Essays on Structure and Operation of a Ponzi Scheme Assignment

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The paper "Structure and Operation of a Ponzi Scheme" is a good example of a business assignment.   Ponzi scheme operates by giving the investors return for their investment from the money that they pay to the scheme or paying the investors their return using the money paid by other investors. Therefore such scheme doses not pay return from the profits earned through investment as should be the case. So as to attract potential investors Ponzi scheme in their operation offers more appealing returns when compared to other investment schemes like an abnormally high return or short-term returns.

Ponzi scheme is structured in such a way that it requires investors to constantly bring in money so that the scheme continues running. However, such a scheme normally collapses within a short period of time because they are unable to maintain their operations where payments made as return are more than earnings. But in some cases, such schemes are discovered by legal authorities and their operations interrupted before they collapse. This is because with an increasing number of investors being involved, the chances of the scheme being discovered by legal authorities are high (Utpal, 2003). Ponzi scheme derives its name from Charles Ponzi who was well known for using it in 1920 and he becomes a millionaire in just six months.

The scheme started as a way of earning profits through reply coupons that were traded for postage stamps. But Ponzi soon started using his investors’ money to pay the first investors and diverted the other investment money toward his own personal wealth. A profit was supposed to be got by redeeming reply coupon with stamps at a higher cost (Utpal, 2003). The First World War resulted in inflation in Italy which led to a decrease in the cost of postage stamps when expressed in U. S.

dollars. Therefore International reply coupons were bought at a low cost in Italy and exchanged in the U. S. for stamps at a higher value hence earning some profit from the exchange and Ponzi argued that the net profit that could be earned through these transactions was about 400%. The whole process involved buying an asset in a market where its price was low and then selling the same asset in a market where the price was high and therefore you make a profit and this was in no way illegal (Williams, February 4, 2009). Ponzi drums up support from his close friends and associates to support his scheme, promising a 50% investment return within a short period of 45 days.

In order to promote his scheme, Ponzi started a new firm which he called "Securities Exchange Company", where those who invested in the firm were promised 50% investment return within 45 days or "double your money" within 90 days (Utpal, 2003). Ponzi was able to attract around 40,000 investors in his scheme all of them together making a large investment of around $15 million.

However contrary to what Ponzi had promised only a third of that investment money was returned to them at the end. Investors would mortgage their homes so as to invest in Ponzi scheme and some other investors would invest their life savings. Many of the investors in Ponzi scheme did not take their investment return but reinvested it in the scheme.

Ponzi was, therefore, bringing in investment money into the scheme at a high rate, but the scheme operations were at the same time running a very big loss. However since investment money kept flowing in from new investors and reinvestment, existing investors continued being paid with the inflowing money. Inflowing money was what Ponzi used to pay existing investors, as he was not making any profit from the investment since he was not investing in the reply coupons as he had promised his investors. Ponzi was in his scheme able to accumulate too much wealth and he lived a luxurious life (Edith and Wilchins, 2008).

References

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Edith Honan and Dan Wilchins (12 December 2008). "Bernard Madoff arrested over alleged $50 billion fraud". Yahoo! News. Retrieved on 19th May, 2009 from http://news.yahoo.com/s/nm/20081212/bs_nm/us_madoff_arrest

Espinoza, Javier (April 6, 2009). "Rio Tinto on the Hunt for Cash". Forbes.com.

Four pillars back on agenda, The Age, May 14, 2008

Freed, Jamie (February 1, 2008). "Chinese raid on Rio Tinto could thwart BHP". Sydney Morning Herald.

Sandra O'Malley (March 25, 2009) Chinalco's bid for Rio Tinto passes ACCC, News. Com. Au. Retrieved on 19th May, 2009 from http://www.news.com.au/business/story/0,27753,25241059-31037,00.html

The End of the Financial World as We Know It New York Times, 2008.

Utpal Bhattacharya (2003). "The optimal design of Ponzi schemes in finite economies". Journal of Financial Intermediation 12: 2–24.

Westpac-St George merger won't topple four-pillars, The Age, May 15, 2008

Williams, Walter (February 4, 2009), "The National Ponzi Scheme", Capitalism Magazine, Retrieved on 19th May, 2009 from http://www.capmag.com/article.asp?ID=5409

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