1 00:00:15,410 --> 00:00:26,250 Speaker 1: Pushkin, Do you know your Ponzi schemes from your pyramid schemes? 2 00:00:26,690 --> 00:00:29,810 Speaker 1: The following episode digs into the pitfalls of get rich 3 00:00:29,930 --> 00:00:33,450 Speaker 1: Quick scams. It was recorded in front of a live 4 00:00:33,610 --> 00:01:01,650 Speaker 1: audience at the Bristol Festival of Economics. Gosh, wow, are 5 00:01:01,650 --> 00:01:17,850 Speaker 1: you already excellent? Okay, so we will begin. Sophie and 6 00:01:18,090 --> 00:01:21,770 Speaker 1: Julia were relaxing on the riverside terrace of a fancy 7 00:01:21,890 --> 00:01:28,450 Speaker 1: London spa, two rich girls joined by an even richer one, Tatiana, 8 00:01:29,010 --> 00:01:34,090 Speaker 1: the glamorous wife of an investment banker. Tatiana ordered another 9 00:01:34,130 --> 00:01:38,170 Speaker 1: bottle of champagne and launched into her sales pitch. You 10 00:01:38,410 --> 00:01:43,050 Speaker 1: simply must buy our heart. Julia and Sophie looked at 11 00:01:43,090 --> 00:01:46,810 Speaker 1: each other and sighed. This wasn't the first time they 12 00:01:46,850 --> 00:01:49,810 Speaker 1: had heard the spiel. It was the summer of two 13 00:01:49,930 --> 00:01:55,050 Speaker 1: thousand and three, and hearts with a capital H were 14 00:01:55,210 --> 00:01:59,530 Speaker 1: all the rage among the champagne drinking, horse riding banker 15 00:01:59,610 --> 00:02:04,570 Speaker 1: marrying ladies of Great Britain. Here's how it worked. You 16 00:02:04,690 --> 00:02:10,090 Speaker 1: donated three thousand pounds to buy a heart and join 17 00:02:10,170 --> 00:02:13,530 Speaker 1: the scheme at the bottom of a pyramid. That's about 18 00:02:13,650 --> 00:02:17,290 Speaker 1: six thousand dollars in today's money, Your money would go 19 00:02:17,330 --> 00:02:20,450 Speaker 1: to the person at the top, called the receiver. 20 00:02:21,090 --> 00:02:22,650 Speaker 2: They'd leave the pyramid. 21 00:02:23,650 --> 00:02:25,570 Speaker 1: The two people on the next level down would be 22 00:02:25,610 --> 00:02:27,290 Speaker 1: promoted to the top. 23 00:02:27,130 --> 00:02:28,490 Speaker 2: Roll of receiver. 24 00:02:28,970 --> 00:02:32,090 Speaker 1: In fact, the pyramid would then split into two, so 25 00:02:32,210 --> 00:02:34,170 Speaker 1: that both of them would be at the top of 26 00:02:34,210 --> 00:02:38,730 Speaker 1: their own pyramid. Everyone would move up a level, and 27 00:02:38,770 --> 00:02:42,970 Speaker 1: everyone on the lowest layer, including you, would recruit two 28 00:02:43,130 --> 00:02:47,170 Speaker 1: people to buy a heart and fill in the newly 29 00:02:47,290 --> 00:02:51,970 Speaker 1: vacant layer beneath you. Six weeks later, you would be 30 00:02:52,450 --> 00:02:57,850 Speaker 1: a receiver and would get twenty four thousand pounds, the 31 00:02:57,890 --> 00:03:02,970 Speaker 1: equivalent of fifty thousand dollars today, and a huge return. 32 00:03:03,690 --> 00:03:07,570 Speaker 2: No matter how you measured it, the money just. 33 00:03:07,650 --> 00:03:18,930 Speaker 1: Grew like a snowball rolling downhill until it became an avalanche. 34 00:03:19,170 --> 00:03:24,370 Speaker 1: If you're not halfway through your second bottle of lunchtime champagne, 35 00:03:24,610 --> 00:03:29,210 Speaker 1: you can probably spot the problem here. This is transparently 36 00:03:29,610 --> 00:03:33,890 Speaker 1: a pyramid scheme, and pyramid schemes don't make money, they 37 00:03:34,010 --> 00:03:37,450 Speaker 1: just move it around. If someone's going to make twenty 38 00:03:37,490 --> 00:03:41,770 Speaker 1: four thousand pounds, then that money must come from other members, 39 00:03:42,490 --> 00:03:46,690 Speaker 1: so eight other people must lose their investment of three 40 00:03:46,730 --> 00:03:47,530 Speaker 1: thousand pounds. 41 00:03:47,810 --> 00:03:49,090 Speaker 2: It's really that simple. 42 00:03:50,290 --> 00:03:53,770 Speaker 1: In order to persuade people to join a pyramid scheme, 43 00:03:54,290 --> 00:03:58,370 Speaker 1: there's often some sort of story designed to obscure this 44 00:03:58,610 --> 00:04:05,050 Speaker 1: implacable arithmetic. This one about buying a heart was marketed 45 00:04:05,170 --> 00:04:10,370 Speaker 1: as feminism. The whole project was called Women in Empowering Women. 46 00:04:11,250 --> 00:04:14,570 Speaker 2: Men weren't allowed. Men are more corruptible. 47 00:04:15,130 --> 00:04:19,970 Speaker 1: They can't be trusted, as Tatiana explained. She also added 48 00:04:20,010 --> 00:04:22,530 Speaker 1: that she had spent her first wind fall on a 49 00:04:22,570 --> 00:04:27,610 Speaker 1: little intimate plastic surgery that she preferred not to discuss 50 00:04:27,650 --> 00:04:33,170 Speaker 1: with her husband. Julia and Sophie were tempted, as Julia 51 00:04:33,330 --> 00:04:36,730 Speaker 1: later recalled in an article for the Mail on Sunday newspaper. 52 00:04:37,610 --> 00:04:44,730 Speaker 1: Then Tatiana whispered that apparently the supermodel Claudius Schieffer had 53 00:04:44,730 --> 00:04:48,250 Speaker 1: been spotted at a women Empowering Women party at a 54 00:04:48,290 --> 00:04:54,490 Speaker 1: mansion in central London. That was the clincher sign me up, 55 00:04:54,850 --> 00:05:00,570 Speaker 1: said Julia. Things moved quickly. The next day, Julia received 56 00:05:00,570 --> 00:05:04,250 Speaker 1: a phone call from a lady called Elfie, who was 57 00:05:04,290 --> 00:05:10,050 Speaker 1: collecting her boy Archie from an exclusive London school. Darling, 58 00:05:10,650 --> 00:05:12,690 Speaker 1: I must be quick, but I couldn't wait to tell 59 00:05:12,730 --> 00:05:15,970 Speaker 1: you the news. You've already moved up a line. 60 00:05:16,930 --> 00:05:20,370 Speaker 3: You're one step closer to becoming a receiver. 61 00:05:21,410 --> 00:05:22,930 Speaker 2: Wonderful, replied Julia. 62 00:05:23,890 --> 00:05:30,890 Speaker 1: So now you must send me three thousand pounds. I'm 63 00:05:30,970 --> 00:05:35,170 Speaker 1: Tim Harford and you're listening to Cautionary Tales live at 64 00:05:35,210 --> 00:05:48,810 Speaker 1: the Bristol Festival of Economics. This is a cautionary tale 65 00:05:48,850 --> 00:05:52,970 Speaker 1: about investment scams and about the way that they snowball 66 00:05:53,050 --> 00:05:57,410 Speaker 1: out of control, often flattening not only the victims but 67 00:05:57,490 --> 00:06:03,290 Speaker 1: the fraudster too. Some of those fraudsters are anonymous figures. Julia, 68 00:06:03,570 --> 00:06:07,050 Speaker 1: Sophie and even Tatiana had no idea who set up 69 00:06:07,210 --> 00:06:12,450 Speaker 1: women empowering women, but some of them are not. Few 70 00:06:12,570 --> 00:06:18,450 Speaker 1: people are less anonymous than Samuel Israel, the Third. Let's 71 00:06:18,450 --> 00:06:22,890 Speaker 1: call him Sam Israel for short. Sam came from a 72 00:06:22,930 --> 00:06:26,650 Speaker 1: wealthy family of commodity traders in New Orleans, but was 73 00:06:26,690 --> 00:06:30,490 Speaker 1: determined to make his own way in life. He started 74 00:06:30,690 --> 00:06:33,970 Speaker 1: at the bottom in nineteen seventy eight, dropping out of 75 00:06:34,010 --> 00:06:37,450 Speaker 1: college to run errands for one of Wall Street's most 76 00:06:37,530 --> 00:06:43,330 Speaker 1: famous share traders. Sometimes those errands merely meant fetching pizza. 77 00:06:44,250 --> 00:06:48,570 Speaker 1: Sometimes they involved going to a particular room in the 78 00:06:48,690 --> 00:06:52,810 Speaker 1: Pierre Hotel on the Upper east Side and speaking a 79 00:06:52,850 --> 00:06:55,210 Speaker 1: code phrase to a Swiss gentleman. 80 00:06:55,930 --> 00:06:59,770 Speaker 3: The weather is nice for this time of year, yes. 81 00:07:00,130 --> 00:07:05,370 Speaker 1: But today it looks like rain. The Swiss man gave 82 00:07:05,450 --> 00:07:10,250 Speaker 1: Sam a satchel. Sam didn't look inside it until his 83 00:07:10,330 --> 00:07:13,690 Speaker 1: boss showed him that it was filled with one hundred 84 00:07:13,770 --> 00:07:18,530 Speaker 1: dollar bills, well over one hundred thousand dollars at a 85 00:07:18,570 --> 00:07:22,930 Speaker 1: time when one hundred thousand dollars was real money. Odd 86 00:07:22,970 --> 00:07:26,130 Speaker 1: things like this tended to happen from time to time, 87 00:07:26,170 --> 00:07:30,970 Speaker 1: and through it all, Sam Israel watched and learned and 88 00:07:31,090 --> 00:07:34,410 Speaker 1: kept his mouth shut, and he began to thrive on 89 00:07:34,490 --> 00:07:40,330 Speaker 1: Wall Street. Sam married a childhood sweetheart, an ice girl 90 00:07:40,690 --> 00:07:44,930 Speaker 1: called Janis. She was sensible, training to be an accountant. 91 00:07:45,810 --> 00:07:50,010 Speaker 1: It wasn't the ideal match. I hid everything from Janis, 92 00:07:50,650 --> 00:07:54,970 Speaker 1: Sam Israel confessed to the Rolling Stone journalist Gee Lawson. 93 00:07:55,290 --> 00:07:57,570 Speaker 4: I've been hiding things from her since we were kids. 94 00:07:57,970 --> 00:08:00,850 Speaker 4: She was the responsible worker. I was the fuck up. 95 00:08:01,250 --> 00:08:04,690 Speaker 4: I smoked weed and snorted coke. I couldn't talk to 96 00:08:04,730 --> 00:08:07,210 Speaker 4: her about what was really going on because I couldn't 97 00:08:07,210 --> 00:08:07,930 Speaker 4: confide in her. 98 00:08:09,170 --> 00:08:13,290 Speaker 1: And what was really going on That depends on when 99 00:08:13,330 --> 00:08:16,970 Speaker 1: you asked the question. In nineteen seventy eight, Sam was 100 00:08:17,170 --> 00:08:21,290 Speaker 1: quietly being a courier of satchels full one hundred dollar bills. 101 00:08:22,210 --> 00:08:26,610 Speaker 1: The night before he married Janis, Sam was having a 102 00:08:26,650 --> 00:08:30,530 Speaker 1: threesome with two expensive call girls, paid for by his 103 00:08:30,610 --> 00:08:34,730 Speaker 1: Wall Street trader boss as a wedding gift. In nineteen 104 00:08:34,770 --> 00:08:39,170 Speaker 1: eighty seven, Sam was making a small fortune by fortuitously 105 00:08:39,210 --> 00:08:43,370 Speaker 1: betting that the market would fall just before the largest 106 00:08:43,530 --> 00:08:47,730 Speaker 1: one day crash in Wall Street history. Sam always swore 107 00:08:47,810 --> 00:08:50,730 Speaker 1: he could have made more if the Federal Reserve hadn't 108 00:08:50,810 --> 00:08:55,330 Speaker 1: swooped in printing money to prop up the market. In 109 00:08:55,370 --> 00:08:59,290 Speaker 1: the early nineteen nineties, Sam was winning and losing huge 110 00:08:59,330 --> 00:09:04,930 Speaker 1: sums several times over by trading on insider tips. 111 00:09:03,890 --> 00:09:05,570 Speaker 2: Some good and some bad. 112 00:09:07,090 --> 00:09:10,810 Speaker 1: Sam couldn't talk to janisout any of this, of course. 113 00:09:11,970 --> 00:09:16,130 Speaker 1: But what Sam really couldn't talk to Janis about was 114 00:09:16,250 --> 00:09:22,010 Speaker 1: by you capital, By you capital was well, it was 115 00:09:22,050 --> 00:09:26,330 Speaker 1: a con. But let's come back to that. Let's talk 116 00:09:26,330 --> 00:09:30,850 Speaker 1: about a simpler con first. An early example, if you like, 117 00:09:31,450 --> 00:09:33,570 Speaker 1: of women empowering women. 118 00:09:35,370 --> 00:09:37,690 Speaker 2: In eighteen seventy. 119 00:09:37,210 --> 00:09:42,530 Speaker 1: Eight, refined ladies of Boston, Massachusetts, were intrigued to hear 120 00:09:42,770 --> 00:09:48,090 Speaker 1: of a wonderful investment opportunity. A new bank, founded by 121 00:09:48,210 --> 00:09:53,690 Speaker 1: women for women and called the Ladies Deposit Company, paid 122 00:09:53,890 --> 00:09:59,610 Speaker 1: interest of eight percent. Eight percent a year would be 123 00:09:59,650 --> 00:10:03,930 Speaker 1: a solid enough offering. The Lady's Deposit Company, however, paid 124 00:10:04,130 --> 00:10:10,130 Speaker 1: eight percent every month, deposit one hundred, and by the 125 00:10:10,250 --> 00:10:13,530 Speaker 1: end of the year you'd have earned ninety six dollars, 126 00:10:13,530 --> 00:10:18,770 Speaker 1: nearly doubling your original investment. There were no rumors of 127 00:10:18,890 --> 00:10:23,370 Speaker 1: supermodels back in eighteen seventy eight, but the gossip suggested 128 00:10:23,410 --> 00:10:30,490 Speaker 1: something even more reassuring. The Ladies Deposit Company was said 129 00:10:30,530 --> 00:10:37,770 Speaker 1: to be backed by a Quaker charity doing many unspecified 130 00:10:37,930 --> 00:10:44,410 Speaker 1: good works. Only unmarried women need apply. Such unprotected women 131 00:10:44,690 --> 00:10:48,050 Speaker 1: who lacked the security of a husband's income were in 132 00:10:48,090 --> 00:10:52,170 Speaker 1: a precarious position. Either they were poor and trying to 133 00:10:52,210 --> 00:10:54,730 Speaker 1: earn a wage in a world where women were barred 134 00:10:54,770 --> 00:10:58,050 Speaker 1: from well paid jobs, or they were of a social 135 00:10:58,090 --> 00:11:02,090 Speaker 1: background where they were expected to live off an inheritance. 136 00:11:02,970 --> 00:11:06,010 Speaker 1: The investment return on that inheritance, then was a matter 137 00:11:06,090 --> 00:11:11,210 Speaker 1: of huge importance, and eight percent a month too good 138 00:11:11,210 --> 00:11:17,410 Speaker 1: to miss, or alternatively, too good to be true. The 139 00:11:17,570 --> 00:11:22,450 Speaker 1: Ladies Deposit Company was not founded by Quakers, but by 140 00:11:22,530 --> 00:11:27,890 Speaker 1: a stage psychic and professional fortune teller named as Sarah Howe. 141 00:11:28,970 --> 00:11:32,610 Speaker 1: The company had some similarities with a pyramid scheme like 142 00:11:32,690 --> 00:11:37,290 Speaker 1: the Hearts of Women Empowering Women, but also some differences. 143 00:11:38,450 --> 00:11:43,130 Speaker 1: The grim arithmetic of the scheme was concealed. Money poured 144 00:11:43,210 --> 00:11:47,450 Speaker 1: into the Ladi's Deposit Company, money poured out, and the 145 00:11:47,490 --> 00:11:52,810 Speaker 1: mechanics of how it all worked were conveniently obscure. One 146 00:11:53,130 --> 00:11:58,970 Speaker 1: intrepid reporter even disguised himself as a woman one can 147 00:11:59,010 --> 00:12:03,370 Speaker 1: only presume that no female journalists were available in order 148 00:12:03,410 --> 00:12:07,930 Speaker 1: to gain entry to the Deposit Company's headquarters, but he 149 00:12:07,970 --> 00:12:12,370 Speaker 1: didn't learn much. We never disclose the methods by which 150 00:12:12,450 --> 00:12:16,610 Speaker 1: we do business, was all that the company's employees would say. 151 00:12:17,970 --> 00:12:22,370 Speaker 1: Sarah Howe had established what we'd now call a Ponzi scheme, 152 00:12:23,130 --> 00:12:27,530 Speaker 1: named after Charles Ponzi, a flamboyant Bostonian whose own cover 153 00:12:27,610 --> 00:12:32,770 Speaker 1: story was something to do with international postage coupons. Sarah 154 00:12:32,810 --> 00:12:36,330 Speaker 1: Howe had the same basic idea in the same city 155 00:12:37,050 --> 00:12:41,570 Speaker 1: nearly fifty years earlier. But women never seem to get 156 00:12:41,610 --> 00:12:47,570 Speaker 1: the credit for inventing anything, even investment fraud. The local 157 00:12:47,610 --> 00:12:51,370 Speaker 1: press soon concluded that the Ladies Deposit Company. 158 00:12:51,210 --> 00:12:52,890 Speaker 2: Was an obvious scam. 159 00:12:53,410 --> 00:12:58,770 Speaker 1: The Boston Daily Advertiser published an illustrated explainer, some articles 160 00:12:58,970 --> 00:13:05,090 Speaker 1: highlighting the stage psychic hows, rather questionable qualifications, and a 161 00:13:05,130 --> 00:13:09,050 Speaker 1: prediction that the whole thing would collapse in short order. 162 00:13:11,010 --> 00:13:15,330 Speaker 1: In the face of this negative publicity and some twitchy depositors, 163 00:13:15,810 --> 00:13:20,330 Speaker 1: Sarah Howe decided that the best way forward was bluff. 164 00:13:21,330 --> 00:13:24,210 Speaker 1: She announced that anyone who wanted their money back with 165 00:13:24,370 --> 00:13:28,650 Speaker 1: interest in full, could have it immediately. She hoped that 166 00:13:28,690 --> 00:13:31,930 Speaker 1: the ladies of Boston would be so reassured by this 167 00:13:32,050 --> 00:13:36,330 Speaker 1: offer that they wouldn't take it up. Alas, the ladies 168 00:13:36,330 --> 00:13:39,770 Speaker 1: of Boston were not reassured at all. They asked for 169 00:13:39,810 --> 00:13:43,130 Speaker 1: their money back, and when Sarah Howe didn't have it, 170 00:13:44,770 --> 00:13:49,770 Speaker 1: she went to jail. The Lady's Deposit Company is a 171 00:13:49,810 --> 00:13:53,850 Speaker 1: wonderful illustration of what Dan Davies in his book Lying 172 00:13:54,090 --> 00:14:00,330 Speaker 1: for Money calls the snowball effect. These scams need to 173 00:14:00,410 --> 00:14:04,050 Speaker 1: suck in an ever growing number of dupes to keep going, 174 00:14:04,410 --> 00:14:09,650 Speaker 1: and eventually that snowball of money rolling downhill, becoming bigger 175 00:14:09,930 --> 00:14:12,610 Speaker 1: and bigger, simply falls apart. 176 00:14:13,210 --> 00:14:14,290 Speaker 2: It's too big. 177 00:14:15,690 --> 00:14:21,250 Speaker 1: Remember, Sarah Howe was offering to almost double your money 178 00:14:21,570 --> 00:14:25,210 Speaker 1: in a year. If you invested with her. So let's 179 00:14:25,450 --> 00:14:31,130 Speaker 1: watch the snowball from a safe distance. Imagine that Sarah 180 00:14:31,170 --> 00:14:33,850 Speaker 1: receives an investment of one hundred dollars from a little 181 00:14:33,890 --> 00:14:37,850 Speaker 1: old lady and steals it. By the end of the year, 182 00:14:38,250 --> 00:14:41,610 Speaker 1: that little old lady expects her one hundred dollars back, 183 00:14:41,970 --> 00:14:46,930 Speaker 1: on top of ninety six dollars in interest. So Sarah 184 00:14:46,930 --> 00:14:50,090 Speaker 1: finds two more investors, steals their money, and gives it 185 00:14:50,090 --> 00:14:53,410 Speaker 1: to the little old lady. But by the end of 186 00:14:53,450 --> 00:14:56,930 Speaker 1: the following year, Sarah Howe needs to have given nearly 187 00:14:57,130 --> 00:15:01,370 Speaker 1: two hundred dollars to both of her investors. To do that, 188 00:15:01,450 --> 00:15:04,890 Speaker 1: she needs four new investors, who shouldn't be hard to 189 00:15:04,930 --> 00:15:07,370 Speaker 1: find if they think they're going to double their money. 190 00:15:08,290 --> 00:15:11,010 Speaker 1: When the four new investors want a total of eight 191 00:15:11,130 --> 00:15:14,290 Speaker 1: hundred dollars back, she just needs to find eight new 192 00:15:14,330 --> 00:15:16,450 Speaker 1: investors to join the Lady's Deposit Company. 193 00:15:17,290 --> 00:15:19,850 Speaker 2: Now you can see the trap here. 194 00:15:20,650 --> 00:15:24,570 Speaker 1: Eventually there will be no more lady depositors for the 195 00:15:24,650 --> 00:15:31,330 Speaker 1: Lady's Deposit Company. But what's perhaps less immediately obvious is 196 00:15:31,370 --> 00:15:35,650 Speaker 1: that in this little story, Sarah Howe will soon owe 197 00:15:36,130 --> 00:15:41,330 Speaker 1: sixteen hundred dollars to eight investors. And yet she only 198 00:15:41,370 --> 00:15:46,650 Speaker 1: ever stole one hundred dollars for herself. The growing snowball 199 00:15:46,730 --> 00:15:50,570 Speaker 1: of fraud is huge, and it needs to keep getting huger. 200 00:15:51,050 --> 00:15:55,770 Speaker 1: The profit for the fraudster as rellatively tiny. No wonder 201 00:15:55,890 --> 00:16:00,170 Speaker 1: that so many fraudsters eventually get caught, and no wonder 202 00:16:00,210 --> 00:16:03,850 Speaker 1: perhaps that when they do get caught, so many of 203 00:16:03,890 --> 00:16:10,130 Speaker 1: them weep with relief. There will be tears a plenty, 204 00:16:10,890 --> 00:16:12,090 Speaker 1: but not much relief. 205 00:16:13,130 --> 00:16:14,330 Speaker 2: After the break. 206 00:16:34,650 --> 00:16:38,290 Speaker 1: In the summer of two thousand and three, Julia started 207 00:16:38,330 --> 00:16:42,090 Speaker 1: to try to recruit investors to buy hearts for women, 208 00:16:42,290 --> 00:16:46,690 Speaker 1: empowering women. Julia had been signed up by Tatiana, the 209 00:16:46,730 --> 00:16:50,530 Speaker 1: banker's wife, over champagne at the Spa. She had sent 210 00:16:50,650 --> 00:16:54,210 Speaker 1: three thousand pounds to Elfie, the mother of Darling Archie 211 00:16:54,210 --> 00:16:58,570 Speaker 1: from the Fancy School, but Julia's own recruitment efforts were 212 00:16:58,570 --> 00:17:02,650 Speaker 1: going nowhere. Her rich friends sneered at her that had 213 00:17:02,650 --> 00:17:06,010 Speaker 1: already been approached so many times to invest in her 214 00:17:06,050 --> 00:17:09,770 Speaker 1: heart that the whole affair had become a bore ring joke. 215 00:17:10,970 --> 00:17:14,770 Speaker 1: Horror friends were less likely to have heard about the scheme, 216 00:17:15,410 --> 00:17:18,010 Speaker 1: but they were also less likely to have the money 217 00:17:18,050 --> 00:17:23,810 Speaker 1: to invest. I mentioned that as a matter of simple arithmetic. 218 00:17:24,290 --> 00:17:27,450 Speaker 1: For everyone who makes twenty four thousand pounds in a 219 00:17:27,450 --> 00:17:31,170 Speaker 1: pyramid scheme, there must be eight people who lose three 220 00:17:31,210 --> 00:17:35,050 Speaker 1: thousand pounds. But how can it be that so many 221 00:17:35,130 --> 00:17:39,170 Speaker 1: people lose out? Well, that's simple too. Every time a 222 00:17:39,290 --> 00:17:42,490 Speaker 1: new group of recruits is brought in, the entire operation 223 00:17:42,650 --> 00:17:47,090 Speaker 1: has to double in size. Every recruit finds two more recruits, 224 00:17:47,130 --> 00:17:52,250 Speaker 1: and every pyramid becomes two pyramids. The rolling snowball becomes 225 00:17:52,290 --> 00:17:59,050 Speaker 1: a vast snow boulder, then collapses into a destructive avalanche 226 00:17:59,090 --> 00:18:06,050 Speaker 1: of disappointment and loss. Pyramid schemes fail because they run 227 00:18:06,090 --> 00:18:10,770 Speaker 1: out of recruits just after becoming huge, when a vast 228 00:18:10,850 --> 00:18:15,090 Speaker 1: number of people have recently joined but not yet cashed out. 229 00:18:16,330 --> 00:18:18,210 Speaker 2: Julia was one of those people. 230 00:18:19,890 --> 00:18:25,210 Speaker 1: In growing desperation, Julia went to a recruitment party in 231 00:18:25,290 --> 00:18:30,090 Speaker 1: the hope of recruiting new investors. She'd been told tales 232 00:18:30,130 --> 00:18:35,730 Speaker 1: about parties in central London mansions, champagne being quaffed with 233 00:18:35,850 --> 00:18:40,210 Speaker 1: supermodels as suitcases of cash were handed to people who'd 234 00:18:40,210 --> 00:18:44,050 Speaker 1: reached the top of the pyramid. That this recruitment party 235 00:18:44,970 --> 00:18:49,490 Speaker 1: was in a hairdressers instead of champagne. On ice, there 236 00:18:49,570 --> 00:18:54,810 Speaker 1: was warm white wine, and a growing sense of irritation 237 00:18:55,050 --> 00:19:00,370 Speaker 1: that Julia's failure to recruit was letting down everyone above 238 00:19:00,410 --> 00:19:05,410 Speaker 1: her in the pyramid. There was, of course, no sign 239 00:19:06,050 --> 00:19:12,650 Speaker 1: of Claudia Schieffer. The brilliance of women empowering women is 240 00:19:12,690 --> 00:19:17,690 Speaker 1: that it seems to have been largely self organizing. Many scams, 241 00:19:18,090 --> 00:19:20,170 Speaker 1: in contrast, require. 242 00:19:19,810 --> 00:19:24,530 Speaker 2: A lot of hard work. Just ask Sam Israel. 243 00:19:25,490 --> 00:19:28,770 Speaker 1: He set up his ill fated hedge fund by you 244 00:19:28,930 --> 00:19:33,250 Speaker 1: Capital in nineteen ninety six, assisted by an accountant named 245 00:19:33,370 --> 00:19:37,090 Speaker 1: Dan Marino, who lived with his mother and. 246 00:19:37,130 --> 00:19:38,690 Speaker 2: Dreamed of greatness. 247 00:19:40,050 --> 00:19:44,370 Speaker 1: Apparently, Sam actually intended to run an honest hedge fund, 248 00:19:44,970 --> 00:19:48,610 Speaker 1: or if not quite honest, a hedge fund that would 249 00:19:48,650 --> 00:19:53,330 Speaker 1: make money for investors. His business plan, by You Capital 250 00:19:53,530 --> 00:19:57,210 Speaker 1: would use a new computer algorithm he had developed, plus 251 00:19:57,450 --> 00:20:00,610 Speaker 1: the skills of a once great trader whom Sam had 252 00:20:00,690 --> 00:20:04,730 Speaker 1: hired after he had fallen on hard times, plus a 253 00:20:04,770 --> 00:20:08,090 Speaker 1: few insider tips like in the old days when he'd 254 00:20:08,090 --> 00:20:12,410 Speaker 1: collect bags of cash from the Pierre Hotel. That should 255 00:20:12,410 --> 00:20:13,770 Speaker 1: do the trick, thought Sam. 256 00:20:14,490 --> 00:20:15,130 Speaker 2: But it didn't. 257 00:20:16,210 --> 00:20:19,530 Speaker 1: The once great trader was washed up. He made a 258 00:20:19,530 --> 00:20:24,010 Speaker 1: lot of bad calls. The computer algorithm seemed to misfire 259 00:20:24,250 --> 00:20:27,450 Speaker 1: as often as it worked, and Sam didn't have the 260 00:20:27,490 --> 00:20:29,370 Speaker 1: same insider access that. 261 00:20:29,330 --> 00:20:33,450 Speaker 2: He used to. After a couple of lackluster. 262 00:20:32,970 --> 00:20:37,050 Speaker 1: Years in which Sam loudly told his few investors that 263 00:20:37,090 --> 00:20:42,450 Speaker 1: the funds results were great, he pondered his options. The 264 00:20:42,530 --> 00:20:46,090 Speaker 1: results were not in fact great, and if he simply 265 00:20:46,210 --> 00:20:50,330 Speaker 1: published the firm's accounts showing a loss, the investors would 266 00:20:50,410 --> 00:20:53,290 Speaker 1: yell at him for all his empty boasts, and Bayou 267 00:20:53,410 --> 00:21:01,850 Speaker 1: Capital would collapse. Or alternatively, Sam and his colleagues, the 268 00:21:01,970 --> 00:21:05,050 Speaker 1: washed up trader and the accountant who lived with his mum, 269 00:21:05,730 --> 00:21:14,490 Speaker 1: could lie, could publish audited accounts which claimed stella results. 270 00:21:15,570 --> 00:21:20,690 Speaker 1: Like Sarah Howe, they'd be offering fantastic returns. Unlike Sarah Howe, 271 00:21:20,930 --> 00:21:23,890 Speaker 1: who would simply steal money from new depositors and pay 272 00:21:23,930 --> 00:21:27,770 Speaker 1: it out as interest, they'd need to show some kind 273 00:21:27,810 --> 00:21:31,850 Speaker 1: of evidence that they were making profitable investments. To do that, 274 00:21:32,730 --> 00:21:40,210 Speaker 1: they'd need a fraudulent auditor. No problem. Dan Marino simply 275 00:21:40,250 --> 00:21:43,930 Speaker 1: set up his own audit firm, marking his own homework. 276 00:21:44,690 --> 00:21:48,610 Speaker 1: Nobody ever checked that the auditor who was verifying that 277 00:21:48,730 --> 00:21:52,490 Speaker 1: Dan Marino was telling the truth was a Dan Marino. 278 00:21:53,770 --> 00:21:57,810 Speaker 1: It probably didn't hurt that if anyone ever tried to 279 00:21:57,930 --> 00:22:02,690 Speaker 1: search for Dan Marino on the still young worldwide Web, 280 00:22:03,050 --> 00:22:07,770 Speaker 1: they were sure to get Dan Marino, the unimaginably famous 281 00:22:08,090 --> 00:22:13,330 Speaker 1: Miami Dolphins quarterback, rather than Dan Marino the crooked accountant. 282 00:22:14,490 --> 00:22:17,370 Speaker 1: For a while, the plan was that Sam would go 283 00:22:17,450 --> 00:22:21,570 Speaker 1: on a profitable streak and actually make the profits that 284 00:22:21,690 --> 00:22:26,130 Speaker 1: Dan Marino's fake accounts were claiming. But the snowball was 285 00:22:26,170 --> 00:22:30,050 Speaker 1: starting to grow. The more profit they said they were making, 286 00:22:30,810 --> 00:22:34,650 Speaker 1: the larger the fictional pot of money was growing, and 287 00:22:34,690 --> 00:22:37,050 Speaker 1: the harder it was for Sam and his partner to 288 00:22:37,170 --> 00:22:41,330 Speaker 1: catch up to their own lies. It didn't help that 289 00:22:41,450 --> 00:22:46,570 Speaker 1: Sam kept claiming to outperform the market. Dan Marino was 290 00:22:46,690 --> 00:22:50,810 Speaker 1: losing his mind at the fact that Sam couldn't control himself. 291 00:22:50,970 --> 00:22:53,250 Speaker 3: When they had a good month and made money, they 292 00:22:53,370 --> 00:22:55,410 Speaker 3: used that as the performance number. 293 00:22:55,330 --> 00:22:57,810 Speaker 1: Complained Dan to the journalist Gee Lawson. 294 00:22:57,970 --> 00:22:59,930 Speaker 3: When they had a bad month, they used a made 295 00:23:00,010 --> 00:23:00,490 Speaker 3: up number. 296 00:23:01,330 --> 00:23:02,410 Speaker 2: That won't work. 297 00:23:03,010 --> 00:23:06,530 Speaker 1: If you let the fraud snowball grow too big, you'll 298 00:23:06,530 --> 00:23:10,210 Speaker 1: never get it under control. Sam Israel would never be 299 00:23:10,290 --> 00:23:13,090 Speaker 1: able to catch up to his own lies because he 300 00:23:13,130 --> 00:23:15,610 Speaker 1: could never bring himself to pretend he'd had a bad 301 00:23:15,730 --> 00:23:17,210 Speaker 1: quarter when it had a good one. 302 00:23:17,330 --> 00:23:21,130 Speaker 3: We went with grace and luls with integrity. 303 00:23:20,930 --> 00:23:26,050 Speaker 1: Boasted Sam to his investors. Dan Marino knew the awful truth. 304 00:23:26,130 --> 00:23:29,730 Speaker 3: I stopped tracking the published numbers against the real numbers. 305 00:23:29,330 --> 00:23:30,050 Speaker 2: Said Marino. 306 00:23:30,610 --> 00:23:33,530 Speaker 1: The snowball was already too big. 307 00:23:33,770 --> 00:23:35,690 Speaker 3: Oh, it made me sick to my stomach. 308 00:23:37,810 --> 00:23:41,770 Speaker 1: Four years after the Ladies Deposit Company was exposed by 309 00:23:41,770 --> 00:23:46,170 Speaker 1: the Boston Daily Advertiser and collapsed, ands Sarah Howe was 310 00:23:46,210 --> 00:23:51,930 Speaker 1: sent to prison. Refined women of Boston, Massachusetts, were intrigued 311 00:23:52,010 --> 00:23:57,050 Speaker 1: to hear of a wonderful investment opportunity. A new bank, 312 00:23:57,650 --> 00:24:03,170 Speaker 1: founded for women by women and called the Boston Women's Bank, 313 00:24:03,850 --> 00:24:11,050 Speaker 1: paid interest of seven percent per month. Too good to miss, 314 00:24:12,050 --> 00:24:16,770 Speaker 1: or alternatively, too good to be true. After a couple 315 00:24:16,810 --> 00:24:22,410 Speaker 1: of years, the Boston Daily Advertiser discovered and published the truth. 316 00:24:23,250 --> 00:24:29,090 Speaker 1: The manager of the Boston Women's Bank was not missus J. C. Ewle, 317 00:24:29,370 --> 00:24:35,530 Speaker 1: as advertised, but an ex convict by the name of 318 00:24:35,650 --> 00:24:42,330 Speaker 1: Sarah Howe. Sarah Howe had learned one lesson this time. 319 00:24:42,650 --> 00:24:48,370 Speaker 1: She skipped town and moved to Chicago. In due course, 320 00:24:48,850 --> 00:24:53,730 Speaker 1: the refined Ladies of Chicago, we're intrigued to hear of 321 00:24:53,810 --> 00:24:59,690 Speaker 1: a wonderful investment opportunity The Lady's Provident Aid Society was 322 00:24:59,810 --> 00:25:04,330 Speaker 1: offering interest of Oh never mind, the police caught up 323 00:25:04,370 --> 00:25:08,530 Speaker 1: with miss Sarah Howe shut down the Lady's Provident Aid Society, 324 00:25:08,730 --> 00:25:09,810 Speaker 1: and so enough. 325 00:25:10,050 --> 00:25:12,050 Speaker 2: As Howe was back in prison. 326 00:25:12,930 --> 00:25:20,810 Speaker 1: Worth it surely not in character, most definitely, Sometimes when 327 00:25:20,850 --> 00:25:25,850 Speaker 1: the snowball starts to roll, the fraudster just can't quit. 328 00:25:27,810 --> 00:25:31,530 Speaker 1: Sam Israel seemed to have it all, a loving wife 329 00:25:31,530 --> 00:25:35,330 Speaker 1: and children, a luxurious home, and at least on paper, 330 00:25:35,610 --> 00:25:40,570 Speaker 1: a fortune to his name. But appearances can be deceptive. 331 00:25:41,290 --> 00:25:44,930 Speaker 1: Sam was a mess. He was taking too much cocaine 332 00:25:45,290 --> 00:25:48,930 Speaker 1: and drinking far too much booze, and like so many people, 333 00:25:49,330 --> 00:25:52,450 Speaker 1: he had become addicted to painkillers after a back injury. 334 00:25:53,330 --> 00:25:58,210 Speaker 1: All the while, the fraud snowball was growing. But Sam 335 00:25:58,250 --> 00:26:02,050 Speaker 1: and Dan had one advantage, which is that a fraudulent 336 00:26:02,170 --> 00:26:06,370 Speaker 1: hedge fund doesn't have a cell by date. That's different 337 00:26:06,370 --> 00:26:09,770 Speaker 1: from the other scams we've heard about. Tatyana was promising 338 00:26:09,890 --> 00:26:14,330 Speaker 1: Julia that women empowering women would multiply her money in 339 00:26:14,570 --> 00:26:18,890 Speaker 1: just six weeks. The Ladies Deposit Company promised to almost 340 00:26:18,930 --> 00:26:23,050 Speaker 1: double investors' money after a year. But by you capital 341 00:26:23,170 --> 00:26:27,090 Speaker 1: was different because hedge fund investors didn't tend to withdraw 342 00:26:27,170 --> 00:26:30,890 Speaker 1: their money if things seemed to be going well. Instead, 343 00:26:31,610 --> 00:26:36,850 Speaker 1: they sat back and watched the snowball grow. But the 344 00:26:36,890 --> 00:26:40,850 Speaker 1: more by you capital snowball grew, the harder it would 345 00:26:40,930 --> 00:26:45,050 Speaker 1: ever be for Sam Israel to trade his way out 346 00:26:45,090 --> 00:26:50,810 Speaker 1: of the lie. One September Friday, his computer algorithm suggested 347 00:26:50,810 --> 00:26:53,850 Speaker 1: a big bet on shares going up in the next week. 348 00:26:54,970 --> 00:27:01,650 Speaker 1: Sam made that bet. The following Tuesday morning, two airliners 349 00:27:02,130 --> 00:27:06,970 Speaker 1: swept out of the cloudless sky above Manhattan and crashed 350 00:27:06,970 --> 00:27:11,570 Speaker 1: into the World Trade Center. The world reeled with the 351 00:27:11,610 --> 00:27:17,210 Speaker 1: implications of the atrocity, but for Sam Israel and Dan Marino, 352 00:27:17,410 --> 00:27:20,330 Speaker 1: the only thing that mattered was how it changed their 353 00:27:20,370 --> 00:27:25,890 Speaker 1: own twisted financial world. Sam was aghast that his bet 354 00:27:25,890 --> 00:27:33,050 Speaker 1: had spectacularly backfired, while Dan Marino spotted an opportunity close 355 00:27:33,090 --> 00:27:37,050 Speaker 1: the fund. Said Dan Marino and ten investors, he lost 356 00:27:37,090 --> 00:27:39,490 Speaker 1: most of their money in the aftermath of nine to eleven, 357 00:27:39,610 --> 00:27:43,490 Speaker 1: and give the dregs back. Everyone will yell, but nobody 358 00:27:43,490 --> 00:27:47,090 Speaker 1: will suspect anything, and neither you nor I will. 359 00:27:46,930 --> 00:27:47,610 Speaker 3: Go to jail. 360 00:27:47,850 --> 00:27:52,890 Speaker 1: Please speG Marino, But sam Israel wouldn't do it. He 361 00:27:53,050 --> 00:27:56,730 Speaker 1: knew that if by you capital folded, he might escape jail, 362 00:27:57,210 --> 00:28:00,450 Speaker 1: but it'd still lose his fancy home. He should have 363 00:28:00,490 --> 00:28:04,410 Speaker 1: listened to Marino, because within two years he was going 364 00:28:04,450 --> 00:28:10,090 Speaker 1: to lose his home anyway. Cautionary tales, We'll be back 365 00:28:10,330 --> 00:28:38,250 Speaker 1: in a moment. In two thousand and three, Sam Israel 366 00:28:38,410 --> 00:28:41,650 Speaker 1: was at home leaning over a line of white powder 367 00:28:41,810 --> 00:28:44,090 Speaker 1: with a rolled twenty dollar bill up his nose. 368 00:28:46,170 --> 00:28:46,930 Speaker 2: When his wife. 369 00:28:46,850 --> 00:28:52,090 Speaker 1: Janice walked in. She became upset. He became outraged. How 370 00:28:52,210 --> 00:28:57,210 Speaker 1: dare she suggests he was taking cocaine. She persuaded him 371 00:28:57,250 --> 00:29:00,930 Speaker 1: to take urine tests to ensure he stayed off the drugs, 372 00:29:01,570 --> 00:29:05,850 Speaker 1: until one evening he angrily unzipped his pants and went 373 00:29:05,890 --> 00:29:08,450 Speaker 1: all over the bathroom floor, bellowing. 374 00:29:08,330 --> 00:29:09,570 Speaker 3: You want yourn. 375 00:29:10,930 --> 00:29:15,650 Speaker 1: At Thanksgiving that year, he passed out over the turkey. 376 00:29:19,370 --> 00:29:23,370 Speaker 1: By Christmas two thousand and three, janis had thrown him 377 00:29:23,410 --> 00:29:28,570 Speaker 1: out of their house and secured a protective order. Sam 378 00:29:28,770 --> 00:29:33,690 Speaker 1: rented the most tasteless, ostentatious bachelor pad he could find, 379 00:29:34,330 --> 00:29:40,610 Speaker 1: a vast Tudor style manner, with outsized chandeliers, marble bathrooms, 380 00:29:40,810 --> 00:29:45,330 Speaker 1: and comically huge beds. Sam paid the monthly rent of 381 00:29:45,410 --> 00:29:48,970 Speaker 1: twenty two thousand dollars to the house's owner, a. 382 00:29:48,930 --> 00:29:52,930 Speaker 2: Gentleman by the name of Donald Trump. 383 00:29:53,250 --> 00:30:00,010 Speaker 3: So good, so good, amazing house, huge beds. 384 00:30:00,050 --> 00:30:04,370 Speaker 1: Sam hung around clubs, tipping the bartender to introduce him 385 00:30:04,410 --> 00:30:07,890 Speaker 1: to pretty women. He fitted the Trump mansion with the 386 00:30:07,970 --> 00:30:12,410 Speaker 1: latest trading A seventeen screens so he could work from home. 387 00:30:13,050 --> 00:30:15,130 Speaker 1: He was still looking for a way to make all 388 00:30:15,130 --> 00:30:18,850 Speaker 1: the money back, but the fraud snowball that Bayou was 389 00:30:18,850 --> 00:30:22,130 Speaker 1: getting bigger and bigger, and Dan Marino had had a 390 00:30:22,170 --> 00:30:25,850 Speaker 1: couple of near misses when investors or regulators had asked 391 00:30:25,850 --> 00:30:30,970 Speaker 1: to see documents that would prove highly incriminating. Marino was 392 00:30:31,010 --> 00:30:35,490 Speaker 1: reduced to sending those incriminating documents to counterparties on a 393 00:30:35,610 --> 00:30:38,890 Speaker 1: Friday evening in the hope that they would be tossed 394 00:30:38,930 --> 00:30:41,730 Speaker 1: into a backlog file and then buried under the Monday 395 00:30:41,810 --> 00:30:47,210 Speaker 1: morning rush. Amazingly, that tactic worked, but it couldn't work forever. 396 00:30:47,650 --> 00:30:49,450 Speaker 2: Dan and Sam. 397 00:30:49,130 --> 00:30:55,930 Speaker 1: Were going to jail for sure unless Sam Israel could 398 00:30:55,930 --> 00:30:59,650 Speaker 1: find a sure fire scheme to make How big was 399 00:30:59,690 --> 00:31:04,850 Speaker 1: the snowball Now there were several hundred million dollars Sam 400 00:31:04,890 --> 00:31:09,570 Speaker 1: Israel was starting to get desperate. There's an old saying, 401 00:31:10,290 --> 00:31:14,250 Speaker 1: you can't cheat an honest man, and there's truth in 402 00:31:14,330 --> 00:31:18,770 Speaker 1: that saying, because the premise of a scam is often simply. 403 00:31:18,730 --> 00:31:21,290 Speaker 3: I'm doing crimes, and if you come and do crimes 404 00:31:21,330 --> 00:31:23,090 Speaker 3: with me, we'll both make money. 405 00:31:24,850 --> 00:31:27,970 Speaker 1: That's a sales pitch to drive away honest folk, but 406 00:31:28,090 --> 00:31:31,450 Speaker 1: it also has some appeal because it provides a logical 407 00:31:31,490 --> 00:31:34,370 Speaker 1: reason why there might be quick money to be made 408 00:31:34,770 --> 00:31:38,970 Speaker 1: for someone who could keep a secret. Sam Israel was 409 00:31:39,010 --> 00:31:42,730 Speaker 1: not an honest man. He'd seen enough cheating on Wall 410 00:31:42,770 --> 00:31:46,330 Speaker 1: Street to know that the game was often fixed, and 411 00:31:46,410 --> 00:31:50,810 Speaker 1: the crazy simplicity of the Bayou fraud, coupled perhaps with 412 00:31:50,890 --> 00:31:53,970 Speaker 1: the fact that Sam was taking a lot of drugs, 413 00:31:54,890 --> 00:31:59,250 Speaker 1: was just starting to make him doubt everything. How many 414 00:31:59,370 --> 00:32:02,770 Speaker 1: other hedge funds were just Ponzi schemes? What else was 415 00:32:02,810 --> 00:32:06,610 Speaker 1: a Ponzi scheme? He had seen the Federal Reserve magic 416 00:32:06,690 --> 00:32:09,290 Speaker 1: money out of thin air after that great crash of 417 00:32:09,370 --> 00:32:12,250 Speaker 1: nineteen eighty seven, when Sam had made so much money 418 00:32:12,250 --> 00:32:15,050 Speaker 1: and could have made more if the FED hadn't stepped in. 419 00:32:15,810 --> 00:32:18,010 Speaker 1: The FED stepped in after nine to eleven too. 420 00:32:18,650 --> 00:32:20,770 Speaker 3: Who exactly was running the world economy. 421 00:32:20,810 --> 00:32:28,610 Speaker 1: Anyway, Sam started to run in strange conspiratorial circles. If 422 00:32:28,650 --> 00:32:32,210 Speaker 1: you want the full story, it's told in incredible cringe 423 00:32:32,250 --> 00:32:37,170 Speaker 1: making detail in Gee Lawson's book Octopus, which describes an 424 00:32:37,250 --> 00:32:41,890 Speaker 1: astonishing cast of characters and an even more astonishing array 425 00:32:42,170 --> 00:32:47,650 Speaker 1: of delusional beliefs. Sam became obsessed with finding the undoctored 426 00:32:47,730 --> 00:32:52,530 Speaker 1: footage showing who really killed JFK. He believed he had 427 00:32:52,570 --> 00:32:55,810 Speaker 1: been attacked by an assassin on the streets of Hamburg, 428 00:32:56,330 --> 00:32:59,530 Speaker 1: and that had blown the man's brains out in self defense. 429 00:33:00,450 --> 00:33:04,330 Speaker 1: Needless to say, Hamburg's police have no record at all 430 00:33:04,370 --> 00:33:09,770 Speaker 1: of such events. Above all, Sam came to believe in 431 00:33:09,810 --> 00:33:16,610 Speaker 1: a global conspiracy thirteen powerful families who truly rule the world, 432 00:33:17,250 --> 00:33:22,290 Speaker 1: whom he called the Octopus. It all gets very, very weird. 433 00:33:22,810 --> 00:33:26,450 Speaker 1: Do read the book. It's quite a trip. But for 434 00:33:26,530 --> 00:33:29,610 Speaker 1: our purposes, what we need to know is that Sam 435 00:33:29,770 --> 00:33:33,330 Speaker 1: Israel fell under the spell of a man called Robert 436 00:33:33,410 --> 00:33:38,250 Speaker 1: Booth Nichols, who was claimed to be a top CIA agent, 437 00:33:39,050 --> 00:33:42,530 Speaker 1: whose bare hands were said to be deadly weapons, and 438 00:33:42,570 --> 00:33:48,490 Speaker 1: who was undoubtedly a confidence trickster. Like an aging chain 439 00:33:48,650 --> 00:33:53,130 Speaker 1: smoking James Bond. He swaggered around London City with tight 440 00:33:53,210 --> 00:33:56,570 Speaker 1: controls on firearms with a revolver in a shoulder holster. 441 00:33:57,650 --> 00:34:01,490 Speaker 1: Sam believed that Nichols had access to a special CIA 442 00:34:01,690 --> 00:34:05,850 Speaker 1: program which monitored every bank transaction on the planet, an 443 00:34:05,890 --> 00:34:10,010 Speaker 1: insider trader's dream, and he flew out to London to 444 00:34:10,130 --> 00:34:13,330 Speaker 1: beg Nichols to give it to him. He'd do anything, 445 00:34:13,450 --> 00:34:17,890 Speaker 1: he said. Do you have one hundred million dollars in cash? 446 00:34:18,010 --> 00:34:19,170 Speaker 1: Said Nichols, I do. 447 00:34:19,490 --> 00:34:22,130 Speaker 3: I've got one hundred million in cash. 448 00:34:22,570 --> 00:34:24,890 Speaker 2: Do you have one hundred and fifty million? 449 00:34:25,410 --> 00:34:25,650 Speaker 3: Yes. 450 00:34:27,330 --> 00:34:31,290 Speaker 1: Forget the special CIA program which monitors bank accounts. 451 00:34:30,850 --> 00:34:31,530 Speaker 2: Said Nichols. 452 00:34:31,890 --> 00:34:34,810 Speaker 1: We can make some real money together if we can 453 00:34:34,890 --> 00:34:40,330 Speaker 1: access a special secret market operated by the thirteen families 454 00:34:40,370 --> 00:34:42,450 Speaker 1: who together secretly rule the world. 455 00:34:42,770 --> 00:34:45,090 Speaker 2: You know the octopus. 456 00:34:46,170 --> 00:34:49,290 Speaker 1: And just as Julia had said to Tatiana at the 457 00:34:49,330 --> 00:34:53,690 Speaker 1: Riverside spa, Sam Israel said to Nichols, sign me up, 458 00:34:54,970 --> 00:34:59,090 Speaker 1: but not for three thousand pounds, for more than one 459 00:34:59,170 --> 00:35:06,130 Speaker 1: hundred million dollars. With Nichols by his side whispering into 460 00:35:06,170 --> 00:35:12,090 Speaker 1: his ear, Sam Israel joined an absolutely bizarre world full 461 00:35:12,130 --> 00:35:16,690 Speaker 1: of conspiracy theorist fraudsters, all claiming to believe in the 462 00:35:16,730 --> 00:35:20,090 Speaker 1: existence of a secret market that can multiply your money 463 00:35:20,130 --> 00:35:25,410 Speaker 1: tenfold overnight, all secretly frustrated that they personally have never 464 00:35:25,450 --> 00:35:29,010 Speaker 1: been able to get access to that entirely fictional market, 465 00:35:29,690 --> 00:35:34,370 Speaker 1: and all trying to rip each other off. At one stage, 466 00:35:34,650 --> 00:35:38,250 Speaker 1: Nichols got sam Israel to give him ten million dollars 467 00:35:38,290 --> 00:35:40,810 Speaker 1: in cash on the basis of a story about a 468 00:35:40,970 --> 00:35:45,290 Speaker 1: stash of treasure stolen and hidden by a Japanese general 469 00:35:45,490 --> 00:35:48,650 Speaker 1: in the Second World War and protected by poison gas 470 00:35:48,730 --> 00:35:53,770 Speaker 1: booby traps. Then another con man persuaded Nichols to give 471 00:35:53,970 --> 00:35:56,930 Speaker 1: him a million dollars to help the finance an expedition 472 00:35:57,570 --> 00:35:59,770 Speaker 1: to find the exact same treasure. 473 00:36:00,810 --> 00:36:04,410 Speaker 2: Can we have a recap? Of course, sam Israel was 474 00:36:04,450 --> 00:36:07,690 Speaker 2: controlling one hundred million dollars of Buyo Capital's money based 475 00:36:07,690 --> 00:36:10,250 Speaker 2: on a fraud, invested that money in. 476 00:36:10,290 --> 00:36:11,490 Speaker 3: Robert Nichols's fraud. 477 00:36:12,010 --> 00:36:15,730 Speaker 1: Robert Nichols then invested that money in yet another fraud. 478 00:36:16,530 --> 00:36:18,490 Speaker 2: Exactly, thank you, are you? 479 00:36:18,570 --> 00:36:21,890 Speaker 1: Surely, though, it's quite hard to give one hundred million 480 00:36:21,970 --> 00:36:25,370 Speaker 1: dollars to a fraudster to invest in a special market 481 00:36:25,450 --> 00:36:29,210 Speaker 1: protected by assassins and controlled by the thirteen families who 482 00:36:29,250 --> 00:36:32,330 Speaker 1: really rule the world. There are hard checks and balances 483 00:36:32,330 --> 00:36:36,610 Speaker 1: in place. Several times Sam Israel tried to invest the 484 00:36:36,650 --> 00:36:39,850 Speaker 1: one hundred million in one scam or another, and a 485 00:36:39,890 --> 00:36:44,450 Speaker 1: banker or a stockbroker simply refused to process the transaction 486 00:36:45,130 --> 00:36:47,730 Speaker 1: until there was proof that it was genuine, and there 487 00:36:47,730 --> 00:36:53,130 Speaker 1: never was. In the end, the Bayou Capital ponzi scheme 488 00:36:53,650 --> 00:36:58,930 Speaker 1: was exposed. But it wasn't because Sam Israel's investors believed 489 00:36:58,930 --> 00:37:01,890 Speaker 1: that he had lost his mind, or even that he 490 00:37:01,890 --> 00:37:05,610 Speaker 1: had lost their money. They just believed that he'd lost 491 00:37:05,610 --> 00:37:09,850 Speaker 1: his touch. They noticed that sam wasn't spending much time 492 00:37:09,890 --> 00:37:12,930 Speaker 1: at work. Little did they know that this was because 493 00:37:12,970 --> 00:37:15,490 Speaker 1: he was in Europe being taught how to kill a 494 00:37:15,530 --> 00:37:18,570 Speaker 1: person with his bare hands by a manly believed was 495 00:37:18,610 --> 00:37:24,330 Speaker 1: an elite CIA operative. Bayou's investors asked for their money back, 496 00:37:24,810 --> 00:37:27,810 Speaker 1: which would have been fine, except that most of that 497 00:37:27,970 --> 00:37:32,610 Speaker 1: money had only ever existed in Dan Marino's fraudulent accounts. 498 00:37:33,130 --> 00:37:39,330 Speaker 1: The snowball had grown enormous. The fraud was at last exposed. 499 00:37:41,130 --> 00:37:45,570 Speaker 1: Sam Israel was given a sentence of twenty years, and, 500 00:37:45,810 --> 00:37:49,210 Speaker 1: as an act of leniency that seems to be common 501 00:37:49,250 --> 00:37:52,770 Speaker 1: for white collar criminals, eight weeks of freedom to get 502 00:37:52,770 --> 00:37:58,290 Speaker 1: his affairs in order before reporting to jail. Listener, he 503 00:37:58,370 --> 00:38:05,570 Speaker 1: did not report to jail. Police found his car parked 504 00:38:05,690 --> 00:38:09,050 Speaker 1: on the Bear Mountain Bridge high over the Hudson River 505 00:38:09,410 --> 00:38:13,530 Speaker 1: in upstate New York. He left a suicide note and 506 00:38:13,570 --> 00:38:16,570 Speaker 1: smudged in the dust on his car's hood were the 507 00:38:16,570 --> 00:38:22,890 Speaker 1: words suicide is painless. But Sam Israel's suicide note was 508 00:38:22,930 --> 00:38:27,810 Speaker 1: as fictional as his investment returns. The authorities tracked him down, 509 00:38:28,090 --> 00:38:31,890 Speaker 1: alive and well and a campsite in Massachusetts. They promptly 510 00:38:31,930 --> 00:38:35,730 Speaker 1: sent him to jail. By faking his own suicide, He 511 00:38:35,850 --> 00:38:39,290 Speaker 1: got just three more weeks of freedom, and of course 512 00:38:39,650 --> 00:38:43,730 Speaker 1: landed his girlfriend in trouble for helping him out. Worth 513 00:38:43,770 --> 00:38:53,770 Speaker 1: it surely not in character. Most definitely, Julia's investment troubles, thankfully, 514 00:38:54,050 --> 00:38:58,850 Speaker 1: were rather more mundane. Having invested three thousand pounds in 515 00:38:58,890 --> 00:39:03,690 Speaker 1: the Women Empowering Women pyramid, she found herself fielding ever 516 00:39:03,810 --> 00:39:08,530 Speaker 1: more strident calls from people further up the pyramid, berating 517 00:39:08,570 --> 00:39:14,130 Speaker 1: her not finding more recruits. Tricksy, Pucky and Buttons all 518 00:39:14,130 --> 00:39:18,890 Speaker 1: had their say. It was, says Julia, like being bullied 519 00:39:18,930 --> 00:39:23,330 Speaker 1: by a bunch of fairies. But the curious thing about 520 00:39:23,490 --> 00:39:28,890 Speaker 1: women empowering women. Nobody knows who started it. We think 521 00:39:29,170 --> 00:39:32,530 Speaker 1: that it's hard to be sure that most Ponzi schemes fail. 522 00:39:33,250 --> 00:39:36,810 Speaker 1: When they do, it's because of the relentless logic of 523 00:39:36,850 --> 00:39:41,770 Speaker 1: the snowball. Sarah Howe went to prison twice. Sam Israel 524 00:39:42,090 --> 00:39:46,770 Speaker 1: faked his own suicide in a desperate attempt to escape. 525 00:39:47,330 --> 00:39:51,210 Speaker 1: But the unknown woman who created the whole spiel about 526 00:39:51,650 --> 00:39:56,410 Speaker 1: hearts and empowering other women, she's the exception to the 527 00:39:56,490 --> 00:40:01,410 Speaker 1: rule that fraud doesn't pay. She pushed a few snowballs 528 00:40:01,450 --> 00:40:06,250 Speaker 1: down a steep snowy hill, decided that she'd made enough money, 529 00:40:07,050 --> 00:40:11,970 Speaker 1: and before the casualties began to mount down below, she 530 00:40:12,050 --> 00:40:18,890 Speaker 1: walked away. But those casualties did exist, and Julia met them. 531 00:40:19,370 --> 00:40:22,690 Speaker 1: The grumpy fairies could probably afford to lose the money, 532 00:40:23,610 --> 00:40:27,010 Speaker 1: but it was less funny to receive voicemails from distraught 533 00:40:27,130 --> 00:40:32,210 Speaker 1: Filipino cleaners who'd bought hearts and now feared they'd lose 534 00:40:32,290 --> 00:40:36,650 Speaker 1: three thousand pounds They definitely could not afford to squander, 535 00:40:38,010 --> 00:40:42,090 Speaker 1: having run out of spa going pony riding ladies who lunch. 536 00:40:42,650 --> 00:40:47,370 Speaker 1: The women empowering women Snowball had started to flatten much 537 00:40:47,690 --> 00:40:51,930 Speaker 1: poorer women, women who would struggle to pick themselves up 538 00:40:52,770 --> 00:40:58,730 Speaker 1: after the snowball had rolled on. Key sources for this 539 00:40:58,810 --> 00:41:04,610 Speaker 1: episode include Julius Stephenson's article Broken Hearts Club, Daniel Davis's 540 00:41:04,610 --> 00:41:08,610 Speaker 1: book Lying for Money, and for the astonishing story of 541 00:41:08,690 --> 00:41:15,090 Speaker 1: Sam Israel Gee Larson's book Octopus. This live edition of 542 00:41:15,130 --> 00:41:19,010 Speaker 1: Cautionary Tales was written by me Tim Harford with Andrew Wright. 543 00:41:19,490 --> 00:41:22,530 Speaker 1: Tonight you heard the voice talents of Sarah Job and 544 00:41:22,610 --> 00:41:28,770 Speaker 1: Stuart mclachlarn. The original music is the work of Pascal Wise. 545 00:41:29,130 --> 00:41:32,890 Speaker 1: Our b s N interpreter was Katherine Motson. The show 546 00:41:33,050 --> 00:41:36,130 Speaker 1: was produced by Alice Fines, Marilyn Rusk and Ryan Dilling. 547 00:41:36,890 --> 00:41:39,810 Speaker 1: Sarah Nick said it took the script of sound engineer 548 00:41:39,970 --> 00:41:43,250 Speaker 1: was Andrew Bayless. The thanks to Zoe Sedmand, Miilm and 549 00:41:43,370 --> 00:41:46,690 Speaker 1: a team at the British Best Level of Economics. Portional 550 00:41:46,770 --> 00:41:49,770 Speaker 1: Tales is a production of Pushkin Industries. If you like 551 00:41:49,850 --> 00:41:53,730 Speaker 1: the show, please remember to rate, share and review. Want 552 00:41:53,810 --> 00:41:56,450 Speaker 1: to hear the show ad free sign up the Pushkin 553 00:41:56,530 --> 00:42:00,610 Speaker 1: Class on the show page of Apple Podcasts of Pushkin FM, 554 00:42:00,730 --> 00:42:01,810 Speaker 1: slash Truce. 555 00:42:09,810 --> 00:42:12,810 Speaker 2: Thank you that was fun. Thank you so much. 556 00:42:12,850 --> 00:42:25,450 Speaker 1: Guys, the Trump impression was Okay. If you've enjoyed this 557 00:42:25,570 --> 00:42:30,450 Speaker 1: special live episode about pyramid and Ponzi schemes, don't go away. 558 00:42:30,770 --> 00:42:33,250 Speaker 1: I sat down with one of the smartest people I 559 00:42:33,410 --> 00:42:38,290 Speaker 1: know in financial journalism, my Financial Times colleague Rob Armstrong, 560 00:42:38,330 --> 00:42:41,970 Speaker 1: one of the hosts of the Unheedged podcast, and we asked, 561 00:42:42,330 --> 00:42:45,930 Speaker 1: what if everything is a Ponzi scheme. We'll be back 562 00:42:45,970 --> 00:42:50,090 Speaker 1: with that in a moment. We're back, and I've been 563 00:42:50,090 --> 00:42:53,770 Speaker 1: talking to my Financial Times colleague Rob Armstrong about all 564 00:42:53,890 --> 00:42:57,490 Speaker 1: things Ponzie for his podcast Unheedged. 565 00:43:04,370 --> 00:43:04,810 Speaker 5: Pushkin. 566 00:43:07,410 --> 00:43:10,810 Speaker 6: I love a good partsy scheme from Charles Ponzi himself 567 00:43:10,890 --> 00:43:17,370 Speaker 6: to Bernie Madoff. I both admire the wicked intelligence of 568 00:43:17,490 --> 00:43:22,170 Speaker 6: the puppet masters, and I'm fascinated by the persistent credulity 569 00:43:22,290 --> 00:43:25,930 Speaker 6: of the people who fall for Ponzi schemes. Here today 570 00:43:25,970 --> 00:43:29,050 Speaker 6: to discuss Ponzi's and pyramids and everything in between with 571 00:43:29,210 --> 00:43:33,290 Speaker 6: me is Tim Harford, my fellow FT columnist and master 572 00:43:33,410 --> 00:43:35,810 Speaker 6: of his own podcast, Cautionary Tales. 573 00:43:36,250 --> 00:43:36,970 Speaker 5: Tim, how are you? 574 00:43:37,250 --> 00:43:41,170 Speaker 1: I'm great, Robin, pleasure to finally get on Unhedged. I'm 575 00:43:41,210 --> 00:43:43,930 Speaker 1: a loyal listener, although I always feel terribly badly dressed. 576 00:43:44,410 --> 00:43:47,130 Speaker 1: Whenever I whenever I even think of you, Rob, whenever 577 00:43:47,170 --> 00:43:49,970 Speaker 1: I read one of your wonderful columns about sartorial elegance. 578 00:43:50,890 --> 00:43:55,290 Speaker 1: The subtext is, this column is written at you, Harford, 579 00:43:55,770 --> 00:43:59,690 Speaker 1: you slob, and so it just feels sloody guilty about 580 00:43:59,730 --> 00:44:00,210 Speaker 1: the whole thing. 581 00:44:00,250 --> 00:44:02,090 Speaker 5: But yeah, you'll be glad to know I'm sitting in 582 00:44:02,090 --> 00:44:04,130 Speaker 5: my bedroom in a T shirt and a pair of jeans. 583 00:44:04,250 --> 00:44:05,610 Speaker 5: So I hope that puts you at ease. 584 00:44:05,770 --> 00:44:07,890 Speaker 1: Okay, Yeah, I feel better now, Thank you, Rob. 585 00:44:08,050 --> 00:44:11,730 Speaker 6: I was fascinated to listen to the most recent episode 586 00:44:11,770 --> 00:44:15,450 Speaker 6: of Cartiery Tales. It gave a lot of terrific examples, 587 00:44:15,650 --> 00:44:21,530 Speaker 6: starting with the immortal Sarah Howe of Ponzy Schemers. Yeah, 588 00:44:21,650 --> 00:44:24,370 Speaker 6: tell us what a Ponzi scheme fundamentally is and what 589 00:44:24,450 --> 00:44:26,970 Speaker 6: you discovered about them doing that episode. 590 00:44:27,170 --> 00:44:29,450 Speaker 1: Yeah, we had lots of fun cautioning Tales as a 591 00:44:29,450 --> 00:44:32,690 Speaker 1: podcast about things going wrong and what we can learn. 592 00:44:32,770 --> 00:44:36,290 Speaker 1: And this particular episode is about ponzy schemes and pyramid schemes, 593 00:44:36,610 --> 00:44:39,610 Speaker 1: which are obviously always a terrible idea, but they have 594 00:44:39,610 --> 00:44:41,770 Speaker 1: a lot of lessons for us and Sarah how Sarah 595 00:44:41,850 --> 00:44:44,530 Speaker 1: Howe invented the Ponzi scheme, and can you believe that 596 00:44:44,610 --> 00:44:46,970 Speaker 1: it isn't called a house scheme. 597 00:44:47,130 --> 00:44:52,050 Speaker 5: It's outrageous, outrage another woman forgotten by history, unfairly forgotten 598 00:44:52,090 --> 00:44:54,970 Speaker 5: by history, all the credit taken by Ponsey. 599 00:44:55,450 --> 00:44:59,650 Speaker 1: Yeah, she was even operating in the same city, in Boston, Massachusetts. 600 00:44:59,730 --> 00:45:02,570 Speaker 1: So Sarah Howe set up the Ladies Deposit Company and 601 00:45:02,610 --> 00:45:06,610 Speaker 1: basically offered to pay a ladies eight percent a month, 602 00:45:06,650 --> 00:45:10,250 Speaker 1: which is basically doubling your money in a year. And 603 00:45:10,610 --> 00:45:13,450 Speaker 1: of course there's no way of actually making that return. 604 00:45:13,530 --> 00:45:17,010 Speaker 1: And so, as with all ponz schemes, people investing in 605 00:45:17,370 --> 00:45:21,650 Speaker 1: this opportunity, if they decide they want to withdraw their money, 606 00:45:22,210 --> 00:45:25,530 Speaker 1: then Sarah how just paid them out of incoming money 607 00:45:25,570 --> 00:45:27,930 Speaker 1: from other people who were eager to invest. And that's 608 00:45:27,970 --> 00:45:31,090 Speaker 1: the fundamental of a ponz scheme. Early investors who are 609 00:45:31,090 --> 00:45:34,090 Speaker 1: trying to cash out get paid not out of the 610 00:45:34,130 --> 00:45:38,330 Speaker 1: productive return from the productive activity, because there is no 611 00:45:38,370 --> 00:45:41,690 Speaker 1: productive activity. They get paid because other people are also 612 00:45:41,770 --> 00:45:46,410 Speaker 1: pouring money in. And that's the basic genius of the idea. 613 00:45:47,010 --> 00:45:49,330 Speaker 1: And so Cautionary Tales talks about Sarah how who did 614 00:45:49,330 --> 00:45:54,170 Speaker 1: this three times, talks about pyramid schemes, and also talks 615 00:45:54,170 --> 00:45:58,370 Speaker 1: about this insane Ponzi scheme run by a gentleman called 616 00:45:58,450 --> 00:46:03,730 Speaker 1: Sam Israel, which is described in Gye Lawson's book The Octopus, 617 00:46:03,770 --> 00:46:06,970 Speaker 1: which is absolutely bonkers because it just goes utterly down 618 00:46:07,010 --> 00:46:10,690 Speaker 1: a whirlpool of conspiracy theories, and said, it's quite fun. 619 00:46:11,050 --> 00:46:13,650 Speaker 6: I want listeners to know that this is not a 620 00:46:13,690 --> 00:46:14,890 Speaker 6: parochial phenomenon. 621 00:46:14,930 --> 00:46:16,210 Speaker 5: In my home city, Boston. 622 00:46:16,970 --> 00:46:20,210 Speaker 6: I have a good friend and this connects nicely actually 623 00:46:20,250 --> 00:46:23,050 Speaker 6: to the Sarah Howe angle. I have a good friend 624 00:46:23,090 --> 00:46:26,330 Speaker 6: who about ten years ago in Brooklyn was she's quite 625 00:46:26,330 --> 00:46:30,330 Speaker 6: an entrepreneurial person, and was invited by another quite entrepreneurial 626 00:46:30,370 --> 00:46:33,570 Speaker 6: person to a meeting of other women and they were 627 00:46:33,570 --> 00:46:36,730 Speaker 6: going to talk about investment opportunity and so forth. And 628 00:46:37,090 --> 00:46:39,330 Speaker 6: as it turned out, what this meeting of ten or 629 00:46:39,330 --> 00:46:42,650 Speaker 6: twelve women was was, you know, I have this project 630 00:46:42,690 --> 00:46:45,530 Speaker 6: that I'm working on. I need seed money for this endeavor, 631 00:46:46,090 --> 00:46:48,650 Speaker 6: and you know each of you are going to contribute 632 00:46:49,050 --> 00:46:53,290 Speaker 6: X amount to my endeavor and then in the next round, 633 00:46:53,410 --> 00:46:56,530 Speaker 6: each of you will become a receiver of funds from 634 00:46:56,570 --> 00:46:59,810 Speaker 6: other people in the you know, Ladies Empowerment Club of 635 00:46:59,890 --> 00:47:03,730 Speaker 6: Brooklyn or whatever. And my friend, who has her head 636 00:47:04,090 --> 00:47:08,290 Speaker 6: screwed quite tightly onto her shoulders, looked around at these 637 00:47:08,570 --> 00:47:13,970 Speaker 6: well meant in kind of semi bohemian, semi business class 638 00:47:14,050 --> 00:47:17,650 Speaker 6: Brooklyn ladies and said, you're all going to jail. 639 00:47:17,450 --> 00:47:18,930 Speaker 2: If you do this. 640 00:47:18,930 --> 00:47:21,810 Speaker 6: This is a proxy scheme, and now looked at her 641 00:47:21,850 --> 00:47:24,650 Speaker 6: a gast like they they had no idea that they 642 00:47:24,690 --> 00:47:27,450 Speaker 6: were engaged in something untoward or possibly illegal. 643 00:47:28,170 --> 00:47:32,090 Speaker 1: Yeah, part of the issue is that it is not 644 00:47:32,770 --> 00:47:36,410 Speaker 1: always straightforward to figure out whether something is a Ponzi 645 00:47:36,450 --> 00:47:39,610 Speaker 1: scheme or not, because superficially, I mean, there's a lot 646 00:47:39,610 --> 00:47:42,130 Speaker 1: of a lot of stuff in a capitalist economy that involves, well, 647 00:47:42,210 --> 00:47:45,210 Speaker 1: you invest some capital and you take a risk, and 648 00:47:45,250 --> 00:47:48,530 Speaker 1: if things go well, you get paid back ten x 649 00:47:48,570 --> 00:47:50,050 Speaker 1: in the phrase that everyone likes to. 650 00:47:50,090 --> 00:47:53,170 Speaker 6: Use, exactly right, And this was the question listening to 651 00:47:53,170 --> 00:47:56,290 Speaker 6: your episode I most wanted to put to you. How 652 00:47:56,610 --> 00:48:02,010 Speaker 6: is a market in its bubble phase not exactly like 653 00:48:02,650 --> 00:48:06,010 Speaker 6: a Ponzi scheme snowballing insize. 654 00:48:05,610 --> 00:48:08,690 Speaker 1: I love it. So it's like a decentralized Ponzi scheme, Right, It's. 655 00:48:08,530 --> 00:48:14,010 Speaker 6: A decent, naturally occurring, decentralized organic Ponzi scheme where you 656 00:48:14,050 --> 00:48:18,330 Speaker 6: know something, the magnificent seven tech stocks start to go bananas, 657 00:48:18,930 --> 00:48:22,450 Speaker 6: and rather than a central schemer, a Ponzi or a 658 00:48:22,490 --> 00:48:26,570 Speaker 6: how figure, we all do our little part journalists like 659 00:48:26,610 --> 00:48:30,050 Speaker 6: you and I Tim. We hype things up by constantly 660 00:48:30,130 --> 00:48:33,570 Speaker 6: discussing one way or the other the different stocks. Brokers 661 00:48:33,650 --> 00:48:37,650 Speaker 6: have their role to play. Investor chat boards do the job, 662 00:48:37,930 --> 00:48:40,930 Speaker 6: and so we all kind of ponzi each other until 663 00:48:41,010 --> 00:48:43,850 Speaker 6: we're out of the next person to draw into the 664 00:48:43,890 --> 00:48:47,850 Speaker 6: market bubble, at which point the bubble collapses in an 665 00:48:47,890 --> 00:48:51,050 Speaker 6: exact reversal of the social structure that built it. 666 00:48:51,530 --> 00:48:55,330 Speaker 1: So I love this idea. So let's use twenty twenty 667 00:48:55,410 --> 00:48:57,850 Speaker 1: hind sight. Let's go back and let's think about Amazon 668 00:48:58,570 --> 00:49:00,850 Speaker 1: twenty five years ago. And I think a little bit 669 00:49:00,850 --> 00:49:04,930 Speaker 1: of hindsight cliphies things. So what distinguishes Amazon from a 670 00:49:04,930 --> 00:49:06,730 Speaker 1: Ponzi scheme? Because if you think about it, this is 671 00:49:06,970 --> 00:49:10,250 Speaker 1: an organization which in the nineteen nineties, in the early 672 00:49:10,250 --> 00:49:15,170 Speaker 1: two thousands was not making money, losing a lot of money, yes, 673 00:49:15,450 --> 00:49:18,010 Speaker 1: but it's raising money from investors. So investors are putting 674 00:49:18,050 --> 00:49:20,930 Speaker 1: money in and if they wanted to get their money 675 00:49:20,970 --> 00:49:24,330 Speaker 1: out again, they could no problem. How do they get 676 00:49:24,330 --> 00:49:28,490 Speaker 1: paid well, because other investors are putting money in, so 677 00:49:28,530 --> 00:49:30,570 Speaker 1: there's a way to get paid, and more and more 678 00:49:30,610 --> 00:49:31,530 Speaker 1: money gets poured. 679 00:49:31,330 --> 00:49:31,930 Speaker 2: Into this thing. 680 00:49:32,370 --> 00:49:34,490 Speaker 1: And the reason it's not a Ponzi scheme, well, there's 681 00:49:34,490 --> 00:49:38,610 Speaker 1: two things. One is there's no fraud because Amazon was 682 00:49:38,730 --> 00:49:40,930 Speaker 1: perfectly honest about the accounts and perfully honest that it 683 00:49:40,970 --> 00:49:43,610 Speaker 1: was losing money, and so there's no deceptions, no fraud. 684 00:49:43,690 --> 00:49:46,890 Speaker 1: So that's one reason it's not a Ponzi scheme. The 685 00:49:46,970 --> 00:49:49,370 Speaker 1: second reason it's not a Ponzi scheme is in the 686 00:49:49,530 --> 00:49:52,890 Speaker 1: end it all comes good. All of that investment does 687 00:49:52,930 --> 00:49:57,130 Speaker 1: turn into something productive and everybody can get paid back. 688 00:49:57,450 --> 00:50:00,650 Speaker 1: So the first part of that them being honest, Okay, 689 00:50:00,690 --> 00:50:04,410 Speaker 1: that's important, but the second part could not be guaranteed. 690 00:50:04,450 --> 00:50:07,650 Speaker 1: There's no way of guaranteeing that Amazon would ever make money, 691 00:50:07,690 --> 00:50:10,090 Speaker 1: and indeed, lots of those dot com home stocks in 692 00:50:10,130 --> 00:50:13,930 Speaker 1: the nineteen nineties never did, and people could make a 693 00:50:13,930 --> 00:50:16,050 Speaker 1: lot of money as long as they got out in time, 694 00:50:16,130 --> 00:50:17,370 Speaker 1: and that's very ponziush. 695 00:50:17,850 --> 00:50:22,930 Speaker 6: And what is so important about the Amazon example is 696 00:50:22,970 --> 00:50:26,690 Speaker 6: that the kind of faith, or if you prefer, kind 697 00:50:26,730 --> 00:50:34,050 Speaker 6: of credulity of Amazon's early investors is exactly what allowed 698 00:50:34,130 --> 00:50:38,090 Speaker 6: Amazon to become such a great business eventually. In other words, 699 00:50:38,490 --> 00:50:43,930 Speaker 6: because the investors didn't insist on being paid out of 700 00:50:43,930 --> 00:50:48,170 Speaker 6: the company's profits, Amazon was able to have this wonderful 701 00:50:48,210 --> 00:50:50,970 Speaker 6: cycle where it just reinvested all of its capital in 702 00:50:51,010 --> 00:50:57,810 Speaker 6: itself and built this incredibly strong, deep, moded, indestructible business 703 00:50:58,650 --> 00:51:01,170 Speaker 6: because it wasn't paying money to investors, it was reinvesting 704 00:51:01,210 --> 00:51:04,090 Speaker 6: in itself because the investors had that faith. 705 00:51:04,250 --> 00:51:06,490 Speaker 1: So I think we now have a typology. So if 706 00:51:06,530 --> 00:51:11,370 Speaker 1: you're putting money in and bill investors get repaid by 707 00:51:11,530 --> 00:51:16,130 Speaker 1: from later investors, and the accounts are a sham, that's 708 00:51:16,170 --> 00:51:20,930 Speaker 1: a Ponzi scheme and someone's going to jail. If the 709 00:51:21,010 --> 00:51:24,970 Speaker 1: early investors get repaid by the late investors putting money 710 00:51:25,010 --> 00:51:29,010 Speaker 1: in but there's no accounting forward, people are just over 711 00:51:29,050 --> 00:51:31,570 Speaker 1: exuberant and the whole thing all collapses and it's pets 712 00:51:31,650 --> 00:51:34,210 Speaker 1: dot com, then no one goes to jail. That's not 713 00:51:34,250 --> 00:51:38,250 Speaker 1: a Ponzi scheme. That's a bubble. And if in the 714 00:51:38,370 --> 00:51:42,530 Speaker 1: end it turns into a wonderfully productive investments such as Amazon, 715 00:51:42,730 --> 00:51:45,130 Speaker 1: it's neither a Ponzi scheme nor a bubble. It's the 716 00:51:45,170 --> 00:51:46,210 Speaker 1: genius of capitalism. 717 00:51:46,570 --> 00:51:49,530 Speaker 6: I would argue that the Ponzi scheme and the bubble 718 00:51:49,610 --> 00:51:54,690 Speaker 6: case are actually very close together. They're almost indistinguishably close 719 00:51:54,810 --> 00:51:58,650 Speaker 6: because other than the absence of the central figure pulling 720 00:51:58,690 --> 00:52:02,090 Speaker 6: all the strings, simply because at some point in a 721 00:52:02,130 --> 00:52:08,010 Speaker 6: bubble the people involved in it. In markets actually acknowledge 722 00:52:08,610 --> 00:52:12,730 Speaker 6: that races are no longer connected to economic fundamentals or 723 00:52:12,770 --> 00:52:16,210 Speaker 6: the productivity of the companies involved. They start using words 724 00:52:16,250 --> 00:52:19,930 Speaker 6: like momentum, right, and they say, you can't get in 725 00:52:19,970 --> 00:52:21,210 Speaker 6: front of momentum. 726 00:52:21,490 --> 00:52:23,210 Speaker 7: The market is pushing upwards. 727 00:52:23,250 --> 00:52:26,730 Speaker 6: If you get out now, you're going to regret it. 728 00:52:26,730 --> 00:52:27,450 Speaker 7: It's fear of. 729 00:52:27,450 --> 00:52:31,850 Speaker 6: Missing out, and to me, that moment you are living 730 00:52:31,970 --> 00:52:35,090 Speaker 6: Ponzi logic. In that moment, there will be another person 731 00:52:35,130 --> 00:52:37,690 Speaker 6: who will come along and pay more, and I will 732 00:52:37,730 --> 00:52:39,730 Speaker 6: be out of this game and somebody else will be 733 00:52:39,810 --> 00:52:40,530 Speaker 6: left to hold the bat. 734 00:52:40,610 --> 00:52:44,050 Speaker 1: There's always a story about where the money comes from, right, 735 00:52:44,090 --> 00:52:46,690 Speaker 1: And I suppose the thing about bubbly markets is the 736 00:52:46,730 --> 00:52:51,650 Speaker 1: stories get less and less rigorous. People don't need a 737 00:52:51,690 --> 00:52:56,450 Speaker 1: particularly strong, data driven, compelling story. They're just like any 738 00:52:56,450 --> 00:52:59,170 Speaker 1: story will do. I'm greedy now and a lot of 739 00:52:59,210 --> 00:53:02,210 Speaker 1: the Ponzi stories. So, I mean, Charles Ponzi's original story 740 00:53:02,290 --> 00:53:04,970 Speaker 1: was something to do with the arbitrage of international postal 741 00:53:05,010 --> 00:53:10,850 Speaker 1: reply coupons. Really that's going to work, but people believed it. 742 00:53:11,210 --> 00:53:14,610 Speaker 6: There's another question I wanted to ask you, which is 743 00:53:15,250 --> 00:53:18,530 Speaker 6: all of the ponzis you talked about in your podcast, 744 00:53:18,570 --> 00:53:20,410 Speaker 6: and indeed all the ones I know of, and I'm 745 00:53:20,410 --> 00:53:23,170 Speaker 6: thinking here, of course, of Bernie Madeoff, the most famous 746 00:53:23,210 --> 00:53:25,330 Speaker 6: of the recent ponzis. 747 00:53:25,170 --> 00:53:28,090 Speaker 7: These all turn out very poorly. 748 00:53:27,730 --> 00:53:29,530 Speaker 5: For the puppet masters, very poorly. 749 00:53:29,610 --> 00:53:30,490 Speaker 7: So there's a question. 750 00:53:31,090 --> 00:53:34,210 Speaker 6: There's a question about why US suckers fall for them. 751 00:53:34,930 --> 00:53:36,970 Speaker 6: But there's a way in which the puppet master is 752 00:53:36,970 --> 00:53:41,250 Speaker 6: the ultimate sucker. They've somehow believed their own Ponzi scheme 753 00:53:41,370 --> 00:53:43,290 Speaker 6: in some way and they end up in jail or 754 00:53:43,290 --> 00:53:44,090 Speaker 6: disgraced her. 755 00:53:44,410 --> 00:53:45,330 Speaker 5: Why do they do it? 756 00:53:45,450 --> 00:53:47,650 Speaker 1: I really am not sure why they do it. I 757 00:53:47,690 --> 00:53:50,370 Speaker 1: suppose you could say, well, if the Ponzi schemes do 758 00:53:50,530 --> 00:53:55,090 Speaker 1: somehow work out, if the international postal reply coupon arbitrage works, 759 00:53:56,290 --> 00:53:59,770 Speaker 1: then everyone gets paid back in the end. I guess 760 00:53:59,850 --> 00:54:04,090 Speaker 1: Sam Israel, who ran the Bayu Capital Ponzi scheme, maybe 761 00:54:04,090 --> 00:54:05,930 Speaker 1: he would have gotten away with it if one of 762 00:54:05,970 --> 00:54:08,490 Speaker 1: his attempts to swing for the fences. 763 00:54:08,570 --> 00:54:09,490 Speaker 2: Had paid off. 764 00:54:09,970 --> 00:54:12,930 Speaker 1: But ultimately, there's a really interesting idea which I was 765 00:54:12,970 --> 00:54:15,890 Speaker 1: introduced to by the writer Dan Davis, who wrote this 766 00:54:15,970 --> 00:54:19,770 Speaker 1: terrific book about fraud called Lying for Money, and he 767 00:54:19,850 --> 00:54:23,010 Speaker 1: basically points out that if you take a typical Ponzi scheme, 768 00:54:23,050 --> 00:54:25,610 Speaker 1: So let's say you're promising to the double people's money 769 00:54:25,970 --> 00:54:28,690 Speaker 1: every year. Okay, So you take one hundred dollars from 770 00:54:28,690 --> 00:54:31,770 Speaker 1: a little old lady and you steal it. Okay, Now 771 00:54:31,810 --> 00:54:34,130 Speaker 1: in a year, you need to pay her two hundred dollars. 772 00:54:34,170 --> 00:54:36,970 Speaker 1: That's okay. So you find two other little old ladies, 773 00:54:37,210 --> 00:54:39,250 Speaker 1: you steal their money and you pay the first little 774 00:54:39,290 --> 00:54:42,090 Speaker 1: old lady. Now, of course, in a year's time, you've 775 00:54:42,090 --> 00:54:44,330 Speaker 1: got to do it all again, and each year you're 776 00:54:44,330 --> 00:54:46,410 Speaker 1: owing twice as much money, and you need to defraud 777 00:54:46,410 --> 00:54:48,970 Speaker 1: twice as many little old ladies to pay the previous 778 00:54:48,970 --> 00:54:50,970 Speaker 1: little old ladies. So that's all kind of obvious, and 779 00:54:51,010 --> 00:54:54,450 Speaker 1: it's obvious that that can't keep going forever. That's an 780 00:54:54,450 --> 00:54:57,810 Speaker 1: exponential process that's all going to come unraveled. But what 781 00:54:57,970 --> 00:55:00,810 Speaker 1: Dan Davis pointed out is what is easy to miss 782 00:55:00,930 --> 00:55:04,290 Speaker 1: is that can balloon into thousands and thousands and thousands 783 00:55:04,290 --> 00:55:09,050 Speaker 1: of dollars based on the original one hundred dollar theft. 784 00:55:10,170 --> 00:55:13,610 Speaker 1: The frauds that only stole one hundred dollars, and somehow 785 00:55:13,650 --> 00:55:18,570 Speaker 1: now they're responsible for maintaining this enormous fraud, and no wonder, 786 00:55:18,610 --> 00:55:21,290 Speaker 1: so many of them are crying with relief when they're 787 00:55:21,330 --> 00:55:24,130 Speaker 1: finally arrested, like, thank goodness, I don't have to do 788 00:55:24,210 --> 00:55:27,170 Speaker 1: this anymore. So I don't know why people do this. 789 00:55:27,530 --> 00:55:31,250 Speaker 6: It's the magician's apprentice story. You cast the spell, and 790 00:55:31,410 --> 00:55:33,410 Speaker 6: all of a sudden, it's much bigger than you are. 791 00:55:33,890 --> 00:55:38,410 Speaker 6: And I think there is a general point about fraudsters 792 00:55:38,450 --> 00:55:42,090 Speaker 6: that clearly applies to some Ponzi fraudsters is that they 793 00:55:42,130 --> 00:55:45,450 Speaker 6: do get into it by mistake. You start a fund, 794 00:55:46,170 --> 00:55:48,570 Speaker 6: you're struggling to be a legitimate investor. 795 00:55:48,650 --> 00:55:50,890 Speaker 7: Something goes slightly wrong. 796 00:55:50,890 --> 00:55:53,930 Speaker 6: And okay, just one month, I'm going to fudge the 797 00:55:54,010 --> 00:55:57,210 Speaker 6: numbers so I can pitch to one more investor. 798 00:55:57,250 --> 00:55:59,930 Speaker 7: And then that takes on a life of its own. 799 00:55:59,970 --> 00:56:03,490 Speaker 6: You get into it incrementally by small steps, and suddenly 800 00:56:03,530 --> 00:56:05,610 Speaker 6: the thing grows by leaps and bounds. And I think 801 00:56:05,650 --> 00:56:09,730 Speaker 6: there's a way to read the Bernie Madoffski as having 802 00:56:09,770 --> 00:56:13,850 Speaker 6: some of that character, and you can read Madeoff's actions 803 00:56:13,930 --> 00:56:17,330 Speaker 6: late in the scheme as desperately trying to keep the 804 00:56:17,370 --> 00:56:24,010 Speaker 6: thing under control, turning investors away as it because he 805 00:56:24,050 --> 00:56:24,890 Speaker 6: couldn't handle it. 806 00:56:25,330 --> 00:56:27,730 Speaker 1: And it just gets so huge that in the end, 807 00:56:28,010 --> 00:56:32,570 Speaker 1: the gap between the underlying reality of the investments, like 808 00:56:32,730 --> 00:56:35,850 Speaker 1: how much money you are really generating in postal reply 809 00:56:36,050 --> 00:56:40,530 Speaker 1: coupon arbitrage, and the fiction what you're telling people you 810 00:56:40,530 --> 00:56:43,770 Speaker 1: are making, that gap eventually becomes impossible to bridge. A 811 00:56:43,770 --> 00:56:46,370 Speaker 1: lot of Ponzi schemes. I think it's ambiguous at the start. 812 00:56:46,570 --> 00:56:48,450 Speaker 1: Did they mean it to be a Ponzi scheme or 813 00:56:48,490 --> 00:56:50,850 Speaker 1: did they actually think they were investment geniuses that everyone 814 00:56:50,890 --> 00:56:53,610 Speaker 1: would get paid back. There is often an ambiguity at 815 00:56:53,610 --> 00:56:57,450 Speaker 1: the start, but unless you're able to close the fraudulent 816 00:56:57,490 --> 00:57:01,090 Speaker 1: gap early, it becomes so unbridgable you don't have a chance. 817 00:57:01,770 --> 00:57:04,850 Speaker 6: Tim, If you give me one hundred dollars, I have 818 00:57:04,970 --> 00:57:06,090 Speaker 6: a brilliant idea. 819 00:57:06,290 --> 00:57:07,250 Speaker 2: I'm always. 820 00:57:11,610 --> 00:57:14,050 Speaker 6: This is long short, that portion of the show where 821 00:57:14,050 --> 00:57:16,730 Speaker 6: we go long something we like or short something we 822 00:57:16,890 --> 00:57:17,370 Speaker 6: don't like. 823 00:57:19,810 --> 00:57:21,450 Speaker 5: Tim, are you long or short something? 824 00:57:22,130 --> 00:57:26,850 Speaker 1: Can I go for a paired trade rather than do Greg. 825 00:57:27,010 --> 00:57:32,530 Speaker 1: So I'm going to go short Ponzi and long pyramid schemes. 826 00:57:32,770 --> 00:57:35,810 Speaker 1: So we should probably very briefly explain the difference. So 827 00:57:36,130 --> 00:57:39,410 Speaker 1: a Ponzi scheme, someone's running a Ponzi scheme. They're lying, 828 00:57:39,970 --> 00:57:43,050 Speaker 1: they're paying out earlier investors using money from later investors. 829 00:57:43,450 --> 00:57:46,570 Speaker 1: Pyramid scheme works in a similar way, but it's it's decentralized. 830 00:57:46,610 --> 00:57:50,210 Speaker 1: You basically get the later investors to send money to 831 00:57:50,250 --> 00:57:53,250 Speaker 1: the early investors, and then the later investors then have 832 00:57:53,290 --> 00:57:56,490 Speaker 1: to recruit even later investors to pay them. And it's 833 00:57:56,770 --> 00:58:00,210 Speaker 1: more transparent. But more to the point, there's nobody actually 834 00:58:00,330 --> 00:58:00,970 Speaker 1: running a thing. 835 00:58:01,170 --> 00:58:02,850 Speaker 2: And what that means. 836 00:58:02,930 --> 00:58:06,290 Speaker 1: Is that the person who sets up each individual pyramid 837 00:58:06,290 --> 00:58:10,250 Speaker 1: scheme can cash out and walk away. And in fact, 838 00:58:10,250 --> 00:58:13,450 Speaker 1: the pyramid scheme I describe in the cautionary tale, we 839 00:58:13,530 --> 00:58:15,650 Speaker 1: have no idea who set it up. She seems to 840 00:58:15,650 --> 00:58:18,770 Speaker 1: have got fairly rich and just walked away and she never. 841 00:58:18,610 --> 00:58:19,170 Speaker 5: Went to jail. 842 00:58:19,170 --> 00:58:21,250 Speaker 8: And we don't you say she, Tim? You say she, 843 00:58:21,530 --> 00:58:23,930 Speaker 8: But I think we're talking about you, Tim, or are we? 844 00:58:24,090 --> 00:58:28,770 Speaker 8: I couldn't possibly comment, couldn't possibly come in. Well, okay, 845 00:58:29,050 --> 00:58:32,970 Speaker 8: I'm short ponzi, long pyramid? Do you have a long 846 00:58:33,090 --> 00:58:33,810 Speaker 8: or a short for us? 847 00:58:34,290 --> 00:58:37,130 Speaker 5: Well, let me ask you a question. Is bitcoin a 848 00:58:37,170 --> 00:58:40,210 Speaker 5: ponzi or a pyramid? Neither or neither? 849 00:58:40,330 --> 00:58:43,130 Speaker 1: I mean I think it's more it's more bubbly than either. 850 00:58:43,210 --> 00:58:46,090 Speaker 1: But it's not a Ponzi scheme because there's nobody in charge. 851 00:58:46,130 --> 00:58:48,650 Speaker 1: That's the whole point of bitcoin, right, Nobody is in charge. 852 00:58:48,810 --> 00:58:51,330 Speaker 1: So if it's anything, it's closer to a pyramid scheme, 853 00:58:51,330 --> 00:58:54,410 Speaker 1: where transparently, if you want to get paid for investing 854 00:58:54,410 --> 00:58:57,650 Speaker 1: in bitcoin, you get paid by other people coming in 855 00:58:57,930 --> 00:59:00,770 Speaker 1: and buying your bitcoin, So it's closer to a pyramid scheme. 856 00:59:01,130 --> 00:59:04,090 Speaker 5: I'm going to be sure bitcoin just because I'm a coward. 857 00:59:04,170 --> 00:59:06,970 Speaker 1: Well, I think that that's your inalienable, right, Robin. I 858 00:59:07,050 --> 00:59:09,290 Speaker 1: think I might join you in your. 859 00:59:09,170 --> 00:59:11,850 Speaker 5: Cowdi Thanks for being on the show. 860 00:59:12,050 --> 00:59:13,490 Speaker 1: Oh that's a real pleasure. 861 00:59:13,570 --> 00:59:16,050 Speaker 5: Thank you. I loved it. Listeners. 862 00:59:16,890 --> 00:59:20,890 Speaker 6: If you like Unhedged, you will love cautionary tales Tim's 863 00:59:20,890 --> 00:59:23,850 Speaker 6: podcast Unhedged. We'll be back in your feed before you 864 00:59:23,930 --> 00:59:28,330 Speaker 6: know it. Thanks for listening. Unhedged is produced by Jake 865 00:59:28,330 --> 00:59:32,490 Speaker 6: Harper and edited by Brian Ernstadt. Our executive producer is 866 00:59:32,570 --> 00:59:33,450 Speaker 6: Jacob Goldstein. 867 00:59:33,810 --> 00:59:35,170 Speaker 5: You have additional help from. 868 00:59:35,010 --> 00:59:39,130 Speaker 6: Toeprah foreheaz Cheryl Brumley is the FT's global head of Audio. 869 00:59:39,810 --> 00:59:44,770 Speaker 6: Special thanks Laura Clark, Alistair Mackey, Branda Cone, Marilyn Rust, 870 00:59:45,090 --> 00:59:50,050 Speaker 6: Kira Posey, and Natalie Sadler. FT Premium subscribers can get 871 00:59:50,090 --> 00:59:51,970 Speaker 6: the Unhedged newsletter for free. 872 00:59:52,090 --> 00:59:54,890 Speaker 7: My thirty day free trial is available to everyone else. 873 00:59:55,370 --> 01:00:00,090 Speaker 5: Just go to ft dot com slash Unhedged offer. I'm 874 01:00:00,170 --> 01:00:02,010 Speaker 5: Rob Armstrong. Thanks for listening. 875 01:00:07,890 --> 01:00:10,930 Speaker 1: That was a special episode of the Unhedged podcast. If 876 01:00:10,970 --> 01:00:14,650 Speaker 1: you liked what you heard, you know where to find Unhedged, 877 01:00:14,690 --> 01:00:18,090 Speaker 1: the same place you find all good podcasts. Cautionary tales 878 01:00:18,090 --> 01:00:20,010 Speaker 1: will be back in this feed soon