Part 7: The Bubble Bursts

It does not take long before Ponzi hits some hurdles.

He learns that international response coupons can only be redeemed for stamps but not for cash. However, his investors expect their payments in dollars, so he has to find a way to convert postage stamps to dollars.

Investors Outside Ponzi's Office

Meanwhile, he is paying out thousands of dollars in maturing notes, and his investors think the 50% interest he's giving them comes from his lucrative trade in international reply coupons.

It is not until May that he realizes he is paying out $1,500 for every $1,000 received and that the extra $500 is a debt he'll have to pay someday.

The countdown to this day begins on 2 July 1920, when Joseph Daniels, the furniture dealer who lent Ponzi $350 in furniture and $200 in cash when he was stating out sues him for $1 million. Daniels believes his loan is the seed capital Ponzi used to start his lucrative coupons business, so he wants the court to declare he is entitled to part of its proceeds. The suit freezes 5 of Ponzi's accounts that have a total of $700,000.

The story of Daniel's suit is widely reported, and it triggers several reactions.

First, it results in a 2-day run on Ponzi, with hundreds of investors queuing to demand their money back, fearing the suit could hurt their investment.

Second, it prompts banking authorities to investigate his business. Joseph Allens, the Massachusetts banking commissioner discovers that most of Ponzi's transactions are centred around the Hanover Trust, a bank in which he is the largest depositor and has recently acquired the controlling interest. He instructs his staff to keep a close watch on all his accounts and alert him if any is overdrawn.

Meanwhile, Ponzi successfully weathers the run on his business. He refunds all investors who want their money back, and the business resumes after three days. Incidentally, the number of investors keen on entrusting him with their money is now larger than before the run. His decision to keep on paying despite the run has boosted public trust of him and confidence in his ability to meet his obligations.

To help him overcome the negative publicity created by Daniel's suit, Ponzi hires a public relations expert, William McMasters. As a result, the Boston Post of 24 July has a story that describes Ponzi's business in flattering terms. Although it is presented as a news story, it sounds more like a spin. in which Ponzi talks about himself, his business, and his money. He tells readers how he was penniless a few months ago but is now worth $8.5 million and is helping others become millionaires like him. The story even has a photo of him, his wife, and his mother in front of their Lexington mansion.

What happens next is something that not even Ponzi could have expected. When the story hits the newsstands, thousands of people jam the streets around Ponzi's 27 School Street, scrambling to buy his note. By the end of the day, he collects $2 million.

State officials are, however, concerned about this turn of events. Although they have no evidence of any wrongdoing on Ponzi's part, they decide to act to protect the public interest. They summon Ponzi for a meeting and prevail upon him to stop collecting deposits to enable a state-appointed auditor to assess if he can meet his obligations. He also agrees to continue paying maturing notes and also to refund, without the 50% interest, those whose notes have not matured but want their money back.

News that Ponzi is being investigated sparks another run on Ponzi, but he pays all those who want their money back, and public confidence in his business is restored once more. He is even forced to turn away the large number of people who show up every day demanding that he accepts their deposits.

Without any deposits, Ponzi's cash reserves are being depleted, so he hopes the auditor will complete his investigation quickly so that he can resume taking deposits. The agreement with the state officials is that once the auditor determines the extent of Ponzi's liabilities, Ponzi will produce enough assets to cover them.

However, one more event severely impairs his ability to continue.

On 2 August, The Boston Post publishes an exposé by William H. McMasters, Ponzi's public relations expert, claiming that Ponzi is insolvent. Coming from a Ponzi insider, the story triggers a new massive run that goes on most of the week.

On 10 August, the Banking Commissioner, Joseph Allen, learns from his staff that one of Ponzi's accounts at the Hannover Trust Bank is overdrawn. Allen instructs the bank to stop honouring Ponzi's cheques. The bank ignores Allen's instructions, and he orders the bank closed on 11 August, the same day the auditor completes assessing Ponzi's liabilities.

Thursday, 12 August 1920

At 10 am, Ponzi goes to United States District Attorney's office. He finds Shea, Pride, the auditor, and two other people when he arrives. Shea informs Ponzi that his liabilities are $7 million, according to the auditor's report, but Ponzi rejects the figure.

"But you have agreed to accept the auditor's figures," Shea reminds Ponzi.

"Yes," Ponzi admits, "I agreed to accept his estimates because I didn't think they would be more than $250,000. But, regardless, I agreed, so I'll stick to my word."

When asked if he could produce enough assets to cover the $7 million liabilities, he says the most he can raise is $4 million.

"In that case, you are $3 million short. Mr Ponzi," announces Shea, "I apologize for the inconvenience, but I must perform my duty and place you under arrest."

A marshall then steps forward and handcuffs Ponzi.

His house of cards has collapsed. The bubble has busted.