[Desk Column] Greed, Moral Hazard, and Ponzi

[Asia Economy Reporter Jeon Pil-su] There is a man named Charles Ponzi, an Italian-American. He is the very Ponzi behind the 'Ponzi scheme' that has come into the spotlight due to the Optimus scandal. In 1920, Ponzi committed a multi-level financial fraud using a product called international reply coupons, causing several banks to go bankrupt. International reply coupons exempted additional postage fees when sending letters abroad and receiving replies back from the sender. After World War I, due to inflation in Europe, buying international reply coupons in Europe and selling them in the United States generated a price difference.

Ponzi used this to attract investors by promising to double their money in three months. In January 1920, he raised only $1,800 from 18 people, but by the end of July, he was collecting $1 million a day (equivalent to $12 million in today's value). Early investors were mostly low-income individuals, but by this time, large sums from the upper class started pouring in. Some bankers entrusted as much as $10,000 at once.

The problem was that although there was a price difference using international reply coupons, it took 53,000 coupons just to pay dividends to the initial 18 investors who invested $1,800. To pay dividends to the swollen 15,000 investors, they would have had to bring and sell international reply coupons loaded on a ship as large as the Titanic. It was impossible to pay normally from the start. Yet investors flocked because Ponzi paid dividends to early investors, and he covered these dividends with the investment money from new investors. For example, dividends for customer A were paid with investments from customer B, and dividends for customer B were paid with investments from customer C, forming a multi-level financial fraud.

One hundred years after Charles Ponzi shook the United States with his multi-level financial fraud, Ponzi schemes came under scrutiny in a South Korean National Assembly audit. Optimus attracted a staggering 1.5 trillion won by enticing investors with the sweet talk of earning an annual 2.8% return by investing in public institution accounts receivable. While market interest rates were in the 1% range, they claimed nearly 3% returns on safe assets like public institution accounts receivable. Semi-governmental organizations such as the Korea Communications Agency invested, and leading domestic securities firms like NH Investment & Securities sold the funds. The funds were entrusted to KEB Hana Bank, one of the four major commercial banks.

Since the best expert groups recommended it and semi-governmental organizations invested, it was natural that general investors flocked. Many even invested their jeonse deposits or children's wedding funds. Even a sitting minister joined this group, meaning the Ponzi scheme was quite successful. However, if only a little caution had been exercised, this fraud might never have started. This is because public institution accounts receivable themselves could not exist.

Accounts receivable simply refer to the securitization of sales on credit. When public institutions contract with private companies for construction work, the National Contract Act stipulates that payment must be made to the contracting party within five days or every 30 days according to the progress of the work. Since accounts receivable on credit sales cannot exist, accounts receivable based on them cannot exist either.

If one only had very common-sense doubts, Ponzi schemes would be difficult to succeed. Yet Ponzi schemes succeed because of greed for money and moral hazard. Between investors' desire to safely earn money and financial institutions' mindset of 'investment responsibility lies with the investor'?just collecting fees behind that phrase?Ponzi schemes spread like poisonous mushrooms.

High returns come with high risks (high risk, high return). No financial product or asset in the world is exempt from this rule. If someone claims otherwise, you should suspect fraud. Other people's money has sharp teeth.