Charlie Ponzi

With all of the Madoff ponzi scheme talk in the news, I wondered what a ponzi scheme really is.

Wikipedia says, "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 any actual profit earned."

CBS says that the term Ponzi scheme came from the con artist, Charles Ponzi. After WWI, Charles sold International Reply Coupons, a way to prepay international postage. Using an exchange rate "quirk", Ponzi could buy the coupons overseas and cash them in the States for a profit. He was able to rake in huge profits - up to a million a week (pre-Depression dollars).

The only problem was, he wasn't actually buying any of the coupons. When a newspaper pointed out that there weren't even enough of the coupons in existence to supply what Ponzi claimed to have bought, his plot came crashing down.

Investors went into bankruptsy and Charles Ponzi's name became associated with thievery.