan Marino was losing his mind at the fact that
Speaker 2: Sam couldn't control himself.
Speaker 5: When they had a good month and made money, they
Speaker 5: used that as the performance number.
Speaker 2: Complained Dan to the journalist Gee Lawson.
Speaker 1: When they had a bad month, they used a made
Speaker 1: up number.
Speaker 2: That won't work. If you let the fraud snowball grow
Speaker 2: too big, you'll never get it under control. Sam Israel
Speaker 2: would never be able to catch up to his own
Speaker 2: lies because he could never bring himself to pretend he'd
Speaker 2: had a bad quarter when it had a good one.
Speaker 1: We went with Grace fan RULs with integrity.
Speaker 2: Boasted Sam to his investors. Dan Marino knew the awful truth.
Speaker 5: I stopped tracking the published numbers against the real numbers.
Speaker 2: Said Marino. The snowball was already too big.
Speaker 1: Oh, it made me sick to my stomach.
Speaker 2: Four years after, the Ladies Deposit Company was exposed by
Speaker 2: the Boston Daily Advertiser and collapsed, and Miss Sarah Howe
Speaker 2: was sent to prison. Refined women of Boston, Massachusetts were
Speaker 2: intrigued to hear of a wonderful investment opportunity. A new bank,
Speaker 2: founded for women by women and called the Boston Women's Bank,
Speaker 2: paid interest of seven percent per month. Too good to miss,
Speaker 2: or alternatively.
Speaker 1: Too good to be true.
Speaker 2: After a couple of years, the Boston Daily Advertiser discovered
Speaker 2: and published the truth. The manager of the Boston Women's
Speaker 2: Bank was not missus J. C Ewle, as advertised, but
Speaker 2: an ex convict by the name of Sarah Howe. Sarah
Speaker 2: Howe had learned one lesson this time, she skipped town
Speaker 2: and moved to Chicago. In due course, the refined ladies
Speaker 2: of Chicago, we're intrigued to hear of a wonderful investment
Speaker 2: opportunity the Lady's Provident Aid Society was offering interest of
Speaker 2: Oh never mind. The police caught up with Miss Sarah Howe,
Speaker 2: shut down the Lady's Provident Aid Society, and soon enough
Speaker 2: Miss Howe was back in prison. Worth it surely not
Speaker 2: in character, most definitely, Sometimes when the snowball starts to roll,
Speaker 2: the fraudster just can't quit. Sam Israel seemed to have
Speaker 2: it all, a loving wife and children, a luxurious home,
Speaker 2: and at least on paper, a fortune to his name.
Speaker 2: But appearances can be deceptive. Sam was a mess. He
Speaker 2: was taking too much cocaine and drinking far too much booze,
Speaker 2: and like so many people, he had become addicted to
Speaker 2: painkillers after a back injury. All the while, the fraud
Speaker 2: snowball was growing. But Sam and Dan had one advantage,
Speaker 2: which is that a fraudulent hedge fund doesn't have a
Speaker 2: cell by date. That's different from the other scams we've
Speaker 2: heard about. Tatiana was promising Julia that women empowering women
Speaker 2: would multiply her money in just six weeks. The Ladies
Speaker 2: Deposit Company promised to almost double investors' money.
Speaker 1: After a year.
Speaker 2: But by you Capital was different because hedge fund investors
Speaker 2: didn't tend to withdraw their money if things seemed to
Speaker 2: be going well. Instead, they sat back and watched the
Speaker 2: snowball grow. But the more by you capital snowball grew,
Speaker 2: the harder it would ever be for Sam Israel to
Speaker 2: trade his way out of the lie. One September Friday,
Speaker 2: his computer algorithm suggested a big bet on shares going
Speaker 2: up in the next week. Sam made that bet. The
Speaker 2: following Tuesday morning, two airliners swept out of the cloudless
Speaker 2: sky above Manhattan and crashed into the World Trade Center.
Speaker 2: The world reeled with the implications of the atrocity, but
Speaker 2: for Sam Israel and Dan Marino, the only thing that
Speaker 2: mattered was how it changed their own twisted financial world.
Speaker 2: Sam was aghast that his bet had spectacularly backfired, while
Speaker 2: Dan Marino spotted an opportunity close the fund, said Dan
Speaker 2: Marino and ten investors. He lost most of their money
Speaker 2: in the aftermath of nine to eleven, and give the
Speaker 2: dregs back. Everyone will yell, but nobody will suspect anything,
Speaker 2: and neither you nor I.
Speaker 1: Will go to jail. Please speG Marino.
Speaker 2: But Sam Israel wouldn't do it. He knew that if
Speaker 2: by you capital folded, he might escape jail, but it'd
Speaker 2: still lose his fancy home. He should have listened to Marino,
Speaker 2: because within two years he was going to lose his
Speaker 2: home anyway. Cautionary tales will be back in a moment.
Speaker 2: In two thousand and three, Sam Israel was at home
Speaker 2: leaning over a line of white powder with a rolled
Speaker 2: twenty dollar bill up his nose. When his wife, Janice
Speaker 2: walked in. She became upset. He became outraged. How dare
Speaker 2: she suggests he was taking cocaine. She persuaded him to
Speaker 2: take urine tests to ensure he stayed off the drugs,
Speaker 2: until one evening he angrily unzipped his pants and went
Speaker 2: all over the bathroom floor, bellowing, you want urine. At
Speaker 2: Thanksgiving that year, he passed out over the turkey. By
Speaker 2: Christmas two thousand and three, Janice had thrown him out
Speaker 2: of their house and secured a protective order. Sam rented
Speaker 2: the most tasteless, ostentatious bachelor pad he could find, a
Speaker 2: vast Tudor style manner, with outsized chandeliers, marble bathrooms, and
Speaker 2: comically huge beds. Sam paid the monthly rent of twenty
Speaker 2: two thousand dollars to the house's owner, a gentleman by
Speaker 2: the name.
Speaker 1: Of Donald Trump.
Speaker 5: So good, so good, amazing house, huge beds.
Speaker 2: Sam hung around clubs, tipping the bartender to introduce him
Speaker 2: to pretty women. He fitted the Trump mansion with the
Speaker 2: latest trading equipment, seventeen screens, so he could work from home.
Speaker 2: He was still looking for a way to make all
Speaker 2: the money back, but the fraud snowball that Bayou was
Speaker 2: getting bigger and bigger, and Dan Marino had had a
Speaker 2: couple of near misses when investors or regulators had asked
Speaker 2: to see documents that would prove highly incriminating. Marino was
Speaker 2: reduced to sending those incriminating documents to counterparties on a
Speaker 2: Friday evening in the hope that they would be tossed
Speaker 2: into a backlog file and then buried under the Monday
Speaker 2: morning rush. Amazingly, that tactic worked, but it couldn't work forever.
Speaker 2: Dan and Sam were going to jail for sure unless
Speaker 2: sam Israel could find a sure fire scheme to make
Speaker 2: How big was the snowball? Now there were several hundred
Speaker 2: million dollars? Sam Israel was starting to get desperate. There's
Speaker 2: an old saying, you can't cheat an honest man, and
Speaker 2: there's truth in that saying, because the premise of a
Speaker 2: scam is often simply.
Speaker 5: Doing crimes, and if you come and do crimes with me,
Speaker 5: we'll both make money.
Speaker 2: That's a sales pitch to drive away honest folk, but
Speaker 2: it also has some appeal because it provides a logical
Speaker 2: reason why there might be quick money to be made
Speaker 2: for someone who could keep a secret. Sam Israel was
Speaker 2: not an honest man. He'd seen enough cheating on Wall
Speaker 2: Street to know that the game was often fixed, and
Speaker 2: the crazy simplicity of the Bayou fraud, coupled perhaps with
Speaker 2: the fact that Sam was taking a lot of drugs,
Speaker 2: was just starting to make him doubt everything. How many
Speaker 2: other hedge funds were just Ponzi schemes? What else was
Speaker 2: a Ponzi scheme? He had seen the Federal Reserve magic
Speaker 2: money out of thin air after that great crash of
Speaker 2: nineteen eighty seven, when Sam had made so much money
Speaker 2: and could have made more if the FED hadn't stepped in.
Speaker 2: The FED stepped in after nine to eleven too.
Speaker 1: Who exactly was running the world economy? Anyway?
Speaker 2: Sam started to run in strange conspiratorial circles. If you
Speaker 2: want the full story, it's told in incredible cringe making
Speaker 2: detail in Gee Lawson's book Octopus, which describes an astonishing
Speaker 2: cast of characters and an even more astonishing array of
Speaker 2: delusional beliefs. Sam became obsessed with finding the undocted footage
Speaker 2: showing who really killed JFK. He believed he had been
Speaker 2: attacked by an assassin on the streets of Hamburg and
Speaker 2: that had blown the man's brains out in self defense.
Speaker 2: Needless to say, Hamburg's police have no record at all
Speaker 2: of such events. Above all, Sam came to believe in
Speaker 2: a global conspiracy thirteen powerful families who truly rule the world,
Speaker 2: whom he called the bus. It all gets very, very weird.
Speaker 2: Do read the book. It's quite a trip. But for
Speaker 2: our purposes, what we need to know is that Sam
Speaker 2: Israel fell under the spell of a man called Robert
Speaker 2: Booth Nichols, who was claimed to be a top CIA agent,
Speaker 2: whose bare hands were said to be deadly weapons, and
Speaker 2: who was undoubtedly a confidence trickster. Like an aging, chain
Speaker 2: smoking James Bond. He swaggered around London City with tight
Speaker 2: controls on firearms, with a revolver in a shoulder holster.
Speaker 2: Sam believed that Nichols had access to a special CIA
Speaker 2: program which monitored every bank transaction on the planet, an
Speaker 2: insider trader's dream, and he flew out to London to
Speaker 2: beg Nichols to give it to him. He'd do anything,
Speaker 2: he said, Do you have one hundred million dollars in cash?
Speaker 1: Said Nichols, I've got one hundred million in cash. Do
Speaker 1: you have one hundred and fifty million? Yes?
Speaker 2: Forget the special CIA program which monitors bank accounts, said Nichols,
Speaker 2: we can make some real money together if we can
Speaker 2: access a special secret market operated by the thirteen families
Speaker 2: who together secretly rule the world, you know, the octopus.
Speaker 2: And just as Julia had said to Tatiana at the
Speaker 2: Riverside spa, sam Israel said to Nichols, sign me up,
Speaker 2: but not for three thousand pounds, for more than one
Speaker 2: hundred million dollars. With Nichols by his side whispering into
Speaker 2: his ear, sam Israel joined an absolutely bizarre world full
Speaker 2: of conspiracy theorist fraudstans, all claiming to believe in the
Speaker 2: existence of a secret market that can multiply your money
Speaker 2: tenfold overnight, all secretly frustrated that they personally have never
Speaker 2: been able to get access to that entirely fictional market,
Speaker 2: and all trying to rip each other off. At one stage,
Speaker 2: Nichols got sam Israel to give him ten million dollars
Speaker 2: in cash on the basis of a story about a
Speaker 2: stash of treasure stolen and hidden by a Japanese general
Speaker 2: in the Second World War and protected by poison gas
Speaker 2: booby traps. Then another con man persuaded Nichols to give
Speaker 2: him a million dollars to help the finance an expedition
Speaker 2: to find the exact same treasure.
Speaker 3: Can we have a recap?
Speaker 4: Of course, sam Israel was controlling one hundred million dollars
Speaker 4: of Buyo Capital's money based on a fraud. He then
Speaker 4: invested that money in Robert Nichols's fraud. Robert Nichols then
Speaker 4: invested that money in yet another fraud.
Speaker 3: Exactly, thank you.
Speaker 2: Reassuringly, though so, it's quite hard to give one hundred
Speaker 2: million dollars to a fraudster to invest in a special
Speaker 2: market protected by assassins and controlled by the thirteen families
Speaker 2: who really rule the world. They were hard checks and
Speaker 2: balances in place. Several times Sam Israel tried to invest
Speaker 2: the one hundred million in one scam or another, and
Speaker 2: a banker or a stockbroker simply refused to process the
Speaker 2: transaction until there was proof that it was genuine, and
Speaker 2: there never was. In the end, the Bayou Capital ponzi
Speaker 2: scheme was exposed. But it wasn't because Sam Israel's investors
Speaker 2: believed that he had lost his mind or even that
Speaker 2: he had lost their money. They just believed that he'd
Speaker 2: lost his touch. They noticed that Sam wasn't spending much
Speaker 2: time at work. Little did they know that this was
Speaker 2: because he was in Europe being taught how to kill
Speaker 2: a person with his bare hands by a man he
Speaker 2: believed was an elite CIA operative. But i u's investors
Speaker 2: asked for their money back, which would have been fine,
Speaker 2: except that most of that money had only ever existed
Speaker 2: in Dan Marino's fraudulent accounts. The snowball had grown enormous.
Speaker 2: The fraud was at last exposed. Sam Israel was given
Speaker 2: a sentence of twenty years, and, as an act of
Speaker 2: leniency that seems to be common for white collar criminals,
Speaker 2: eight weeks of freedom to get his affairs in order
Speaker 2: before reporting to jail. Listener, he did not report to jail.
Speaker 2: Police found his car parked on the Bear Mountain Bridge
Speaker 2: high over the Hudson River in upstate New York. He
Speaker 2: left a suicide note and smudged in the dust on
Speaker 2: his car's hood were the words suicide is paid. But
Speaker 2: sam Israel's suicide note was as fictional as his investment returns.
Speaker 2: The authorities tracked him down, alive and well, and a
Speaker 2: campsite in Massachusetts. They promptly sent him to jail by
Speaker 2: faking his own suicide. He got just three more weeks
Speaker 2: of freedom, and of course landed his girlfriend in trouble
Speaker 2: for helping him out. Worth it surely not in character.
Speaker 2: Most definitely, Julia's investment troubles, thankfully, were rather more mundane.
Speaker 2: Having invested three thousand pounds in the women Empowering Women pyramid,
Speaker 2: she found herself fielding ever more strident calls from people
Speaker 2: further up the pyramid, berating her for not finding more recruits. Tricksy,
Speaker 2: Pucky and Buttons all.
Speaker 1: Had their say.
Speaker 2: It was, says Julia, like being bullied by a bunch
Speaker 2: of fairies. But the curious thing about women empowering women
Speaker 2: nobody knows who started it. We think that it's hard
Speaker 2: to be sure that most Ponzi schemes fail. When they do,
Speaker 2: it's because of the relentless logic of the snowball. Sarah
Speaker 2: Howe went to prison twice. Sam Israel faked his own
Speaker 2: suicide in a desperate attempt to escape. But the unknown
Speaker 2: woman who.
Speaker 3: Created the whole spiel about hearts.
Speaker 2: And empowering other women, she's the exception to the rule
Speaker 2: that fraud doesn't pay. She pushed a few snowballs down
Speaker 2: a steep snowy hill, decided that she'd made enough money,
Speaker 2: and before the casualties began to mount down below, she
Speaker 2: walked away. But those casualties did exist, and Julia met them.
Speaker 2: The grumpy fairies could probably afford to lose the money,
Speaker 2: but it was less funny to receive voicemails from distraught
Speaker 2: Filipino cleaners who'd bought hearts and now feared they'd lose
Speaker 2: three thousand pounds They definitely could not afford to squander,
Speaker 2: having run out of spa going pony riding ladies who
Speaker 2: lunch the women empowering women snowball had started to flatten
Speaker 2: much poorer women, women who would struggle to pick themselves
Speaker 2: up after the snowball had rolled on. Key sources for
Speaker 2: this episode include Julius Stephenson's article Broken Hearts Club, Daniel
Speaker 2: Davis's book Lying for Money, and for the astonishing story
Speaker 2: of Sam Israel Gee Larson's book Octopus. This live edition
Speaker 2: of Cautionary Tales was written by me Tim Harford with
Speaker 2: Andrew Wright. Tonight you heard the voice talents of Sarah
Speaker 2: Job and Stuart McLachlin. The original music is the work
Speaker 2: of Pascal Wise. Our b SL interpreter was Katherine Motson.
Speaker 2: The show was produced by Alice.
Speaker 3: Fines, Marilyn Rusk, and Ryan Dilling.
Speaker 2: Sarah Nick said it took the script of sound engineer
Speaker 2: was Andrew Bayless.
Speaker 3: The thanks to Zoe Seedman, Miilm and the team at
Speaker 3: the British Best Level of Economics. Puchal Tails is a
Speaker 3: production of Pushkin Industries.
Speaker 2: If you like the show, please remember to rate, share
Speaker 2: and review to want to hear the show ad.
Speaker 3: Three sign up the Pushkin past on the show page
Speaker 3: of Apple Podcasts of Pushkin FM, Slash Truce.
Speaker 1: Thank you that was fun.
Speaker 6: Thank you so much, guys.
Speaker 2: The Trump impression was okay?
Speaker 6: Was that?
Speaker 2: If you've enjoyed this special live episode about pyramid and
Speaker 2: Ponzi schemes, don't go away. I sat down with one
Speaker 2: of the smartest people I know in financial journalism, my
Speaker 2: Financial Times colleague Rob Armstrong, one of the hosts of
Speaker 2: the Unheedged podcast, and we asked, what if everything is
Speaker 2: a Ponzi scheme. We'll be back with that in a moment.
Speaker 2: We're back and I've been talking to my Financial Times
Speaker 2: colleague Rob Armstrong about all things Ponzie for his podcast Unheedged.
Speaker 1: Pushkin.
Speaker 6: I love a good Ponzi scheme from Charles Ponzi himself
Speaker 6: to Bernie Madoff. I suppose admire the wicked intelligence of
Speaker 6: the puppet masters, and I fascinated by the persistent credulity
Speaker 6: of the people who fall for Ponzi schemes. Here today
Speaker 6: to discuss Ponzi's and pyramids and everything in between with
Speaker 6: me is Tim Harford, my fellow FT columnist and master
Speaker 6: of his own podcast, Cautionary Tales. Tim, how are you?
Speaker 2: I'm great, Robin pleasure to finally get on Unhedged. I'm
Speaker 2: a loyal listener, although I always feel terribly badly dressed
Speaker 2: whenever I whenever I even think of you roll whenever
Speaker 2: I read one of your wonderful columns about satoial elegance.
Speaker 2: The subtext is this column is written at you, Harford,
Speaker 2: you slob, and so it just feels sloody guilty about
Speaker 2: the whole thing.
Speaker 6: But yeah, you'll be glad to know I'm sitting in
Speaker 6: my bedroom in a tea shirt and a pair of jeans.
Speaker 6: So I hope that puts you at ease.
Speaker 2: Okay, Yeah, I feel better now, Thank you, Rob.
Speaker 6: I was fascinated to listen to the most recent episode
Speaker 6: of Cautionary Tales. It gave a lot of terrific examples,
Speaker 6: starting with the immortal Sarah Howe of Ponzy Schemers. Yeah,
Speaker 6: tell us what that Ponzy scheme fundamentally is and what
Speaker 6: you discovered about them doing that episode.
Speaker 2: Yeah, we had lots of fun Cautioning Tales as a
Speaker 2: podcast about things going wrong and what we can learn.
Speaker 2: And this particular episode is about Ponzy schemes and pyramid schemes,
Speaker 2: which are obviously always a terrible idea, but they have
Speaker 2: a lot of lessons for us and Sarah how Sarah
Speaker 2: Howe invented the Ponzi scheme, and can you believe that
Speaker 2: it isn't called a house scheme. It's outrageous, outrageous for
Speaker 2: another woman forgotten by history, unfairly forgotten by history, all
Speaker 2: the credit taken by Ponsey. Yeah, she was even operating
Speaker 2: in the same city, in Boston, Massachusetts. So Sarah Howe
Speaker 2: set up the Ladies Deposit Company and basically offered to
Speaker 2: pay a ladies eight percent a month, which is basically
Speaker 2: doubling your money in a year. And of course there's
Speaker 2: no way of actually making that return. And so, as
Speaker 2: with all Ponzi schemes, people investing in this opportunity, if
Speaker 2: they decide they want to withdraw their money, then Sarah
Speaker 2: how just paid them out of incoming money from other
Speaker 2: people who were eager to invest. And that's the fundamental
Speaker 2: of a Ponzi scheme. Early investors who are trying to
Speaker 2: cash out get paid not out of the productive return
Speaker 2: from the productive activity, because there is no productive activity.
Speaker 2: They get paid because other people are also pouring money in.
Speaker 2: And that's the basic genius of the idea. And Cautioning
Speaker 2: Tales talks about Sarah how who did this three times,
Speaker 2: talks about pyramid schemes, and also talks about this insane
Speaker 2: Ponzi scheme run by a gentleman called Sam Israel, which
Speaker 2: is described in Gee Lawson's book The Octopus, which is
Speaker 2: absolutely bonkers because it just goes utterly down a whirlpool
Speaker 2: of conspiracy, theorism and so on. So it's great fun.
Speaker 6: I want listeners to know that this is not a
Speaker 6: parochial phenomena of my home city Boston. I have a
Speaker 6: good friend and this connection nicely actually to the Sarah
Speaker 6: Howe angle. I have a good friend who about ten
Speaker 6: years ago in Brooklyn was she's quite an entrepreneurial person,
Speaker 6: and was invited by another quite entrepreneurial person to a
Speaker 6: meeting of other women and they were going to talk
Speaker 6: about investment opportunity and so forth. And as it turned out,
Speaker 6: what this meeting of ten or twelve women was was,
Speaker 6: you know, I have this project that I'm working on.
Speaker 6: I need seed money for this endeavor. And you know,
Speaker 6: each of you are going to contribute x amount to
Speaker 6: my endeavor and then in the next round, each of
Speaker 6: you will become a receiver of funds from other people
Speaker 6: in the you know, Ladies Empowerment Club of Brooklyn or whatever.
Speaker 6: And my friend, who has her head screwed quite tightly
Speaker 6: onto her shoulders, looked around at these well meaning, kind
Speaker 6: of semi bohemian, semi business class Brooklyn ladies and said,
Speaker 6: you're all going to jail if you do this. This
Speaker 6: is a Ponzi scheme. And now looked at her a
Speaker 6: gas like they they had no idea that they were
Speaker 6: engaged in something untoward or possibly illegal.
Speaker 1: Yeah.
Speaker 2: Part of the issue is that it is not always
Speaker 2: straightforward to figure out whether something is a Ponzi scheme
Speaker 2: or not, because superficially, I mean, there's a lot of
Speaker 2: a lot of stuff in the capitalist economy that involves, well,
Speaker 2: you invest some capital and you take a risk, and
Speaker 2: if things go well, you get paid back ten x
Speaker 2: in the phrase that everyone likes to.
Speaker 6: Use, exactly right, And this was the question listening to
Speaker 6: your episode I most wanted to put to you. How
Speaker 6: is a market in its bubble phase? Not exactly like
Speaker 6: a Ponzi scheme snowballing in size?
Speaker 2: I love it. So it's like a decentralized Ponzi scheme, right.
Speaker 6: It's a It's a naturally occurring decentralized organic Ponzi scheme
Speaker 6: where you know something the magnificent seven tech stocks start
Speaker 6: to go bananas and run than a central schemer, a
Speaker 6: Ponzi or a how figure. We all do our little
Speaker 6: part journalists like you and I Tim. We hype things
Speaker 6: up by constantly discussing one way or the other. The
Speaker 6: different stocks. Brokers have their role to play. Investor chat
Speaker 6: boards do the job, and so we all kind of
Speaker 6: ponzi each other until we're out of the next person's
Speaker 6: draw into the market bubble, at which point the bubble
Speaker 6: collapses in an exact reversal of the social structure that
Speaker 6: built it.
Speaker 2: So I love this idea. So let's use twenty twenty
Speaker 2: hind sight. Let's go back and let's think about Amazon
Speaker 2: twenty five years ago. And I think a little bit
Speaker 2: of hindsight cliphies things. So what distinguishes Amazon from a
Speaker 2: Ponzi scheme? Because if you think about it, this is
Speaker 2: an organization which in the nineteen nineties, in the early
Speaker 2: two thousands was not making money, losing a lot of money, yes,
Speaker 2: but it's raising money from investors. So investors are putting
Speaker 2: money in and if they wanted to get their money
Speaker 2: out again, they could no problem. How do they get paid? Well,
Speaker 2: because other investors are putting money in, so there's a
Speaker 2: way to get paid, and more and more money gets
Speaker 2: poured into this thing. And the reason it's not a
Speaker 2: Ponzi scheme, well, there's two things. One is there's no
Speaker 2: fraud because Amazon was perfectly honest about the accounts and
Speaker 2: perfully honest that it was losing money, and so there's
Speaker 2: no deception, there's no fraud. So that's one reason it's
Speaker 2: not a Ponzi scheme. The second reason it's not a
Speaker 2: Ponzi scheme is in the end it all comes good,
Speaker 2: all of that investment does turn into something productive, and
Speaker 2: everybody can get paid back. So the first part of
Speaker 2: that them being honest. Okay, that's important, but the second
Speaker 2: part could not be guaranteed. There's no way of guaranteeing
Speaker 2: that Amazon would ever make money, and indeed, lots of
Speaker 2: those dot com stocks in the nineteen nineties never did,
Speaker 2: and people could make a lot of money as long
Speaker 2: as they got out in time. And that's very ponziish.
Speaker 6: And what is so important about the Amazon example is
Speaker 6: that the kind of faith or if you prefer, kind
Speaker 6: of credulity of Amazon's early investors is exactly what allowed
Speaker 6: Amazon to become such a great business eventually. In other words,
Speaker 6: because the investors didn't insist on being paid out of
Speaker 6: the company's profits, Amazon was able to have this wonderful
Speaker 6: cycle where it just reinvested all of its capital in
Speaker 6: itself and built this incredibly strong, deep moded, indestructible business
Speaker 6: because it wasn't paying money to investors, it was reinvesting
Speaker 6: in itself because the investors had that faith.
Speaker 2: So I think we now have a typology. So if
Speaker 2: you're putting money in and early investors get repaid by
Speaker 2: from later investors and the accounts are a sham. That's
Speaker 2: a Ponzi scheme, and someone's to jail. If the early
Speaker 2: investors get repaid by the late investors putting money in,
Speaker 2: but there's no accounting forward, people are just over exuberant
Speaker 2: and the whole thing all collapses and it's pets dot com,
Speaker 2: then no one goes to jail. That's not a Ponzi scheme.
Speaker 2: That's a bubble. And if in the end it turns
Speaker 2: into a wonderfully productive investments such as Amazon, it's neither
Speaker 2: a Ponzi scheme nor a bubble. It's the genius of capitalism.
Speaker 6: I would argue that the Ponzi scheme and the bubble
Speaker 6: case are actually very close together. They're almost indistinguishably close
Speaker 6: because other than the absence of the central figure pulling
Speaker 6: all the strings, simply because at some point.
Speaker 7: In a bubble, the people involved in it in markets
Speaker 7: actually acknowledge that prices are no longer connected to economic
Speaker 7: fundamentals or the productivity of the companies involved.
Speaker 6: They start using words like momentum right, and they say
Speaker 6: you can't get in front of momentum. The market is
Speaker 6: pushing upwards. If you get out now, you're going to
Speaker 6: regret it. It's fear of missing out, and to me,
Speaker 6: that moment you are living Ponzi logic. In that moment,
Speaker 6: there will be another person who will come along and
Speaker 6: pay more, and I will be out of this game
Speaker 6: and somebody else will be left to hold the bat.
Speaker 2: There's always a story about where the money comes from, right,
Speaker 2: And I suppose the thing about bubbly markets is the
Speaker 2: stories get less and less rigorous. People don't need a
Speaker 2: particularly strong, data driven, compelling story. They're just like any
Speaker 2: story will do. I'm greedy now, and a lot of
Speaker 2: the Ponzi stories so, I mean, Charles Ponzi's original story
Speaker 2: was something to do with the arbitrage of international postal
Speaker 2: reply coupons. Really that's going to work, but you know,
Speaker 2: people believed it.
Speaker 6: There's another question I wanted to ask you, which is
Speaker 6: all of the Ponzi's you talked about in your podcast,
Speaker 6: and indeed all the ones I know of, and I'm
Speaker 6: thinking here, of course, of Bernie Madeoff, the most famous
Speaker 6: of the recent Ponzis. These all turn out very poorly
Speaker 6: for the puppet masters very poorly. So there's a question.
Speaker 6: There's a question about why US suckers fall for them.
Speaker 6: But there's a way in which the puppet master is
Speaker 6: the ultimate sucker. They've somehow believed their own Ponzi scheme
Speaker 6: in some way and they end up in jail or
Speaker 6: disgraced her. Why do they do it?
Speaker 2: I really am not sure why they do it. I
Speaker 2: suppose you could say, well, if the Ponzi schemes do
Speaker 2: somehow work out, if the international postal reply coupon arbitrage works,
Speaker 2: then everyone gets paid back in the end. I guess
Speaker 2: Sam Israel, who ran the Bayu Capital Ponzi scheme, maybe
Speaker 2: he would have gotten away with it if one of
Speaker 2: his attempts to swing for the fences had paid off.
Speaker 2: But ultimately, there's a really interesting idea which I was
Speaker 2: introduced to by the writer Dan Davis, who hate the
Speaker 2: terrific book about fraud called Lying for Money, and he
Speaker 2: basically points out that if you take a typical Ponzi scheme,
Speaker 2: so let's say you're promising to the double people's money
Speaker 2: every year. Okay, so you take one hundred dollars from
Speaker 2: a little old lady and you steal it okay. Now
Speaker 2: in a year, you need to pay her two hundred dollars.
Speaker 2: That's okay. So you find two other little old ladies,
Speaker 2: you steal their money, and you pay the first little
Speaker 2: old lady. Now, of course, in a year's time, you've
Speaker 2: got to do it all again, and each year you're
Speaker 2: owing twice as much money, and you need to defraud
Speaker 2: twice as many little old ladies to pay the previous
Speaker 2: little old ladies. So that's all kind of obvious, and
Speaker 2: it's obvious that that can't keep going forever. That's an
Speaker 2: exponential process. That's all going to come unraveled. But what
Speaker 2: Dan Davis pointed out is what is easy to miss
Speaker 2: is that can balloon into thousands and thousands and thousands
Speaker 2: of dollars based on the original one hundred dollar theft.
Speaker 2: The frauds that only stole one hundred dollars, and somehow
Speaker 2: now they're responsible for maintaining this normalmous fraud, and no wonder,
Speaker 2: so many the men crying with relief when they're finally arrested, like,
Speaker 2: thank goodness, I don't have to do this anymoyss. So
Speaker 2: I don't know why people do this.
Speaker 6: It's the magician's apprentice story. You cast the spell, and
Speaker 6: all of a sudden, it's much bigger than you are.
Speaker 6: And I think there is a general point about fraudsters
Speaker 6: that clearly applies to some Ponzi fraudsters is that they
Speaker 6: do get into it by mistake. You start a fund,
Speaker 6: you're struggling to be a legitimate investor. Something goes slightly wrong,
Speaker 6: and okay, just one month, I'm going to fudge the
Speaker 6: numbers so I can pitch to one more investor, and
Speaker 6: then that takes on a life of its own. You
Speaker 6: get into it incrementally by small steps, and suddenly the
Speaker 6: thing grows by leaps and bounds. And I think there's
Speaker 6: a way to read the Bernie Madoff scheme as having
Speaker 6: some of that character. And you can read Madoff's actions
Speaker 6: late in the scheme as desperately trying to keep the
Speaker 6: thing under control, turning investors away as it because he
Speaker 6: couldn't handle it.
Speaker 2: And it just gets so huge that in the end,
Speaker 2: the gap between the underlying reality of the investments about
Speaker 2: how much money you are really generating in postal reply
Speaker 2: coupon arbitrage and the fiction what you're telling people you
Speaker 2: are making that gap eventually becomes impossible to bridge a
Speaker 2: lot of Ponzi schemes. I think it's ambiguous at the start.
Speaker 2: Did they mean it to be a Ponzi scheme or
Speaker 2: did they actually think they were investment geniuses and that
Speaker 2: everyone would get paid back. There is often an ambiguity
Speaker 2: at the start, but unless you're able to close the
Speaker 2: fraudulent gap early, it becomes so unbridgable you don't have
Speaker 2: a chance.
Speaker 6: Tim, If you give me one hundred dollars, I have
Speaker 6: a brilliant idea. I'm on it. This is a long
Speaker 6: short that portion of the show where we go long
Speaker 6: something we like or short something we don't like. Tim,
Speaker 6: are you long or short something?
Speaker 2: Can I go for a paired trade rather than do Greg? So,
Speaker 2: I'm going to go short Ponzi and long pyramid schemes.
Speaker 2: So we should probably very briefly explain the difference. So
Speaker 2: a Ponzi scheme, someone's running a Ponzi scheme. They're lying
Speaker 2: they're paying out earlier investors using money from later investors.
Speaker 2: Pyramid scheme works in a similar way, but it's it's decentralized.
Speaker 2: You basically get the later investors to send money to
Speaker 2: the early investors. And then the later investors then have
Speaker 2: to recruit even later investors to pay them. And it's
Speaker 2: more transparent. But more to the point, there's nobody actually
Speaker 2: running a thing. And what that means is that the
Speaker 2: person who sets up each individual pyramid scheme can cash
Speaker 2: out and walk away. And in fact, the pyramid scheme
Speaker 2: I describe in the cautionary tail, we have no idea
Speaker 2: who set it up. She seems to have got fairly
Speaker 2: rich and just walked away. And she never went to
Speaker 2: say she.
Speaker 1: Tim.
Speaker 8: You say she, But I think we're talking about you, Tim,
Speaker 8: or are we? I couldn't possibly comment, couldn't possibly come in. Well, okay,
Speaker 8: I'm short Ponzi long pyramid. Do you have a long
Speaker 8: or a short for us?
Speaker 6: Well, let me ask you a question. Is bitcoin a
Speaker 6: Ponzi or a pyramid?
Speaker 2: Neither or neither? I mean I think it's more it's
Speaker 2: more bubbly than either. But it's not a Ponzi scheme
Speaker 2: because there's nobody in charge. That's the whole point of bitcoin, right,
Speaker 2: Nobody is in charge. So if it's anything, it's closer
Speaker 2: to a pyramid scheme, where transparently, if you want to
Speaker 2: get paid for investing in bitcoin, you get paid by
Speaker 2: other people coming in and buying your bitcoin, so it's
Speaker 2: closer to a pyramid scheme.
Speaker 6: I'm going to be sure bitcoin just because I'm a coward.
Speaker 2: Well, I think that that's your inalienable, right, Robin. I
Speaker 2: think I might join you in your cowardice.
Speaker 6: Thanks for being on the show.
Speaker 2: Oh that's a real pleasure. Thank you, Bob. I loved it.
Speaker 6: Listeners. If you like Unheedged, you will of cautionary tales
Speaker 6: Tim's podcast Unhedged. We'll go back in your feed before
Speaker 6: you know it. Thanks for listening. Unhedged is produced by
Speaker 6: Jake Harper and edited by Brian ertstap Our executive producer
Speaker 6: is Jacob Goldstein. You have additional help from Toeprah. Forehead
Speaker 6: Cheryl Brumley is the FT's global head of Audio. Special
Speaker 6: thanks Laura Clark, Alistair Mackey, Branda Cone, Marilyn rust Here
Speaker 6: Posey and Natalie Sadler. FT Premium subscribers can get the
Speaker 6: Unhedged newsletter for free. My thirty day free trial is
Speaker 6: available to everyone else. Just go to ft dot com
Speaker 6: slash Unhedged offering. I'm Rob Armstrong. Thanks for listening.
Speaker 2: That was a special episode. Of the Unhedged podcast. If
Speaker 2: you liked what you heard, you know where to find Unhedged,
Speaker 2: the same place you find all good podcasts. Caution, de
Speaker 2: Tales will be back in feed soon