0:15

Pushkin, Do

0:23

you know your Ponzi schemes from your

0:25

pyramid schemes? The following episode

0:27

digs into the pitfalls of get rich

0:29

Quick scams. It was recorded

0:32

in front of a live audience at

0:34

the Bristol Festival of Economics.

0:59

Gosh, wow, are

1:01

you already excellent?

1:04

Okay, so we

1:06

will begin. Sophie

1:17

and Julia were relaxing on

1:19

the riverside terrace of a fancy

1:21

London spa, two rich

1:24

girls joined by an even

1:26

richer one, Tatiana, the

1:29

glamorous wife of an investment banker.

1:32

Tatiana ordered another bottle

1:34

of champagne and launched into

1:36

her sales pitch. You simply

1:39

must buy our heart. Julia

1:41

and Sophie looked at each other and

1:44

sighed. This wasn't the first

1:46

time they had heard the spiel. It

1:48

was the summer of two thousand and three,

1:51

and hearts with a capital

1:54

H were all the rage among

1:56

the champagne drinking, horse

1:58

riding banker marrying ladies of

2:00

Great Britain. Here's

2:02

how it worked. You donated

2:05

three thousand pounds to

2:07

buy a heart and join

2:10

the scheme at the bottom of a pyramid.

2:13

That's about six thousand dollars in today's

2:15

money, Your money would go

2:17

to the person at the top, called

2:19

the receiver.

2:21

They'd leave the pyramid.

2:23

The two people on the next level down would be promoted

2:26

to the top.

2:27

Roll of receiver.

2:28

In fact, the pyramid would then split

2:31

into two, so that both

2:33

of them would be at the top of their own pyramid.

2:35

Everyone would move up a level,

2:38

and everyone on the lowest layer, including

2:41

you, would recruit two people

2:43

to buy a heart and fill

2:46

in the newly vacant layer beneath

2:48

you. Six weeks later,

2:51

you would be a receiver and

2:53

would get twenty four thousand

2:56

pounds, the equivalent of fifty

2:59

thousand dollars today, and

3:01

a huge return.

3:03

No matter how you measured it, the

3:06

money just.

3:07

Grew like a snowball

3:10

rolling downhill until it became

3:13

an avalanche.

3:19

If you're not halfway through

3:21

your second bottle of lunchtime champagne,

3:24

you can probably spot the problem here. This

3:27

is transparently a

3:29

pyramid scheme, and pyramid

3:31

schemes don't make money, they

3:34

just move it around. If someone's

3:36

going to make twenty four thousand pounds,

3:38

then that money must come from other

3:41

members, so eight

3:43

other people must lose their investment

3:46

of three thousand pounds.

3:47

It's really that simple.

3:50

In order to persuade people to

3:52

join a pyramid scheme, there's

3:54

often some sort of story designed

3:57

to obscure this implacable

3:59

arithmetic. This one about

4:02

buying a heart was marketed

4:05

as feminism. The whole project

4:07

was called Women in Empowering

4:10

Women.

4:11

Men weren't allowed. Men

4:13

are more corruptible.

4:15

They can't be trusted, as Tatiana

4:17

explained. She also added

4:20

that she had spent her first wind

4:22

fall on a little intimate plastic

4:24

surgery that she preferred not

4:27

to discuss with her husband. Julia

4:30

and Sophie were tempted, as

4:32

Julia later recalled in an article

4:35

for the Mail on Sunday newspaper. Then

4:38

Tatiana whispered that apparently

4:41

the supermodel Claudius Schieffer

4:44

had been spotted at a women Empowering

4:46

Women party at a mansion in central

4:49

London. That was

4:51

the clincher sign

4:54

me up, said Julia. Things

4:57

moved quickly. The next day,

4:59

Julia received a phone call from

5:01

a lady called Elfie, who

5:04

was collecting her boy Archie

5:06

from an exclusive London school.

5:09

Darling, I must be quick, but I

5:11

couldn't wait to tell you the news. You've

5:14

already moved up a line.

5:16

You're one step closer to becoming

5:19

a receiver.

5:21

Wonderful, replied Julia.

5:23

So now you must send

5:26

me three thousand

5:28

pounds. I'm

5:30

Tim Harford and you're listening to

5:33

Cautionary Tales live at

5:35

the Bristol Festival of Economics.

5:46

This is a cautionary tale about

5:49

investment scams and about

5:51

the way that they snowball out of control,

5:54

often flattening not only the victims

5:57

but the fraudster too. Some

5:59

of those fraudsters are anonymous

6:01

figures. Julia, Sophie

6:04

and even Tatiana had no idea

6:06

who set up women empowering women,

6:09

but some of them are not. Few

6:12

people are less anonymous

6:14

than Samuel Israel, the

6:17

Third. Let's call him Sam

6:19

Israel for short. Sam

6:22

came from a wealthy family of commodity

6:24

traders in New Orleans, but was

6:26

determined to make his own way in

6:28

life. He started at the

6:30

bottom in nineteen seventy eight, dropping

6:33

out of college to run errands

6:35

for one of Wall Street's most famous

6:38

share traders. Sometimes

6:40

those errands merely meant fetching

6:42

pizza. Sometimes

6:45

they involved going to a particular

6:47

room in the Pierre Hotel on

6:50

the Upper east Side and

6:52

speaking a code phrase to a

6:54

Swiss gentleman.

6:55

The weather is nice for this time

6:58

of year, yes.

7:00

But today it looks like rain.

7:04

The Swiss man gave Sam a satchel.

7:07

Sam didn't look inside it until

7:10

his boss showed him that it was filled

7:12

with one hundred dollar bills, well

7:15

over one hundred thousand dollars

7:18

at a time when one hundred thousand dollars was

7:20

real money. Odd

7:22

things like this tended to happen

7:25

from time to time, and through it all, Sam

7:27

Israel watched and learned

7:30

and kept his mouth shut, and

7:32

he began to thrive on Wall Street.

7:36

Sam married a childhood sweetheart,

7:39

an ice girl called Janis.

7:42

She was sensible, training to be an

7:44

accountant. It wasn't

7:46

the ideal match. I hid everything

7:49

from Janis, Sam Israel

7:51

confessed to the Rolling Stone journalist

7:54

Gee Lawson.

7:55

I've been hiding things from her since we were kids.

7:57

She was the responsible worker. I was

8:00

the fuck up. I smoked weed

8:02

and snorted coke. I couldn't

8:04

talk to her about what was really going on

8:06

because I couldn't confide in her.

8:09

And what was really going on

8:12

That depends on when you asked the question. In

8:15

nineteen seventy eight, Sam was quietly

8:17

being a courier of satchels

8:20

full one hundred dollar bills. The

8:22

night before he married Janis, Sam

8:25

was having a threesome

8:27

with two expensive call girls,

8:29

paid for by his Wall Street trader boss

8:32

as a wedding gift. In

8:34

nineteen eighty seven, Sam was making

8:36

a small fortune by fortuitously

8:39

betting that the market would fall just

8:42

before the largest one day crash

8:44

in Wall Street history. Sam

8:47

always swore he could have made more if

8:49

the Federal Reserve hadn't swooped in

8:51

printing money to prop up the market. In

8:55

the early nineteen nineties, Sam was

8:57

winning and losing huge sums

8:59

several times over by trading

9:02

on insider tips.

9:03

Some good and some bad.

9:07

Sam couldn't talk to janisout

9:09

any of this, of course. But

9:12

what Sam really couldn't

9:14

talk to Janis about was by

9:16

you capital, By you

9:18

capital was well,

9:21

it was a con. But let's

9:24

come back to that. Let's

9:26

talk about a simpler con first.

9:28

An early example, if you like,

9:31

of women empowering women.

9:35

In eighteen seventy.

9:37

Eight, refined ladies

9:39

of Boston, Massachusetts, were

9:41

intrigued to hear of a wonderful

9:43

investment opportunity. A new

9:46

bank, founded by women

9:49

for women and called the Ladies

9:51

Deposit Company, paid interest

9:55

of eight percent. Eight

9:57

percent a year would be a solid

10:00

enough offering. The Lady's

10:02

Deposit Company, however, paid eight

10:04

percent every month, deposit

10:08

one hundred, and by the end of

10:10

the year you'd have earned ninety six

10:12

dollars, nearly doubling your original

10:15

investment. There

10:17

were no rumors of supermodels

10:19

back in eighteen seventy eight, but

10:22

the gossip suggested something even

10:25

more reassuring. The

10:28

Ladies Deposit Company was

10:30

said to be backed by

10:32

a Quaker charity doing

10:36

many unspecified good

10:38

works. Only unmarried

10:40

women need apply. Such

10:43

unprotected women who lacked

10:45

the security of a husband's income were

10:47

in a precarious position. Either

10:50

they were poor and trying to earn a wage

10:52

in a world where women were barred from well

10:55

paid jobs, or they

10:57

were of a social background where they

10:59

were expected to live off an inheritance.

11:02

The investment return on that inheritance, then

11:05

was a matter of huge importance, and

11:08

eight percent a month too

11:11

good to miss, or

11:13

alternatively, too good

11:15

to be true. The Ladies

11:17

Deposit Company was not founded

11:20

by Quakers, but by a stage

11:23

psychic and professional fortune

11:25

teller named as Sarah Howe.

11:28

The company had some similarities

11:31

with a pyramid scheme like the Hearts

11:33

of Women Empowering Women, but

11:36

also some differences. The

11:38

grim arithmetic of the scheme was

11:40

concealed. Money poured

11:43

into the Ladi's Deposit Company, money

11:45

poured out, and the mechanics

11:48

of how it all worked were conveniently

11:50

obscure. One

11:53

intrepid reporter even

11:55

disguised himself as a woman

11:58

one can only presume that no female journalists

12:00

were available in

12:03

order to gain entry to the Deposit

12:05

Company's headquarters, but

12:07

he didn't learn much. We

12:10

never disclose the methods by

12:12

which we do business, was

12:14

all that the company's employees would

12:16

say. Sarah

12:18

Howe had established what we'd now

12:20

call a Ponzi scheme, named

12:23

after Charles Ponzi, a flamboyant

12:25

Bostonian whose own cover story

12:28

was something to do with international

12:30

postage coupons. Sarah

12:32

Howe had the same basic idea

12:35

in the same city nearly

12:37

fifty years earlier. But

12:40

women never seem to get the credit for inventing

12:42

anything, even investment

12:45

fraud. The

12:47

local press soon concluded

12:49

that the Ladies Deposit Company.

12:51

Was an obvious scam.

12:53

The Boston Daily Advertiser

12:55

published an illustrated explainer,

12:57

some articles highlighting the stage

13:00

psychic hows, rather questionable

13:03

qualifications, and a prediction

13:06

that the whole thing would collapse in

13:08

short order. In

13:11

the face of this negative publicity

13:13

and some twitchy depositors, Sarah

13:16

Howe decided that the best way

13:18

forward was bluff.

13:21

She announced that anyone who wanted their

13:23

money back with interest in full,

13:25

could have it immediately. She

13:28

hoped that the ladies of Boston would

13:30

be so reassured by this offer

13:32

that they wouldn't take it up. Alas,

13:35

the ladies of Boston were not reassured

13:37

at all. They asked for their

13:39

money back, and when Sarah Howe

13:42

didn't have it, she

13:44

went to jail. The

13:48

Lady's Deposit Company is a wonderful

13:50

illustration of what Dan Davies

13:52

in his book Lying for Money

13:55

calls the snowball

13:57

effect. These scams

14:00

need to suck in an ever growing

14:02

number of dupes to keep going, and

14:04

eventually that snowball of

14:06

money rolling downhill, becoming

14:09

bigger and bigger, simply

14:11

falls apart.

14:13

It's too big.

14:15

Remember, Sarah Howe

14:18

was offering to almost double

14:20

your money in a year. If

14:22

you invested with her. So let's

14:25

watch the snowball from

14:27

a safe distance. Imagine

14:30

that Sarah receives an investment of one

14:32

hundred dollars from a little old lady and

14:35

steals it. By the

14:37

end of the year, that little old lady

14:39

expects her one hundred dollars back, on

14:42

top of ninety six dollars in interest.

14:45

So Sarah finds two

14:47

more investors, steals their money, and

14:49

gives it to the little old lady. But

14:52

by the end of the following year, Sarah

14:55

Howe needs to have given nearly two

14:57

hundred dollars to both of her investors.

15:00

To do that, she needs four new investors,

15:03

who shouldn't be hard to find if they think they're

15:06

going to double their money. When

15:08

the four new investors want a total

15:10

of eight hundred dollars back, she

15:12

just needs to find eight new investors to

15:14

join the Lady's Deposit Company.

15:17

Now you can see the

15:19

trap here.

15:20

Eventually there will be no

15:22

more lady depositors for the Lady's

15:25

Deposit Company. But what's

15:27

perhaps less immediately obvious

15:31

is that in this little story, Sarah

15:34

Howe will soon owe sixteen

15:36

hundred dollars to eight investors.

15:40

And yet she only ever stole one hundred

15:42

dollars for herself. The

15:45

growing snowball of fraud is

15:47

huge, and it needs to keep getting

15:50

huger. The profit for the fraudster

15:52

as rellatively tiny. No

15:55

wonder that so many fraudsters

15:57

eventually get caught, and

15:59

no wonder perhaps that when

16:01

they do get caught, so many

16:03

of them weep with relief.

16:08

There will be tears a plenty, but

16:11

not much relief.

16:13

After the break.

16:34

In the summer of two thousand and three,

16:37

Julia started to try to recruit investors

16:40

to buy hearts for women, empowering

16:42

women. Julia had been

16:44

signed up by Tatiana, the banker's

16:47

wife, over champagne at the Spa.

16:50

She had sent three thousand pounds to Elfie,

16:52

the mother of Darling Archie from the Fancy

16:54

School, but Julia's

16:57

own recruitment efforts were going nowhere.

16:59

Her rich friends sneered at her

17:02

that had already been approached so many

17:04

times to invest in her heart that

17:06

the whole affair had become a bore

17:09

ring joke. Horror

17:11

friends were less likely to

17:13

have heard about the scheme, but they

17:15

were also less likely to have the money

17:18

to invest. I

17:20

mentioned that as a matter of simple

17:23

arithmetic. For everyone who makes

17:25

twenty four thousand pounds in a pyramid

17:27

scheme, there must be eight people who

17:30

lose three thousand pounds. But

17:33

how can it be that so many people

17:35

lose out? Well, that's simple

17:37

too. Every time a new group of

17:39

recruits is brought in, the entire

17:41

operation has to double in size.

17:44

Every recruit finds two more recruits,

17:47

and every pyramid becomes two pyramids.

17:50

The rolling snowball becomes a vast

17:53

snow boulder, then

17:56

collapses into a destructive

17:58

avalanche of disappointment and

18:01

loss. Pyramid

18:03

schemes fail because they run

18:06

out of recruits just after

18:08

becoming huge, when a vast

18:10

number of people have recently joined but

18:13

not yet cashed out.

18:16

Julia was one of those people.

18:19

In growing desperation, Julia

18:22

went to a recruitment party in

18:25

the hope of recruiting new investors.

18:28

She'd been told tales about parties

18:31

in central London mansions, champagne

18:34

being quaffed with supermodels as

18:37

suitcases of cash were handed

18:39

to people who'd reached the top of the pyramid.

18:42

That this recruitment party was

18:45

in a hairdressers instead

18:47

of champagne. On ice, there was warm

18:50

white wine, and

18:53

a growing sense of irritation that

18:55

Julia's failure to recruit

18:58

was letting down everyone above

19:00

her in the pyramid. There

19:03

was, of course, no sign

19:06

of Claudia Schieffer. The

19:10

brilliance of women empowering

19:12

women is that it seems to have been largely

19:14

self organizing. Many

19:17

scams, in contrast, require.

19:19

A lot of hard work. Just

19:22

ask Sam Israel.

19:25

He set up his ill fated hedge

19:27

fund by you Capital in nineteen

19:30

ninety six, assisted by an

19:32

accountant named Dan Marino, who

19:35

lived with his mother and.

19:37

Dreamed of greatness.

19:40

Apparently, Sam actually intended

19:42

to run an honest hedge fund, or

19:45

if not quite honest, a

19:47

hedge fund that would make money for investors.

19:50

His business plan, by You

19:52

Capital would use a new computer

19:55

algorithm he had developed, plus

19:57

the skills of a once great trader

19:59

whom Sam had hired after he had fallen

20:02

on hard times, plus

20:04

a few insider tips like

20:06

in the old days when he'd collect bags

20:09

of cash from the Pierre Hotel.

20:12

That should do the trick, thought Sam.

20:14

But it didn't.

20:16

The once great trader was

20:18

washed up. He made a lot of bad calls.

20:21

The computer algorithm seemed to misfire

20:24

as often as it worked, and Sam

20:26

didn't have the same insider access

20:29

that.

20:29

He used to. After

20:31

a couple of lackluster.

20:32

Years in which Sam loudly

20:35

told his few investors that

20:37

the funds results were great,

20:40

he pondered his options. The

20:42

results were not in fact great, and

20:45

if he simply published the firm's

20:47

accounts showing a loss, the

20:49

investors would yell at him for all his empty

20:51

boasts, and Bayou Capital

20:53

would collapse. Or

20:57

alternatively, Sam

21:00

and his colleagues, the washed up

21:02

trader and the accountant who lived

21:04

with his mum, could lie,

21:10

could publish audited accounts

21:12

which claimed stella results.

21:15

Like Sarah Howe, they'd be offering fantastic

21:18

returns. Unlike Sarah

21:20

Howe, who would simply steal money

21:22

from new depositors and pay it out as interest,

21:25

they'd need to show some kind

21:27

of evidence that they were making profitable

21:30

investments. To do that, they'd

21:33

need a fraudulent auditor.

21:36

No problem.

21:38

Dan Marino simply set up his own

21:41

audit firm, marking his own

21:43

homework. Nobody ever

21:45

checked that the auditor who was

21:47

verifying that Dan Marino was telling the

21:49

truth was a Dan

21:52

Marino. It probably

21:54

didn't hurt that if anyone ever

21:57

tried to search for Dan Marino

22:00

on the still young worldwide

22:02

Web, they were sure to get Dan

22:04

Marino, the unimaginably

22:07

famous Miami Dolphins quarterback,

22:10

rather than Dan Marino the crooked

22:12

accountant. For a while,

22:15

the plan was that Sam would go

22:17

on a profitable streak and

22:19

actually make the profits that Dan Marino's

22:22

fake accounts were claiming. But

22:25

the snowball was starting to grow.

22:27

The more profit they said they were making,

22:30

the larger the fictional pot of

22:32

money was growing, and the harder

22:35

it was for Sam and his partner to catch

22:37

up to their own lies. It

22:40

didn't help that Sam kept

22:42

claiming to outperform the market.

22:45

Dan Marino was losing his mind

22:48

at the fact that Sam couldn't control

22:50

himself.

22:50

When they had a good month and made money,

22:53

they used that as the performance number.

22:55

Complained Dan to the journalist Gee

22:57

Lawson.

22:57

When they had a bad month, they used a made up

23:00

number.

23:01

That won't work.

23:03

If you let the fraud snowball grow

23:05

too big, you'll never get it under

23:07

control. Sam Israel

23:09

would never be able to catch up to his own

23:11

lies because he could never bring

23:13

himself to pretend he'd had a bad quarter

23:16

when it had a good one.

23:17

We went with grace and luls

23:19

with integrity.

23:20

Boasted Sam to his investors. Dan

23:24

Marino knew the awful truth.

23:26

I stopped tracking the published numbers against

23:28

the real numbers.

23:29

Said Marino.

23:30

The snowball was already too

23:33

big.

23:33

Oh, it made me sick to my stomach.

23:37

Four years after the Ladies Deposit

23:40

Company was exposed by the Boston

23:42

Daily Advertiser and collapsed, ands

23:45

Sarah Howe was sent to prison. Refined

23:48

women of Boston, Massachusetts,

23:51

were intrigued to hear of a wonderful

23:53

investment opportunity. A

23:56

new bank, founded for

23:58

women by women and called

24:01

the Boston Women's Bank, paid

24:04

interest of seven percent

24:07

per month. Too

24:10

good to miss, or

24:12

alternatively, too good

24:14

to be true. After a couple

24:16

of years, the Boston Daily

24:19

Advertiser discovered and

24:21

published the truth. The

24:23

manager of the Boston Women's Bank

24:26

was not missus J. C.

24:28

Ewle, as advertised, but

24:31

an ex convict by the name

24:35

of Sarah Howe.

24:38

Sarah Howe had learned one lesson

24:41

this time. She skipped town and

24:44

moved to Chicago. In

24:47

due course, the refined

24:49

Ladies of Chicago, we're

24:51

intrigued to hear of a wonderful

24:54

investment opportunity The

24:56

Lady's Provident Aid Society

24:59

was offering interest of Oh

25:02

never mind, the police caught

25:04

up with miss Sarah Howe shut

25:06

down the Lady's Provident Aid Society,

25:08

and so enough.

25:10

As Howe was back in prison.

25:12

Worth it surely not in

25:15

character, most definitely,

25:19

Sometimes when the snowball

25:21

starts to roll, the fraudster

25:24

just can't quit. Sam

25:28

Israel seemed to have it all, a

25:30

loving wife and children, a luxurious

25:33

home, and at least on paper, a

25:35

fortune to his name. But

25:38

appearances can be deceptive.

25:41

Sam was a mess. He

25:43

was taking too much cocaine and drinking

25:45

far too much booze, and like

25:48

so many people, he had become addicted

25:50

to painkillers after a back injury.

25:53

All the while, the fraud snowball

25:56

was growing. But Sam and Dan

25:59

had one advantage, which is

26:01

that a fraudulent hedge fund doesn't

26:03

have a cell by date. That's

26:06

different from the other scams we've heard about. Tatyana

26:09

was promising Julia that women empowering

26:11

women would multiply her money

26:14

in just six weeks. The

26:16

Ladies Deposit Company promised to

26:18

almost double investors' money after

26:20

a year. But by you capital

26:23

was different because hedge fund

26:25

investors didn't tend to withdraw their

26:27

money if things seemed to be going well.

26:30

Instead, they sat back and

26:33

watched the snowball grow. But

26:36

the more by you capital snowball grew,

26:39

the harder it would ever be

26:41

for Sam Israel to trade his

26:44

way out of the lie.

26:47

One September Friday, his computer

26:49

algorithm suggested a big bet on

26:52

shares going up in the next week. Sam

26:55

made that bet. The

26:58

following Tuesday morning, two

27:00

airliners swept out

27:03

of the cloudless sky above Manhattan

27:06

and crashed into the World Trade Center. The

27:10

world reeled with the implications

27:12

of the atrocity, but

27:14

for Sam Israel and Dan Marino,

27:17

the only thing that mattered was how

27:19

it changed their own twisted

27:21

financial world. Sam

27:24

was aghast that his bet had spectacularly

27:27

backfired, while Dan Marino

27:30

spotted an opportunity close

27:33

the fund. Said Dan Marino and

27:35

ten investors, he lost most of their money

27:37

in the aftermath of nine to eleven, and give

27:40

the dregs back. Everyone will yell,

27:42

but nobody will suspect anything, and neither

27:45

you nor I will.

27:46

Go to jail.

27:47

Please speG Marino, But

27:50

sam Israel wouldn't do it. He

27:53

knew that if by you capital folded,

27:55

he might escape jail, but it'd

27:57

still lose his fancy home. He

28:00

should have listened to Marino, because

28:02

within two years he was

28:04

going to lose his home anyway.

28:07

Cautionary tales, We'll be back

28:10

in a moment. In

28:35

two thousand and three, Sam

28:37

Israel was at home leaning

28:39

over a line of white powder with a

28:42

rolled twenty dollar bill up his nose.

28:46

When his wife.

28:46

Janice walked in. She became

28:49

upset. He became outraged.

28:51

How dare she suggests he was taking cocaine.

28:56

She persuaded him to take urine tests

28:59

to ensure he stayed off the drugs, until

29:02

one evening he angrily unzipped

29:04

his pants and went all over the bathroom

29:06

floor, bellowing.

29:08

You want yourn.

29:10

At Thanksgiving that year, he

29:13

passed out over the turkey. By

29:19

Christmas two thousand and three, janis

29:22

had thrown him out of their house and

29:24

secured a protective order.

29:28

Sam rented the most tasteless,

29:31

ostentatious bachelor pad he

29:33

could find, a vast Tudor

29:35

style manner, with outsized

29:38

chandeliers, marble bathrooms,

29:40

and comically huge beds.

29:43

Sam paid the monthly rent of twenty

29:45

two thousand dollars to the house's

29:47

owner, a.

29:48

Gentleman by the name of Donald

29:52

Trump.

29:53

So good, so good, amazing house,

29:55

huge beds.

30:00

Sam hung around clubs, tipping

30:02

the bartender to introduce him to pretty

30:04

women. He fitted the Trump

30:07

mansion with the latest trading A seventeen

30:10

screens so he could work from home. He

30:13

was still looking for a way to make all the money

30:15

back, but the fraud snowball

30:17

that Bayou was getting bigger and bigger,

30:20

and Dan Marino had had a couple of near

30:22

misses when investors or regulators

30:25

had asked to see documents that would

30:27

prove highly incriminating. Marino

30:30

was reduced to sending those incriminating

30:33

documents to counterparties on a

30:35

Friday evening in

30:37

the hope that they would be tossed into a backlog

30:39

file and then buried under the Monday morning

30:42

rush. Amazingly, that

30:44

tactic worked, but it couldn't

30:46

work forever.

30:47

Dan and Sam.

30:49

Were going to jail for sure

30:52

unless Sam

30:55

Israel could find a sure fire

30:57

scheme to make How

30:59

big was the snowball Now there were several

31:02

hundred million dollars Sam

31:04

Israel was starting to get desperate.

31:08

There's an old saying, you can't

31:10

cheat an honest man, and

31:13

there's truth in that saying, because the

31:15

premise of a scam is often simply.

31:18

I'm doing crimes, and if you come and do

31:20

crimes with me, we'll both make money.

31:24

That's a sales pitch to drive away

31:26

honest folk, but it also has some appeal

31:29

because it provides a logical reason

31:32

why there might be quick money to be made

31:34

for someone who could keep a secret.

31:37

Sam Israel was not an

31:39

honest man. He'd seen enough cheating

31:42

on Wall Street to know that the game was

31:44

often fixed, and the

31:46

crazy simplicity of the Bayou

31:48

fraud, coupled perhaps with the

31:50

fact that Sam was taking a

31:53

lot of drugs, was just

31:55

starting to make him doubt everything.

31:58

How many other hedge funds were just Ponzi

32:01

schemes? What else was a Ponzi

32:03

scheme? He had seen the Federal

32:05

Reserve magic money out of thin air

32:07

after that great crash of nineteen eighty

32:09

seven, when Sam had made so much money

32:12

and could have made more if the FED hadn't

32:14

stepped in. The FED stepped

32:16

in after nine to eleven too.

32:18

Who exactly was running the world economy.

32:20

Anyway, Sam

32:23

started to run in strange

32:25

conspiratorial circles.

32:28

If you want the full story, it's told in

32:30

incredible cringe making

32:32

detail in Gee Lawson's book

32:34

Octopus, which describes

32:37

an astonishing cast of characters

32:39

and an even more astonishing array

32:42

of delusional beliefs. Sam

32:44

became obsessed with finding the undoctored

32:47

footage showing who really

32:49

killed JFK. He believed

32:52

he had been attacked by an assassin on

32:54

the streets of Hamburg, and that

32:57

had blown the man's brains out in self

32:59

defense. Needless to say,

33:01

Hamburg's police have no record

33:03

at all of such events. Above

33:06

all, Sam came to believe

33:09

in a global conspiracy thirteen

33:13

powerful families who truly

33:15

rule the world, whom he called

33:18

the Octopus. It

33:20

all gets very, very weird. Do

33:23

read the book. It's quite a trip.

33:26

But for our purposes, what we need

33:28

to know is that Sam Israel

33:30

fell under the spell of a man

33:32

called Robert Booth Nichols, who

33:35

was claimed to be a top CIA

33:37

agent, whose bare hands

33:40

were said to be deadly weapons, and

33:42

who was undoubtedly a

33:44

confidence trickster. Like

33:46

an aging chain smoking

33:49

James Bond. He swaggered around

33:51

London City with tight controls

33:53

on firearms with a revolver in a

33:55

shoulder holster. Sam

33:58

believed that Nichols had access to a

34:00

special CIA program which

34:02

monitored every bank transaction on the

34:04

planet, an insider trader's dream,

34:08

and he flew out to London to beg

34:10

Nichols to give it to him. He'd

34:12

do anything, he said. Do

34:15

you have one hundred million dollars

34:17

in cash? Said Nichols, I do.

34:19

I've got one hundred million in cash.

34:22

Do you have one hundred and fifty

34:24

million?

34:25

Yes.

34:27

Forget the special CIA program

34:29

which monitors bank accounts.

34:30

Said Nichols.

34:31

We can make some real money together if

34:34

we can access a special secret

34:37

market operated by the thirteen

34:39

families who together secretly rule

34:42

the world.

34:42

You know the octopus.

34:46

And just as Julia had said

34:48

to Tatiana at the Riverside spa, Sam

34:51

Israel said to Nichols, sign me

34:53

up, but not for three

34:55

thousand pounds,

34:58

for more than one hundred million

35:01

dollars. With Nichols

35:03

by his side whispering

35:05

into his ear, Sam Israel

35:08

joined an absolutely bizarre

35:11

world full of conspiracy theorist

35:13

fraudsters, all claiming

35:15

to believe in the existence of a secret

35:18

market that can multiply your money tenfold

35:20

overnight, all secretly

35:23

frustrated that they personally have never

35:25

been able to get access to that entirely

35:28

fictional market, and all

35:30

trying to rip each other off. At

35:33

one stage, Nichols got sam

35:35

Israel to give him ten million

35:37

dollars in cash on the basis of a

35:40

story about a stash of treasure

35:42

stolen and hidden by a Japanese

35:44

general in the Second World War and

35:47

protected by poison gas booby

35:49

traps. Then another

35:52

con man persuaded Nichols to give him

35:54

a million dollars to help the finance

35:56

an expedition to find the

35:58

exact same treasure.

36:00

Can we have a recap? Of course, sam

36:03

Israel was controlling one hundred million dollars

36:06

of Buyo Capital's money based on a fraud,

36:08

invested that money in.

36:10

Robert Nichols's fraud.

36:12

Robert Nichols then invested that money

36:14

in yet another fraud.

36:16

Exactly, thank you, are you?

36:18

Surely, though, it's quite hard to give

36:20

one hundred million dollars to a fraudster

36:23

to invest in a special market protected

36:25

by assassins and controlled by

36:27

the thirteen families who really rule the

36:29

world. There are hard checks and balances

36:32

in place. Several times

36:34

Sam Israel tried to invest the one

36:36

hundred million in one scam or another,

36:39

and a banker or a stockbroker simply

36:42

refused to process the transaction until

36:45

there was proof that it was genuine, and

36:47

there never was. In

36:50

the end, the Bayou Capital

36:52

ponzi scheme was exposed.

36:55

But it wasn't because Sam Israel's

36:57

investors believed that he had lost

36:59

his mind, or even that

37:01

he had lost their money. They

37:04

just believed that he'd lost his touch.

37:07

They noticed that sam wasn't spending

37:09

much time at work. Little

37:11

did they know that this was because he was in Europe

37:14

being taught how to kill a person with his

37:16

bare hands by a manly believed

37:18

was an elite CIA operative. Bayou's

37:22

investors asked for their money back,

37:24

which would have been fine, except

37:27

that most of that money had only ever

37:29

existed in Dan Marino's fraudulent

37:32

accounts. The snowball had

37:34

grown enormous. The fraud

37:36

was at last exposed.

37:41

Sam Israel was given a sentence

37:43

of twenty years, and,

37:45

as an act of leniency that seems

37:48

to be common for white collar criminals,

37:51

eight weeks of freedom to get his affairs

37:53

in order before reporting to

37:55

jail. Listener,

37:58

he did not report to jail.

38:03

Police found his car parked

38:05

on the Bear Mountain Bridge high

38:08

over the Hudson River in upstate New

38:10

York. He left a suicide

38:12

note and smudged in the dust

38:14

on his car's hood were the words

38:18

suicide is painless. But

38:21

Sam Israel's suicide note was as fictional

38:23

as his investment returns. The

38:26

authorities tracked him down, alive

38:28

and well and a campsite in Massachusetts.

38:31

They promptly sent him to jail. By

38:33

faking his own suicide, He got

38:36

just three more weeks of freedom,

38:38

and of course landed his girlfriend

38:41

in trouble for helping him out. Worth

38:43

it surely not in

38:46

character. Most definitely,

38:51

Julia's investment troubles, thankfully,

38:54

were rather more mundane. Having

38:56

invested three thousand pounds in

38:58

the Women Empowering Women pyramid,

39:01

she found herself fielding ever

39:03

more strident calls from

39:05

people further up the pyramid, berating

39:08

her not finding more recruits.

39:11

Tricksy, Pucky and Buttons

39:13

all had their say. It

39:16

was, says Julia, like being

39:18

bullied by a bunch of fairies. But

39:22

the curious thing about women empowering

39:24

women. Nobody knows

39:26

who started it. We think

39:29

that it's hard to be sure that most Ponzi

39:31

schemes fail. When they do,

39:34

it's because of the relentless logic of

39:36

the snowball. Sarah Howe went

39:39

to prison twice. Sam

39:41

Israel faked his own suicide

39:43

in a desperate attempt to escape.

39:47

But the unknown woman who

39:49

created the whole spiel about hearts

39:52

and empowering other women, she's

39:55

the exception to the rule that fraud

39:58

doesn't pay. She pushed

40:00

a few snowballs down a steep

40:02

snowy hill, decided

40:04

that she'd made enough money, and

40:07

before the casualties began to mount

40:09

down below, she

40:12

walked away. But

40:14

those casualties did exist, and

40:17

Julia met them. The

40:19

grumpy fairies could probably

40:21

afford to lose the money, but

40:23

it was less funny to receive voicemails

40:25

from distraught Filipino cleaners

40:28

who'd bought hearts and

40:30

now feared they'd lose three thousand

40:33

pounds They definitely could not afford

40:36

to squander, having

40:38

run out of spa going pony

40:40

riding ladies who lunch. The women

40:43

empowering women Snowball had

40:45

started to flatten much poorer

40:48

women, women who would

40:50

struggle to pick themselves up after

40:53

the snowball had rolled on.

40:57

Key sources for this episode include

40:59

Julius Stephenson's article Broken

41:02

Hearts Club, Daniel Davis's

41:04

book Lying for Money, and

41:06

for the astonishing story of Sam

41:09

Israel Gee Larson's book

41:11

Octopus. This live

41:14

edition of Cautionary Tales was written

41:16

by me Tim Harford with Andrew

41:18

Wright. Tonight you heard the voice

41:21

talents of Sarah Job and Stuart mclachlarn.

41:26

The original music is the work of Pascal

41:28

Wise. Our b s N interpreter

41:30

was Katherine Motson. The show

41:33

was produced by Alice Fines, Marilyn Rusk

41:35

and Ryan Dilling. Sarah Nick

41:37

said it took the script of sound engineer

41:39

was Andrew Bayless. The thanks to Zoe

41:42

Sedmand, Miilm and a team at the British

41:44

Best Level of Economics. Portional

41:46

Tales is a production of Pushkin Industries.

41:49

If you like the show, please remember to rate,

41:51

share and review. Want to hear

41:54

the show ad free sign up the Pushkin

41:56

Class on the show page of Apple Podcasts

41:59

of Pushkin FM, slash

42:01

Truce.

42:09

Thank you that was fun. Thank

42:12

you so much.

42:12

Guys, the Trump

42:14

impression was Okay.

42:24

If you've enjoyed this special live

42:26

episode about pyramid and Ponzi

42:29

schemes, don't go away. I sat

42:31

down with one of the smartest people I

42:33

know in financial journalism,

42:35

my Financial Times colleague Rob

42:37

Armstrong, one of the hosts of the Unheedged

42:40

podcast, and we asked, what

42:42

if everything is a Ponzi scheme.

42:45

We'll be back with that in a moment. We're

42:49

back, and I've been talking to my Financial Times

42:51

colleague Rob Armstrong about all

42:53

things Ponzie for his podcast

42:56

Unheedged.

43:04

Pushkin.

43:07

I love a good partsy scheme from

43:09

Charles Ponzi himself to Bernie Madoff.

43:12

I both admire the

43:15

wicked intelligence of the puppet

43:18

masters, and I'm fascinated by

43:20

the persistent credulity of the people

43:22

who fall for Ponzi schemes. Here

43:25

today to discuss Ponzi's and pyramids

43:27

and everything in between with me is Tim Harford,

43:30

my fellow FT columnist and master

43:33

of his own podcast, Cautionary Tales.

43:36

Tim, how are you?

43:37

I'm great, Robin, pleasure to finally

43:39

get on Unhedged. I'm a loyal listener,

43:41

although I always feel terribly badly dressed.

43:44

Whenever I whenever I even think of

43:46

you, Rob, whenever I read one of your wonderful columns

43:48

about sartorial elegance. The

43:51

subtext is, this column is

43:53

written at you, Harford,

43:55

you slob, and so it

43:58

just feels sloody guilty about the whole thing.

44:00

But yeah, you'll be glad to know I'm sitting in my bedroom

44:02

in a T shirt and a pair of jeans. So I hope

44:04

that puts you at ease.

44:05

Okay, Yeah, I feel better now, Thank you, Rob.

44:08

I was fascinated to listen to the

44:10

most recent episode of Cartiery

44:12

Tales. It gave a lot of terrific

44:14

examples, starting with the immortal Sarah

44:17

Howe of Ponzy

44:20

Schemers. Yeah, tell us what a

44:22

Ponzi scheme fundamentally is and what

44:24

you discovered about them doing that episode.

44:27

Yeah, we had lots of fun cautioning Tales

44:29

as a podcast about things going

44:31

wrong and what we can learn. And this particular

44:33

episode is about ponzy schemes and pyramid

44:35

schemes, which are obviously always a terrible

44:38

idea, but they have a lot of lessons

44:40

for us and Sarah how Sarah Howe invented

44:42

the Ponzi scheme, and can you believe that it

44:44

isn't called a house scheme.

44:47

It's outrageous, outrage another

44:49

woman forgotten by history, unfairly

44:51

forgotten by history, all the credit taken

44:54

by Ponsey.

44:55

Yeah, she was even operating in the same

44:57

city, in Boston, Massachusetts. So

45:00

Sarah Howe set up the Ladies Deposit Company

45:02

and basically offered to pay a

45:04

ladies eight percent a month, which

45:06

is basically doubling your money in a

45:09

year. And of course

45:11

there's no way of actually making that return.

45:13

And so, as with all ponz schemes, people

45:15

investing in this opportunity,

45:19

if they decide they want to withdraw their money, then

45:22

Sarah how just paid them out

45:24

of incoming money from other people who were

45:26

eager to invest. And that's the fundamental of a

45:28

ponz scheme. Early investors who

45:30

are trying to cash out get paid

45:33

not out of the productive return from

45:36

the productive activity, because there is no productive activity.

45:39

They get paid because other people

45:41

are also pouring money in. And

45:43

that's the basic genius

45:45

of the idea. And so Cautionary

45:47

Tales talks about Sarah how who did this three times,

45:50

talks about pyramid schemes,

45:53

and also talks about this insane

45:55

Ponzi scheme run by a

45:57

gentleman called Sam Israel,

46:00

which is described in Gye Lawson's

46:02

book The Octopus, which is absolutely bonkers

46:05

because it just goes utterly down a

46:07

whirlpool of conspiracy theories, and said,

46:09

it's quite fun.

46:11

I want listeners to know that this is not a

46:13

parochial phenomenon.

46:14

In my home city, Boston.

46:16

I have a good friend and this connects

46:19

nicely actually to the Sarah Howe angle.

46:22

I have a good friend who about ten years

46:24

ago in Brooklyn was she's quite

46:26

an entrepreneurial person, and was

46:28

invited by another quite entrepreneurial person

46:31

to a meeting of other women and they

46:33

were going to talk about investment opportunity and so

46:35

forth. And as it turned

46:37

out, what this meeting of ten or twelve women

46:40

was was, you know, I have this project

46:42

that I'm working on. I need seed money for

46:44

this endeavor, and you know each

46:47

of you are going to contribute X

46:49

amount to my endeavor and

46:51

then in the next round, each of you

46:53

will become a receiver of funds

46:56

from other people in the you know, Ladies

46:58

Empowerment Club of Brooklyn or whatever.

47:01

And my friend, who has her

47:03

head screwed quite tightly onto

47:05

her shoulders, looked around

47:07

at these well meant in kind

47:10

of semi bohemian, semi

47:13

business class Brooklyn ladies and

47:15

said, you're all going to jail.

47:17

If you do this.

47:18

This is a proxy scheme, and

47:21

now looked at her a gast like they they

47:23

had no idea that they were engaged in something

47:25

untoward or possibly illegal.

47:28

Yeah, part of the issue is

47:30

that it is not always

47:33

straightforward to figure out

47:35

whether something is a Ponzi scheme or not, because

47:37

superficially, I mean, there's a lot

47:39

of a lot of stuff in a capitalist economy that involves,

47:41

well, you invest some capital

47:44

and you take a risk, and if things go well,

47:46

you get paid back ten x in the

47:48

phrase that everyone likes to.

47:50

Use, exactly right, And this was the

47:52

question listening to your episode I most wanted

47:54

to put to you. How is

47:57

a market in its bubble phase

48:00

not exactly like a

48:02

Ponzi scheme snowballing insize.

48:05

I love it. So it's like a decentralized Ponzi

48:07

scheme, Right, It's.

48:08

A decent, naturally occurring, decentralized

48:11

organic Ponzi scheme where

48:13

you know something, the magnificent

48:16

seven tech stocks start to go bananas,

48:18

and rather than a central schemer,

48:21

a Ponzi or a how figure, we

48:23

all do our little part journalists

48:26

like you and I Tim. We hype

48:28

things up by constantly discussing one

48:30

way or the other the different stocks. Brokers

48:33

have their role to play. Investor chat

48:36

boards do the job, and so we all

48:38

kind of ponzi each other until

48:41

we're out of the next person to draw

48:43

into the market bubble, at

48:45

which point the bubble collapses in

48:47

an exact reversal of the

48:49

social structure that built it.

48:51

So I love this idea. So

48:53

let's use twenty twenty hind sight. Let's

48:55

go back and let's think about Amazon twenty

48:58

five years ago. And I think a little bit of hindsight

49:01

cliphies things. So what

49:03

distinguishes Amazon from a Ponzi scheme? Because

49:05

if you think about it, this is an organization

49:07

which in the nineteen nineties, in the

49:10

early two thousands was not making money,

49:12

losing a lot of money, yes,

49:15

but it's raising money from investors. So investors

49:17

are putting money in and if

49:19

they wanted to get their money out again, they

49:22

could no problem. How do they

49:24

get paid well, because other

49:26

investors are putting money in, so

49:28

there's a way to get paid, and more and more

49:30

money gets poured.

49:31

Into this thing.

49:32

And the reason it's not a Ponzi scheme, well, there's

49:34

two things. One is there's no fraud

49:37

because Amazon was perfectly honest

49:39

about the accounts and perfully honest that it was losing money,

49:41

and so there's no deceptions, no fraud. So

49:44

that's one reason it's not a Ponzi scheme. The

49:46

second reason it's not a Ponzi scheme is in

49:49

the end it all comes good.

49:51

All of that investment does turn into something productive

49:55

and everybody can get paid back.

49:57

So the first part of that them being honest,

50:00

Okay, that's important, but the second part

50:02

could not be guaranteed. There's

50:04

no way of guaranteeing that Amazon

50:06

would ever make money, and indeed, lots of those dot

50:08

com home stocks in the nineteen nineties

50:11

never did, and people could

50:13

make a lot of money as long as they got out in

50:15

time, and that's very ponziush.

50:17

And what is so important about

50:20

the Amazon example is

50:22

that the kind of faith, or

50:25

if you prefer, kind of credulity

50:28

of Amazon's early

50:30

investors is

50:32

exactly what allowed Amazon

50:34

to become such a great business eventually.

50:37

In other words, because the

50:40

investors didn't insist on being

50:43

paid out of the company's profits, Amazon

50:45

was able to have this wonderful

50:48

cycle where it just reinvested all of

50:50

its capital in itself and

50:52

built this incredibly strong,

50:54

deep, moded, indestructible

50:57

business because it wasn't paying

50:59

money to investors, it was reinvesting in itself

51:02

because the investors had that faith.

51:04

So I think we now have a typology. So if

51:06

you're putting money in and

51:09

bill investors get repaid by

51:11

from later investors, and the

51:14

accounts are a sham, that's

51:16

a Ponzi scheme and someone's

51:19

going to jail. If the early

51:21

investors get repaid by the late

51:23

investors putting money in but

51:25

there's no accounting forward, people

51:28

are just over exuberant and the whole thing all

51:30

collapses and it's pets dot com, then

51:32

no one goes to jail. That's not a Ponzi scheme.

51:35

That's a bubble. And if

51:37

in the end it turns into a wonderfully

51:40

productive investments such as Amazon,

51:42

it's neither a Ponzi scheme nor a bubble. It's

51:45

the genius of capitalism.

51:46

I would argue that the Ponzi scheme

51:48

and the bubble case are actually very

51:51

close together. They're almost

51:53

indistinguishably close because other

51:56

than the absence of the central figure

51:58

pulling all the strings, simply

52:00

because at some point in a bubble

52:03

the people involved in it. In markets

52:06

actually acknowledge that

52:09

races are no longer connected

52:11

to economic fundamentals or the productivity

52:13

of the companies involved. They start using

52:15

words like momentum, right,

52:18

and they say, you can't get in front of momentum.

52:21

The market is pushing upwards.

52:23

If you get out now, you're going

52:25

to regret it.

52:26

It's fear of.

52:27

Missing out, and to me, that

52:29

moment you are living

52:31

Ponzi logic. In that moment, there will

52:34

be another person who will come along and pay

52:36

more, and I will be out of this game

52:38

and somebody else will be left to hold the bat.

52:40

There's always a story about where

52:42

the money comes from, right, And I suppose the thing

52:44

about bubbly markets is the stories

52:47

get less and less rigorous.

52:50

People don't need a particularly

52:52

strong, data driven, compelling

52:55

story. They're just like any story will do. I'm

52:57

greedy now and a lot of the Ponzi

52:59

stories. So, I mean, Charles Ponzi's original

53:01

story was something to do with the arbitrage of

53:04

international postal reply coupons.

53:07

Really that's going to work, but

53:10

people believed it.

53:11

There's another question I wanted to ask you, which

53:14

is all of the ponzis

53:17

you talked about in your podcast, and indeed all

53:19

the ones I know of, and I'm thinking here, of course,

53:21

of Bernie Madeoff, the most famous of the

53:23

recent ponzis.

53:25

These all turn out very

53:27

poorly.

53:27

For the puppet masters, very poorly.

53:29

So there's a question.

53:31

There's a question about why US suckers

53:33

fall for them. But there's a

53:35

way in which the puppet master is the ultimate

53:37

sucker. They've somehow believed their own

53:40

Ponzi scheme in some way and they end

53:42

up in jail or disgraced her.

53:44

Why do they do it?

53:45

I really am not sure why they do

53:47

it. I suppose you could say, well, if the Ponzi schemes

53:50

do somehow work out, if the international postal

53:52

reply coupon arbitrage works,

53:56

then everyone gets paid back in the end.

53:59

I guess Sam Israel, who ran the

54:01

Bayu Capital Ponzi scheme, maybe

54:04

he would have gotten away with it if one of his attempts

54:06

to swing for the fences.

54:08

Had paid off.

54:09

But ultimately, there's a really interesting

54:12

idea which I was introduced to by the

54:14

writer Dan Davis, who wrote this terrific book

54:16

about fraud called Lying for Money,

54:19

and he basically points out that if

54:21

you take a typical Ponzi scheme, So let's say you're

54:23

promising to the double people's money every

54:26

year. Okay, So you take one hundred

54:28

dollars from a little old lady and you steal

54:30

it. Okay, Now in a year, you

54:32

need to pay her two hundred dollars. That's okay.

54:34

So you find two other little old ladies,

54:37

you steal their money and you pay the first little

54:39

old lady. Now, of course, in a year's

54:41

time, you've got to do it all again, and each year

54:44

you're owing twice as much money, and you need to defraud

54:46

twice as many little old ladies to pay the

54:48

previous little old ladies. So that's all kind of

54:50

obvious, and it's obvious that that can't keep

54:52

going forever. That's an exponential

54:55

process that's all going to come unraveled.

54:57

But what Dan Davis pointed out is what

54:59

is easy to miss is that can balloon

55:01

into thousands and thousands and thousands

55:04

of dollars based on the original

55:07

one hundred dollar theft. The

55:10

frauds that only stole one hundred dollars,

55:12

and somehow now they're responsible

55:14

for maintaining this enormous

55:17

fraud, and no wonder, so many of them are

55:19

crying with relief when they're finally arrested,

55:22

like, thank goodness, I don't have to do this anymore.

55:25

So I don't know why people do this.

55:27

It's the magician's apprentice story. You

55:30

cast the spell, and all of a sudden,

55:32

it's much bigger than you are. And I

55:34

think there is a

55:36

general point about fraudsters that clearly

55:39

applies to some Ponzi fraudsters

55:41

is that they do get into it by mistake. You

55:44

start a fund, you're struggling

55:47

to be a legitimate investor.

55:48

Something goes slightly wrong.

55:50

And okay, just one month,

55:53

I'm going to fudge the numbers so I can pitch

55:55

to one more investor.

55:57

And then that takes on a life

55:59

of its own.

55:59

You get into it incrementally by small steps,

56:02

and suddenly the thing grows by leaps and bounds.

56:05

And I think there's a way to read the

56:07

Bernie Madoffski as having

56:09

some of that character, and

56:12

you can read Madeoff's actions late in the

56:14

scheme as desperately trying

56:16

to keep the thing under

56:19

control, turning investors

56:21

away as it because

56:23

he couldn't handle it.

56:25

And it just gets so huge that in

56:27

the end, the gap between

56:30

the underlying reality of the investments,

56:32

like how much money you are really generating

56:34

in postal reply coupon arbitrage,

56:37

and the fiction what you're telling

56:40

people you are making, that gap eventually becomes impossible

56:42

to bridge. A lot of Ponzi schemes.

56:44

I think it's ambiguous at the start. Did

56:46

they mean it to be a Ponzi scheme or did they actually

56:49

think they were investment geniuses that everyone would

56:51

get paid back. There is often an ambiguity

56:53

at the start, but unless

56:55

you're able to close the fraudulent gap

56:57

early, it becomes so unbridgable

57:00

you don't have a chance.

57:01

Tim, If you give me one hundred dollars,

57:04

I have a brilliant idea.

57:06

I'm always.

57:11

This is long short, that portion of the show

57:13

where we go long something we like or

57:16

short something we don't like.

57:19

Tim, are you long or short something?

57:22

Can I go for a paired trade rather

57:25

than do Greg. So I'm

57:27

going to go short Ponzi and

57:31

long pyramid schemes. So we

57:33

should probably very briefly explain

57:35

the difference. So a Ponzi scheme, someone's

57:37

running a Ponzi scheme. They're lying, they're

57:40

paying out earlier investors using money from later

57:42

investors. Pyramid scheme works in a

57:44

similar way, but it's it's decentralized.

57:46

You basically get the later

57:48

investors to send money to the early investors,

57:51

and then the later investors then have

57:53

to recruit even later investors to pay

57:55

them. And it's more transparent.

57:57

But more to the point, there's nobody

57:59

actually running a thing.

58:01

And what that means.

58:02

Is that the person who sets up each

58:05

individual pyramid scheme can

58:07

cash out and walk away. And in

58:10

fact, the pyramid scheme I describe in the cautionary

58:12

tale, we have no idea who

58:14

set it up. She seems to have got fairly

58:16

rich and just walked away and she never.

58:18

Went to jail.

58:19

And we don't you say she, Tim? You say she,

58:21

But I think we're talking about you, Tim, or

58:23

are we? I couldn't possibly comment, couldn't

58:25

possibly come in. Well,

58:28

okay, I'm short ponzi, long

58:30

pyramid? Do you have a long

58:33

or a short for us?

58:34

Well, let me ask you a question. Is

58:36

bitcoin a ponzi or a pyramid? Neither

58:39

or neither?

58:40

I mean I think it's more it's more bubbly

58:42

than either. But it's not a Ponzi

58:44

scheme because there's nobody in charge. That's the whole point

58:46

of bitcoin, right, Nobody is in charge. So

58:48

if it's anything, it's closer to a pyramid

58:51

scheme, where transparently, if you want

58:53

to get paid for investing in bitcoin, you

58:55

get paid by other people coming

58:57

in and buying your bitcoin, So it's

58:59

closer to a pyramid scheme.

59:01

I'm going to be sure bitcoin just because I'm

59:03

a coward.

59:04

Well, I think that that's your inalienable, right,

59:06

Robin. I think I might join you

59:08

in your.

59:09

Cowdi Thanks for being

59:11

on the show.

59:12

Oh that's a real pleasure.

59:13

Thank you. I loved it. Listeners.

59:16

If you like Unhedged, you will love

59:19

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59:21

Unhedged. We'll be back in your feed before you

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59:27

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59:29

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59:31

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59:33

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59:40

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1:00:00

Rob Armstrong. Thanks for listening.

1:00:07

That was a special episode of the Unhedged

1:00:10

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