The Madoff scandal may have you asking: What exactly is a Ponzi scheme?
The essence of a Ponzi scheme is better known today as a pyramid scheme.
In 1920, a Boston investment broker named Charles Ponzi told investors that he could earn them 50% returns on a 45 day bond, from his mysterious investing technique. Within the 45 days, Ponzi would recruit larger investors, and use their investments to pay interest on the last round of investors. When word spread that Ponzi had been delivering on his high yield promises, huge lines of eager investors formed outside his office. In his own words:
“A huge line of investors, four abreast, stretched from the City Hall Annex . . . all the way to my office! . . . Hope and greed could be read in everybody’s countenance. Guessed from the wads of money nervously clutched and waved by thousands of outstretched fists! Madness, money madness, was reflected in everybody’s eyes! . . .To the crowd there assembled, I was the realization of their dreams . . . The ‘wizard’ who could turn a pauper into a millionaire overnight!”
– Charles Ponzi