Bonus: The fraudster's guide to magic money with Tim Harford

SPEAKER_1 (0:00)

Liquid alternatives can offer some substantial diversifying returns, not only in a 2022 world where traditional asset classes are challenged, but also during a world where you have only a few asset classes delivering on their expected returns. And therefore, you need some genuine diversification within your portfolio.

SPEAKER_2 (0:20)

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Rob Armstrong (0:39)

I love a good Ponzi scheme. From Charles Ponzi himself to Bernie Madoff, I both admire the wicked intelligence of the puppet masters, and I'm fascinated by the persistent credulity of the people who fall for Ponzi schemes.

Here today to discuss Ponzis and pyramids and everything in between with me is Tim Harford, my fellow FT columnist and master of his own podcast, Cautionary Tales. Tim, how are you?

Tim Harford (1:09)

I'm great, Rob. Pleasure to finally get on Unhedged. I'm a loyal listener. Although I always feel terribly badly dressed. Whenever I even think of you, Rob, whenever I read one of your wonderful columns about sartorial elegance, the subtext is this column is written at you, Harford, you slob.

And so I just feel slightly guilty about the whole thing.

Rob Armstrong (1:32)

But yeah, you'll be glad to know I'm sitting in my bedroom in a t-shirt and a pair of jeans. So I hope that puts you at ease.

Tim Harford (1:37)

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

Rob Armstrong (1:40)

I was fascinated to listen to the most recent episode of Cautionary Tales. It gave a lot of terrific examples, starting with the immortal Sarah Howe of Ponzi schemers.

Tell us what a Ponzi scheme fundamentally is and what you discovered about them doing that episode.

Tim Harford (1:59)

Yeah, we had lots of fun. Cautionary Tales is a podcast about things going wrong and what we can learn. And this particular episode is about Ponzi schemes and pyramid schemes, which are obviously always a terrible idea, but they have a lot of lessons for us. And Sarah Howe, Sarah Howe invented the Ponzi scheme. And can you believe that it isn't called a Howe scheme? It's outrageous, outrageous.

Rob Armstrong (2:21)

Another woman forgotten by history, unfairly forgotten by history, all the credit taken by Ponzi.

Tim Harford (2:27)

Yeah, she was even operating in the same city in Boston, Massachusetts. So Sarah Howe set up the ladies deposit company and basically offered to pay ladies 8% a month, which is basically doubling your money in a year.

And of course, there's no way of actually making that return. And so as with all Ponzi schemes, people investing in this opportunity, if they decide they want to withdraw their money, then Sarah Howe just paid them out of incoming money from other people who were eager to invest. And that's the fundamental of a Ponzi scheme. Early investors who were trying to cash out get paid not out of the productive return from the productive activity because there is no productive activity. They get paid because other people are also pouring money in. And that's the basic genius of the idea.

And so Cautionary Tales talks about Sarah Howe, who did this three times, talks about pyramid schemes and also talks about this insane Ponzi scheme run by a gentleman called Sam Israel, which is described in Guy Lawson's book, The Octopus, which is absolutely bonkers because it just goes utterly down a whirlpool of conspiracy theories and so on. So it's great fun.

Rob Armstrong (3:43)

I want listeners to know that this is not a political phenomenon of my home city, Boston.

I have a good friend, and this connects nicely actually to the Sarah Howe angle. I have a good friend who about 10 years ago in Brooklyn was she's quite an entrepreneurial person and was invited by another quite entrepreneurial person to a meeting of other women and they were going to talk about investment opportunity and so forth. And as it turned out, what this meeting of 10 or 12 women was, was I have this project that I'm working on. I need seed money for this endeavor. And each of you are going to contribute X amount to my endeavor. And then in the next round, each of you will become a receiver of funds from other people in the ladies' empowerment club of Brooklyn or whatever. And my friend who has her head screwed quite tightly onto her shoulders, looked around at these well-meaning kind of semi-Bohemian, semi-business class Brooklyn ladies and said, you're all going to jail if you do this.

This is a proxy scheme. And they all looked at her aghast like they had no idea that they were engaged in something untoward or possibly illegal.