What happened down in Geelong at Chartwell Enterprises?
We read in this morning's Herald Sun that investors and staff "trashed" the offices of the firm yesterday. This was after they'd been told the firm was out of business, and that the $70 million it owed to clients was gone. Get used to this. It's a good thing there weren't any lampposts and rope around.
"Chartwell claimed to invest in high risk share, foreign exchange and commodity markets," report Craig Binnie and Alice Coster. "Investors were paid a set interest rate - commonly 20 to 40 per cent - on the money they invested. The company was entitled to keep any additional profits it was able to make by investing the money."
Was it a pyramid scheme or was it a Ponzi scheme? Probably a little of both.
A Ponzi scheme is when existing 'investors' are paid with the capital raised from new 'investors'. All of this 'capital raising' is done by one person in a Ponzi scheme. Graeme Hoy of Geelong would seem to be at the center of the storm at Chartwell Enterprises.
The trouble with a Ponzi scheme-indeed the trouble with so much of modern finance-is that it promises huge returns that are not generated from real business activity. The returns are only possible as long as money keeps coming in from new investors to pay the old investors. When the money stops...ashes...ashes...we all fall down.
In Chartwell's case, the Ponzi scheme morphed into a pyramid scheme when existing investors did Hoy's job for him and recruited friends and relatives into the deal to keep it going. The net result is money (and not just money, but the money people were counting on for retirement) gone, and probably gone for good.
Chartwell Enterprises officially told investors it generated returns from commodity and currency markets. It is tempting to believe, especially if you need to turn a modest nest egg into an immodest one in a short time (to make up for a life of low savings and wage growth in the face of inflation.) We hate to resort to cliches. But there is no such thing as a free lunch, especially these days, what with rising food prices.
By the way, most modern public retirement schemes are Ponzi schemes. The folks in Washington D.C. don't call it by its real name, of course. They call it a "pay-as-you-go" system.
In principle, it's the same thing as a Ponzi scheme where the recipients of cash payouts are payed by new recruits. The trouble in the States (and in Japan) is that the number of retirees (and the money they require to live in the lifestyle to which they've grown accustomed) is growing faster than the number of taxpayers in the workforce. This is one reason the amnesty proposal for illegal workers may be popular in the U.S. eventually. It recruits millions of new taxpayers to finance the retirement of the Baby Boomers (although the Boomers should probably begin learning Spanish).
Makes you wonder if the whole idea of being idle and unproductive for twenty years of your adult life is only possible in a world with massive abundance. We don't live in that world anymore, do we?
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Glen on 5 May 2008:
Structurally, a pyramid and a Ponzi are the same. Who is doing the selling is just a side issue.
Good article.