what is a ponzi scheme?

Wednesday, March 11, 2009

Here's a term that's been in the news a lot, but how many people know what it means? Or its origin? Probably a small few. In fact, I've heard more people refer to it as a Potsie Scheme.

But no, for better or worse, it has nothing to do with Happy Days.

Wikipedia has a good definition:

A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit.

"Ponzi" refers to Charles Ponzi, an Italian immigrant who made a lot of money during the 1920s by promising investors a 50% return on their investment in 45 days or 100% in 90 days.

Ponzi pulled it off (for a time) by paying the early investors with the later investors' money. The large profits accrued by the early investors would attract subsequent investors, whose money Ponzi would in turn use to pay off the early investors, and so on.

Bernie Madoff did pretty much the same thing, though his returns weren't quite so high as Ponzi's--which is probably one of the reasons it lasted so long.