A Good Ponzi Needs Some Luck

The basic problem with a Ponzi scheme is that it keeps getting worse. You raise money from people promising them large returns, then you have to raise more money from more people to pay the first people their returns, but then you have to raise even more money to pay off the second set of people, etc. You can’t just do a little bit of Ponzi and be on your way. It keeps snowballing. You need some dramatic event to end it in a satisfying, you-don’t-go-to-prison sort of way.

There are two categories of non-prison endings that might work. One is: You suddenly make a lot of money. This might happen if, for instance, your Ponzi scheme is only partly a Ponzi scheme. You raise money to invest in magic beans, you buy the magic beans, the magic bean market does not develop as robustly as you’d hoped, you use some later investors’ money to pay returns to the earlier investors, everything looks real bad for a while, and then all of a sudden the market for magic beans takes off and everyone is happy. I will tell you that a whole lot of speculative investing looks almost exactly like this! SoftBank Group Corp.’s Vision Fund can call capital from investors to pay those investors’ preferred coupons, which is Ponzi-ish in a technical sense, but not in a fraud-y sense; if you are investing money in a thing that takes a while to pay out, you may find yourself legitimately using money from investors to pay promised returns to investors.1