Bankers’ Hours column: Charlie Ponzi’s better business model
Hey, class: It’s a new year, so you’re in for a treat.
We’re not going to talk about the new tax bill.
OK, OK, settle down. In fact, we’ve got a subject that’s a bit more fun.
As everybody knows by now, on Dec. 21, the SEC charged Robert Shapiro with running a massive Ponzi scheme alleging that the company’s chairman collected money from investors to lend to borrowers on commercial real estate with note rates as high as 15 percent, thus enabling the individual investors to reap a return up to 10 percent.
The problem, according to the SEC, is that most of the borrowers were shell companies controlled by Shapiro, and had no income to pay interest, so the only way that investors could get that sweet return was for more money to be brought in from new investors. Yup, that’s Charlie Ponzi’s better business model.
The scam alleged to have been run by Woodbridge has been around almost as long as Ponzi’s ghost. Its basic mantra is that brilliant entrepreneurs can’t borrow money from stodgy, unimaginative banks, and they’re willing to pay a very high rate because they’re going to make so much money that 11 percent above prime isn’t much at all.
The idea sells pretty well: The perp claims that the money will go to fund first mortgages on prime (always prime, never choice) real estate, and what could be safer? Then, all that’s needed is one big influx of investor cash, followed in a fairly short time by delivery of the promised dividend. Digital communication isn’t needed: In these circumstances word of mouth is faster than Twitter. “Hey, Bubba, you mean you’re earning only 1 percent on your IRA? Well, I’m getting 10 percent on my money at Impossible Dream Investment Corp.”
I’ve personally seen a few of these operators, even been friends with a couple of them until the bubble burst. Some of them don’t start out to be crooks, but they run out of money to fund legitimate commitments, and start spinning the Ponzi wheel. Others know exactly what they’re doing from the git go.
I know of one Front Range operation that was doing OK, until the Great Meltdown came along in 2008, and then new investor money went to pay operating and living expenses, while investors who were in a first mortgage position were switched to a junior lien position, so the operation could borrow from banks.
In another instance, the manager of a Denver-based company specializing in originating and selling construction loans to banks ran out of money to honor construction draws on new projects. To solve this problem, this particular operator, who controlled the construction loan, would release the construction lender’s deed of trust when a project was completed and a new lender recorded a lien, but fail to pay off the construction lender. So a wad of cash was available for the project that was short of money.
Sometimes, these entrepreneurs simply get so much money thrown at them they can’t turn it down. Needless to say, they don’t stick it in CDs and never touch it; they spend it.
Indeed, if you look at the bill of particulars in one of these charges brought by agencies or authorities, almost always there’s a list of personal expenses to which the hapless investors’ money was diverted, including planes, luxury autos, vacation homes, travel and the like.
Of course these are luxuries that a scammer would naturally aspire to. But, in the Ponzi business, to the operator, they’re very much business expenses. There’s nothing like looking filthy rich to get a mark salivating.
The SEC’s filing on Woodbridge, at this point, is an allegation, yet to be proven. But if it should turn out to be true, it wouldn’t be surprising.
Because it’s so easy to get a whole bunch of people to pony up money for an investment that’s too good to be true.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.